With little macro data overnight (aside from a modestly disappointing Australian CPI print), offset by an ongoing of corporate profits (this is the single busiest week for corporate earnings in more than 10 years), today everyone's attention will be focused on three things to come out of Washington: taxes, healthcare, spending.
And while we did our best to summarize what is known and unknown last night, this morning JPM has released what may be the best summary assessment, one which comes to a predictable conclusion, namely that Trump's tax plan "will be virtually impossible to pass through Congress", in other words it is merely a gambit, or as Trump would see it, a first step in a negotiating process with Congress. Whether Congress responds favorable, especially to a plan that has no revenue aspect to it whatsoever, remains to be seen.
Until we wait, for those who may be unfamiliar with the framework of what Trump will propose today, here is JPM's summary:
Washington – three big headlines overnight – taxes, healthcare, spending
Taxes – Trump’s much-anticipated tax blueprint will be released on Wed but
- a lot of the details have already been leaked to the press over the last few days;
- it seems very inchoate, leaving out key details esp. as it pertains to the individual code;
- it will be virtually impossible to pass through Congress.
With all that said, Trump will propose cutting the corporate rate and “pass-through” rate to 15% (from 35% and 39.6% now, respectively) and the repatriation rate to 10% (from 35%) while raising significantly the standard deduction for individual filers (which will have the effect of dramatically cutting individual rates). There are proposals being worked on for deducting child care costs but these won’t be ready for Wed. Trump’s plan won’t contain any large revenue raisers (there won’t be a BAT) and thus the conversation has shifted very much away from “tax reform” and towards “tax cuts”. Needless to say the blueprint would dramatically expand the deficit although WH/Treasury officials are expressing confidence in “dynamic scoring” (i.e. the belief that higher growth will more than pay for the lower tax rates).
- Mnuchin, Cohn (not Trump) expected to roll out Trump tax plan at 1:30pmET – The Hill http://bit.ly/2qdsjMP
- Rather than spurring tax reform, Trump may instead kill it – Trump’s Wed blueprint is so unrealistic that it could actually hurt the chances of Congress taking any action on the tax front – Politico. http://politi.co/2phk6bj
- Dynamic scoring – the NYT (http://nyti.ms/2pklsUJ) examines the “Laffer Curve” and the concept of dynamic scoring (whereby tax cuts pay for themselves via higher economic growth). Stephen Moore has an editorial in the WSJ (“growth can solve the debt dilemma” http://on.wsj.com/2oICesP) although his calls for a return to ‘90s-like growth doesn’t appear realistic given present labor supply/productivity trends (the ‘90s was an extraordinarily unique period of time that is very unlikely to repeat).
- Market expectations - at this point investors would be happy to see the corporate rate brought down to ~27% by the end of Q1:18 (beyond Q1:18 Washington’s focus will shift towards the mid-terms). Most think 15% (Trump), 20% (Ryan), and even 25% to be too ambitious given the country’s political and fiscal constraints. Expectations for changes to the individual tax code are near zero.
Healthcare – once again it looks like a deal may be close in the House on a repeal/replace compromise. All the major media outlets overnight (including Politico http://politi.co/2qdCXmM and Washington Post http://wapo.st/2oKNVzN) were reporting on a compromise agreement that will bridge differences between moderates and conservatives in the House GOP. However, “it is far from clear that the fragile agreement will provide Ryan w/the 216 votes needed for passage in the House” (per Politico). A vote still seems unlikely this week although one could occur soon assuming the Freedom Caucus lends its support.
Spending – indications continue to point to a spending compromise that will avoid a shutdown later this week. Republicans/Trump have withdrawn demands for $1.5B in funding to go towards wall construction although will get money for overall border security. The Pentagon also could see a spending boost. The two sides remain at odds over whether the spending bill would include ACA subsidy payments. Washington Post http://wapo.st/2oICTu9, Politico http://politi.co/2ovcBQP, WSJ http://on.wsj.com/2pkc2J1.