Goldman Still Sees 65% Chance Of Tax Reform Passing; Expects Senate To Make These Changes...

After a wave of GOP defections in recent days and waffling on timing, Goldman's economics team apparently still sees a 65% chance of a tax reform bill being enacted by "early 2018," but warns that the final bill may look nothing like the one recently proposed by the House.

As we pointed out yesterday (see: The Republican Tax Plan Will Crush These Housing Markets), Goldman fully expects the Washington D.C. swamp, led by realtors and homebuilders in this case, to attack various components of the House's bill, including efforts to slash the mortgage deduction cap, but don't think those efforts will be enough to tank tax reform altogether.

Political opposition to the bill seems likely to result in changes to the bill, particularly in the Senate, but it is less likely to block enactment of a tax bill altogether. The National Association of Realtors (NAR), National Association of Home Builders (NAHB), National Federation of Independent Businesses (NFIB), and anti-tax groups such as the Club for Growth have opposed the current House proposal for various reasons.


That said, we believe this is more likely to result in changes to the bill in the Senate rather than a failure to pass a tax bill at all.


These changes—for example, raising the proposed principal cap on mortgage interest deductibility and potentially making the treatment of pass-through income more generous than the initial House proposal—could crowd out other priorities, but don’t seem likely to block passage entirely. There is also a more fundamental political motivation, which is that many congressional Republicans would like to enact at least one piece of major legislation prior to the 2018 midterm election.


So, what does Goldman see changing in the Senate bill?  Here's a recap:

Mortgage Deduction: We expect the Senate to be more generous on mortgage interest than the House’s proposed $500k cap on principal on which interest can be deducted. This might involve an initial proposal to set the principal cap at $750k, or possibly keeping the deduction as it is today (principal is deductible on mortgage principal of $1 million and home equity debt of $100k). A $750k cap might raise about one-quarter of the roughly $300bn over 10 years the $500k limitation would raise.


SALT: By contrast, we expect the Senate to be less generous on state and local tax deductions, potentially proposing to eliminate all state and local tax deductibility, whereas the House has proposed to allow up to $10k in property taxes to be deducted (no state/local income taxes would be deductible).


Estate tax repeal: The House proposal would double the amount exempted from the estate tax for the next five years, and then repeal the tax altogether after 2023. We do not expect estate tax repeal to have adequate support in the Senate, which might free up a bit less than $100bn (compared with the House bill) for other purposes.


The corporate tax rate: The Senate’s version of tax reform legislation looks likely to propose a 20% corporate tax rate, but we continue to believe it is likely this will be phased in rather than taking effect immediately in 2018. Our expectation is that the final House-Senate compromise will phase in the corporate rate reduction because of fiscal constraints; we also believe there is a good chance the rate will be higher than 20% and that it will potentially end up around 25%.


Interest deductibility: The House has proposed limiting corporate interest deductibility to 30% of EBITDA. It is unclear what approach the Senate will take on interest deductibility, but some limitation looks likely to be proposed, in our view. One alternative that has been discussed in the past is to limit the deduction to a share of overall interest expense (e.g., 70% or 80% of interest could be deducted). This would have the advantage of reducing the disruption to the most highly levered firms, and might also potentially allow for grandfathering of existing debt.


Base-erosion measures: The House proposal has a few measures aimed at preventing the shifting of corporate profits from the US to other lower-tax countries. One is a 10% minimum tax on foreign earnings (more precisely, 50% of foreign profits above a normal return on capital would be taxed as US income at the 20% corporate rate, for an effective rate of up to 10%). A second measure would impose a 20% excise tax on related-party cross-border transactions (discussed below). We expect the Senate to include a measure aimed at preventing base-erosion in the Senate bill as well, potentially including the foreign minimum tax, but expect the Senate to take a different approach than the proposed 20% excise tax, which has already changed in the House in any case.

Meanwhile, rumors have surfaced of late that suggest the Trump administration delayed an executive order repealing Obamacare's individual mandate on hopes that it could be wrapped into the Senate's tax reform bill...Goldman is skeptical...

Probably not, but it looks like it could be included in the House bill before it passes. There are two reasons this could be an attractive option. First, many Republican voters see ACA repeal to be at least as high a priority as tax reform, so combining the issues would allow Republican leaders to take action on aspects of both. Second, mandate repeal has been estimated in the past to reduce the deficit by more than $300bn over ten years because it would reduce enrollment in subsidized health insurance. This would allow tax writers to fill the hole that has been created by scaling back other revenue raisers already, and the further scaling back that is likely to occur as the process moves forward. However, there is an even stronger argument against including mandate repeal, which is simply that repeal of the individual and employer mandate—so-called “skinny repeal”—failed to pass the Senate over the summer and including it in tax reform could simply sink both efforts. So if it is included in an early version of tax reform, repeal still seems likely to be dropped before tax reform becomes law.

Of course, the much bigger issue is whether the Senate will be able to overcome a very narrow Republican majority while passing a bill that complies with "Reconciliation Rules" and the "Byrd Rule."

Yes, this is one of the reasons we expect the bill to change. “Reconciliation” bills need only 51 votes to pass the Senate if they remain within fiscal targets in the budget resolution and do not violate any existing Senate rules. A violation takes 60 votes (and therefore Democratic support) to overcome. The recent budget resolution allows for a tax cut of up to $1.5 trillion over ten years. After recent changes to the bill in the House, the bill is now estimated to increase the deficit by $1.57 trillion over ten years. A second procedural obstacle is the Senate’s “Byrd Rule”, which prohibits reconciliation legislation from raising the deficit after ten years. The House provisions are mostly permanent, which would violate the Byrd Rule. This leaves the Senate with two options: offset the cost of tax relief with base-broadening or other measures after ten years, or make the tax relief temporary. We expect the Senate bill to do some of each by partially offsetting tax reductions and then allowing whatever has not been offset to expire. This means that the more structural elements of the bill would likely be permanent, such as the limitation on individual itemized deductions and the shift to a territorial tax system for foreign corporate income, while at least some of the tax relief, including individual and corporate rate reductions, would expire after ten years.

