Why Washington Politics Make Trump's Tax Cuts All But Impossible

Throughout the 2016 Presidential campaign Trump promised American voters that he planned to, among other things, "cut the hell out of taxes."

 

But despite the promises, the politics and partisanship gripping Washington DC means that Trump's tax reform policies are almost certain to face the same fate as his failed Obamacare repeal effort.

On the one hand, Trump could choose to appeal to the the Freedom Caucus with massive tax cuts across the board.  That said, conservative members of the House would almost certainly look to combine tax cuts with entitlement reform, something that Trump has very publicly opposed.

On the other hand, Trump could attempt to strike a bipartisan deal with Democrats.  But, there again, while Democrats may be open to middle class tax cuts and leaving entitlements alone, they will vehemently oppose any plan which offers cuts to higher income individuals and corporations.  As Senator Ben Cardin said, for Democrats to hop on board with Trump's tax cuts they would have to be "responsible" and "progressive."  Per The Wall Street Journal:

Democrats say they oppose net tax cuts and will resist proposals that mostly benefit high-income households.

 

“Tax reform’s got to be responsible and it’s got to be progressive,” said Sen. Ben Cardin (D., Md.).

And, with Trump's plan calling for a 15% marginal cut for America's top earnings, we're somewhat doubtful that it meshes well with Democrats' definition of "progressive."

Trump Taxes

 

Of course, please don't tell California's democrats that the $5.2 billion 'gas tax' they just imposed on residents is pretty much the most regressive tax possible as it may make the following rhetoric a bit awkward.

“Some Republican members of Congress and the administration are locked in competition to see who can propose the biggest tax cut for the fortunate few,” said Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee.

 

He argues that wage-earners face compulsory taxation while top earners and investors use loopholes and lawyers to lower their tax bills, and that any tax plan should eliminate those inequities.

 

“At the heart of bipartisan tax reform is recognizing that we really today have two tax codes,” he said.

Meanwhile, some recent chatter would suggest that Trump's 'conservative' opening tax reform 'ask' was just a starting point for negotiations which, like the TrumpCare proposal, could end up veering much further left than originally expected.

The Trump administration, for its part, has left an opening, recently signaling to Congress that it is seriously concerned about pushing a tax plan whose benefits are tilted to top earners, said a GOP aide.

 

Rep. Richard Neal of Massachusetts, the top Democrat on the Ways and Means Committee, said Democrats want to participate.

 

“If they’re going to talk about some middle-class tax relief, we certainly want to engage,” he said. “If this is a redo of the Bush tax cuts of 2001 and 2003, that’s a nonstarter. Those were advertised as a tax cut for everybody”—and Democrats think too many of the tax breaks went to high-income households.

 

Mr. Neal said he met last month with Gary Cohn, director of the White House National Economic Council.

 

“He simply indicated their intention is to go big on tax reform, said it needed to be bipartisan and said they were very interested in the deductions for the people at the top and how the preferences were parceled out,” Mr. Neal said.

 

Mr. Cohn’s comments and other recent statements from administration officials suggest the White House tax agenda remains fluid. That leaves open the prospect for a deal, but it also could lead the administration right back to a Republican-only approach. That would leave the GOP with little room for dissent on a subject where home-state issues affecting industries such as agriculture and oil could split the Republican party.

Unfortunately, while Washington may have their doubts about passing tax reform, equity markets seem to be quite convinced.  That said, it's only a matter of time before some BTFD equity analyst pens a report to explain why no tax reform is actually better for the S&P...should be worth at least another 10%.