In the week that’s passed since the White House unveiled its tax-reform plan, Republicans and Democrats have expressed their reservations about the proposal, particularly after an analysis from the non-partisan Tax Policy Center suggested that taxes would rise over the coming ten years for most members of the middle class if the proposal were passed into law.
Wall Street, for the most part, has ignored these criticisms and US stocks have continued to climb to ever-higher record highs - even after two industry luminaries joined a growing chorus of skeptics warning that tax reform may not pass by year end.
Both Warren Buffett and Blackrock chief Larry Fink have spoken out against the administration’s proposal, echoing the most trenchant criticism of the bill. Namely, that it’s overly generous toward corporations without doing enough to help the middle class, according to Reuters.
With the White House and top Republicans in Congress already on the defensive over claims the plan would not cut taxes for many middle-class Americans, Buffett and BlackRock Inc Chief Executive Larry Fink suggested in separate interviews that the corporate rate may not have to be cut as deeply as proposed.
“We have a lot of businesses... I don’t think any of them are non-competitive in the world because of the corporate tax rate,” Buffett, the chairman and CEO of Berkshire Hathaway Inc told CNBC.
Meanwhile, Fink, who was rumored to be on Hillary Clinton’s short list of Treasury Secretary candidates, echoed Republican Sen. Bob Corker’s criticisms by admitting that he’s nervous about how the bill would impact the deficit, while adding that if the administration insists on incorporating the elimination of deductions for state and local taxes into the final bill, that the measure would almost certainly fail.
Fink predicted tax legislation would not pass if it includes a proposal to eliminate a popular deduction for state and local tax payments.
“I don’t believe we’re going to get tax reform if there is the elimination of deductibility of state and local taxes,” he said.
Eliminating the state and local tax deduction would raise about one-quarter of the $4 trillion in revenues that some Republicans say they need to prevent tax cuts from creating a massive increase in the federal budget deficit.
Buffett, who’s a well-known advocate for progressive taxes on the wealthy, said that eliminating the estate tax would be a “terrible mistake” that unnecessarily benefits rich people.
Fortunately for the market, Republican leaders are reportedly backing away from the proposed elimination of the SALT deductions – a measure that would impact some 40 million tax-paying Americans.
But even if Republicans ultimately decide against eliminating the SALT deduction, they will still need to find some other way to pass tax reform without massively blowing out the deficit. To be sure, the administration has maintained that revenue lost from corporate-tax cuts will be partly offset by closing loopholes for special interests.
But no matter what form, or forms, the bill ultimately takes, it’s chances of passing are far from assured. And while stocks have so far (mostly) ignored these nagging doubts, challenges to the market’s sanguine outlook are growing increasingly frequent.
Earlier this week, David Stockman, the Reagan administration's director of the Office of Management and Budget, told CNBC earlier this week that Wall Street is "delusional" for believing it will even be passed.
And earlier today, Bill Blain posited that deficit hawks like Corker would ultimately kill the reform effort.
In its analysis, the TPC found that by 2027, taxes would rise for roughly one-quarter of taxpayers, including nearly 30 percent of those with incomes between about $50,000 and $150,000 and 60 percent of those making between about $150,000 and $300,000. Meanwhile, 80% of the benefits would accrue to the top 1% of taxpayers.
The market greeted Republicans’ failure to repeal and replace Obamacare as investors quickly retreated back inside their bubble of complacency.
At the time, market strategists reasoned that it’d be easier for the administration and the Republicans’ Congressional leadership to rally support for tax reform. This no longer appears to be true.
And with the Fed preparing to begin the arduous process of reducing its balance sheet next month, the market is quickly running out of excuses to keep stocks bid.