So what say you?  Will tax reform mark the Trump administration's first major legislative victory or will John McCain spoil the party once again?


abyssinian Thu, 11/09/2017 - 11:27 Permalink

Last minute corruption by goldman... get those hookers and bags of blow out now! If that doesn't work, blackmail them with sexual assult charges.

Batman11 Thu, 11/09/2017 - 11:32 Permalink

The US was once the bastion of capitalism.Bernie Sanders is now the most popular politician there, it’s turned socialist.The maths tells us why .....The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of livingDisposable income = wages – (taxes + the cost of living)Stop fixating on taxes get the cost of living down.

Batman11 Batman11 Thu, 11/09/2017 - 11:35 Permalink

The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and conflated “land” with capital”.To ensure thinking didn’t stray down unwanted lines, they took the focus off the cost of living.The West has now made a right pig’s ear of globalisation.The knowledge that lead them to repeal the Corn Laws for free trade had gone, it was all about the cost of living.You need a low cost of living to be able to pay low, internationally competitive wages.It's why all the jobs get off-shored  from the US.

In reply to by Batman11

DosZap Batman11 Thu, 11/09/2017 - 12:07 Permalink

Only way to do that is SOCIALISM.WalMurt has stopped PRICE matching,and their prices have not gone down.Maybe if 50-60% of Americans started crossing into Canada and Mexico to get their scrips,and find a Dr.that will see them for a FEW buckarinos, we could MAKE the Pharma's stop making us pay for the R&D for the worlds 3rd world poop holes.

In reply to by Batman11

Stinko da Munk Thu, 11/09/2017 - 11:34 Permalink

McCain has decided to spend his final days creating a "legacy", a manufactered reputation to paint his overly long political career in glory and secure nice words in some dusty book. He will of course oppose anything that he can find so as to keep his self-declared "maverick" image intact. FYIGM at it's best.

HenryJ Thu, 11/09/2017 - 11:46 Permalink

That great whizzing sound we all heard a year ago was the bullet that missed us when Hillary Clinton was denied the presidency. An opportunity to correct some of the damage that has been done? Would they repeal Obamacare and provide fundamental tax reform? No. The Supreme Court and Congress have defended Obamacare. And if there is ever to be a tax bill passed, the very fact that it must be revenue neutral ensures that there will be nothing fundamental about it. I’m sorr...y to have to tell you this but the republic you thought you had was stolen.You see while you were busy running your life and raising your children, building businesses and making this country work, mischief has been afoot. You assumed the Constitution was there limiting government and protecting your liberty but politicians who neither fear nor respect you and a bunch of folks who just want to be taken care of have been equally busy destroying the founders’ framework. And let me tell you something else, they are not going to just give it back to you. I could lie and tell you that this next election is the most important and will make all the difference or to stand up and let your voices be heard but the truth is that will not be enough.This theft did not happen overnight. Generations have passed without the hard work of educating the next generations on what it means to be an American. Why liberty is important and special and fragile. Why it is necessary to limit government. The things which makes us different and yes better than all other places on Earth. If there is to be an American revival it will not happen at the ballot box. You are going to have to raise new generations that hunger to be free.

tahoebumsmith Thu, 11/09/2017 - 11:47 Permalink

1.5 Trillion over 10 years? Hahaha that's only
150 billion a year that won't even cover the federal
Gas tax hikes consumers will pay during same period ...what a joke. While the washed up old farts sit in the house and senate sipping their Metamucil spiked water bottles pretending to actually do something , Skankfein continues to pull the stings behind the curtain

Money_for_Nothing Thu, 11/09/2017 - 12:02 Permalink

150 billion / 150 million workers = $1,000 each
Mail them a check before December 15th, 2017. They mostly voted for Trump and Republicans.
Ten years is eternity for tax legislation. Byrd is dead and in hell if you believe in that sort of thing.
Otherwise get voted out of your sinecure. Simple thing. Ordering checks to be mailed. All in favor say yay.

aliens is here Thu, 11/09/2017 - 12:09 Permalink

I can't fking believe it. We are a country of almost 300 million people and I see old fkers leading the country. No wonder we are screwed.  I say there is a 50/50 chance we'll have that old hack Pelosi as a speaker again. Sad.

Last of the Mi… Thu, 11/09/2017 - 12:30 Permalink

The great shell game commences. One group adjusts the tax rate schedules while the other nullifies deductions on the back end to pay for it all. Greatest tax cut in history, my ass. Nearly 50% of us aren't paying taxes. There is no way they're going to rebate money back to the middle class for an increase in disposable income. Just not going to happen. Corporate taxes (and this really is a corporate tax bill), maybe but the remainder of the middle class that is active employed, paying for healthcare and paying taxes. Not going to happen. All congress has for those of us who remain is complete and utter contempt that we're not able to pay more and it will show in the final bill.

Quivering Lip Thu, 11/09/2017 - 12:49 Permalink

Fucking Goldman!! Talk about tax dodging bailout queens!!The same asshats that shelter their bailout fiat globally need a tax cut? Fuck off parasites!! Major Corporations don't need a tax cut! They don't pay anywhere near %35, besides all business taxes are priced in to end prices.Corporations have never paid a smaller percentage of total federal taxes already and they ain't going to use this money for good paying jobs, just more bonuses and buybacks.