How Tax Reform Can Still Blow Up: A Side-By-Side Comparison Of The House And Senate Tax Plans

To much fanfare, mostly out of president Trump, on Thursday the House passed their version of the tax bill 227-205 along party lines, with 13 Republicans opposing. The passage of the House bill was met with muted market reaction. The Senate version of the tax reform is currently going through the Senate Finance Committee for additional amendments and should be ready for a full floor debate in a few weeks. While some, like Goldman, give corporate tax cuts (if not broad tax reform), an 80% chance of eventually becoming law in the first quarter of 2018, others like UBS and various prominent skeptics, do not see the House and Senate plans coherently merging into a survivable proposal. 

Indeed, while momentum seemingly is building for the tax plan, some prominent analysts believe there are several issues down the road that could trip up or even stall a comprehensive tax plan from passing the Congress, the chief of which is how to combine the House and Senate plans into one viable bill.

How are the two plans different? 

Below we present a side by side comparison of the two plans from Bank of America, which notes that the House and the Senate are likely to pass different tax plans with areas of disagreement (see table below). This means that the two chambers will need to form a conference committee to hash out the differences. There are three major friction points:

  1. the repeal of the state and local tax deductions (SALT),
  2. capping mortgage interest deductions and
  3. the delay in the corporate tax cut.

The House seems strongly opposed to fully repealing SALT and delaying the corporate tax cuts and the Senate could push back on changing the mortgage interest deductions. Finding compromise on these issues without disturbing other parts of the plan while keeping the price tag under the $1.5tn over 10 years could be challenging.

Here are the key sticking points per BofA:

  • Skinny ACA repeal: The repeal of the individual mandate is back on the table. It would free up approximately $300bn in revenue to pay for the tax plan. But this likely means no Democratic Senator will support the bill. This could prove costly as the Republicans can only afford to lose 2 votes and several Republican Senators are already on the fence on the tax plan.
  • Byrd Rule means tax plan might not hatch: Reconciliation directives allow the tax plan to add $1.5tn to the deficit in the first 10 years (See appendix for breakdown of the cost of each plan). However, rules in the Senate state that any bill passed under reconciliation has to be revenue neutral beyond the 10 year budget window. Given that the Republicans are hoping to make the corporate tax cuts permanent, it would mean that they would need to find additional revenue in the out years while sunsetting all other tax cut provisions (e.g. personal tax cuts). This will mean the personal tax code at best will revert back to current law or at worst roll back the cuts and preserve the repeal of the deduction which would amount to a tax increase on households after ten years. Currently, the Senate plan would let reduction in the personal tax rates, expansions of the standard deduction and child tax credit and other provisions expire after 2025. The court of public opinion could threaten the tax plan.

And while it remains to be seen if tax reform will pass the Senate, or like Obamacare repeal, it will get shot down by the like of McCain (and perhaps Corker), another key question, is whether the US even needs tax reform at this point - the Fed certainly could do without the added inflationary pressure - and whereas former Goldman COO and Trump's econ advisor, Gary Cohn certainly thinks so, his former boss, Lloyd Blankfein disagrees. So does Bank of America, which maintains that at this stage of the business cycle, tax cuts are not needed to sustain the current expansion. Nevertheless, BofA concedes the passage of a comprehensive tax plan would likely lead to a short term boost to growth which would translate to further declines in the unemployment rate and higher inflation.

Then, as the economy begins to heat up, the Fed will likely lean against the economy by implementing a faster hiking cycle than currently projected, which will ultimately spark the next market crash, recession and financial crisis. Ironically, the seed of Trump's own destruction would be planted by his biggest political victory yet (assuming tax reform passes, of course).

* * *

As a bonus, here is a simulation BofA ran using the Fed's FRB/US model to calculate the potential costs of the tax plans. BofA ran its simulations assuming model consistent expectations for all sectors of the economy and using the inertial Taylor rule to set the path of the federal funds rate: "o simulate the impact of the fiscal stimulus brought on by the tax cuts, we make the fiscal setting exogenous during the first 10 year period and adjust the path for corporate and personal income taxes to take into account the government revenue effects from the tax plan."

Costs aside, to get a sense of the economic impact from the two tax plans, BofA similarly models the two plans' outcomes using the FRB/US macroeconomic model. The simulation results suggest under the House plan, the US would see a boost to aggregate demand as growth would be approximately 0.4pp higher relative to baseline in 2018 and 0.3pp higher in 2019. Better aggregate demand would reduce the unemployment rate by 0.3pp by 2019 and put upward pressure on inflation. These growth and price dynamics would lead the FOMC to raise rates an additional 1 to 2 hikes over the next two years. The economic impact from the Senate plan would be slightly more modest but in the same ballpark as the House plan. Under the Senate plan, the model predicts growth to be approximately 0.3pp higher in both 2018 and 2019 and similar dynamics for the unemployment rate and inflation as seen in the House plan, leading the FOMC to tighten quicker than the current baseline path.

There is also an "alternative" scenario where we a watered down version of the tax plan passes (i.e. modest tax cuts for middle-income households and a corporate tax cut near 25-28% that is deficit increasing by $600bn-$800bn on a static basis). Under the "alternative" scenario, we would see approximately half the economic impact that is seen under the House plan. Given that such a plan would likely only generate modest inflationary pressures, the Fed's response likely would be relatively muted and it would likely stay on its baseline path.


junction NotApplicable Fri, 11/17/2017 - 11:59 Permalink

I see comments here indicating there is a big difference between the Democratic and Republican Party at the national level  What difference?  Look at these facts:  Aftter a career in politics, D-Party House leader Nancy Pelosi is worth over $100 million.  Her husband, a hedge fund operator is worth even more.  The change in IRS regulations that institutionalized the "carried interest" tax loophole dates from 1993, when the Democrats controlled the White House and Congress.  R-Party Senate Majority Leader Mitch McConnell's father-in-law worked his way up to owning a shipping line that got caught shipping cocaine from Columbia to Europe.For a snapshot of the changes for the worse in the United States since Wall Street and the Rothschild bankers took over America after JFK's NWO approved assassination, read the selection below on the now-defunct Sam Goody chain. When I arrived at Sam Goody records in 1974, the store's basic marketing strategy could be summarized as follows: provide the public with highly knowledgeable staff and a huge inventory. These components represented the two major capital costs of running a city wide record store. Lou, Jeff and others received relatively decent salaries. Everyone in the store, even part timers, received medical insurance, sick pay, vacation pay, and retirement benefits --- a package that is inconceivable today. 

In reply to by NotApplicable

JimmyJones Fri, 11/17/2017 - 11:48 Permalink

Those jerks will do anything from giving the working people a break.  Obama doubles the national debt, not a peep and ZERO action from the RINO's .  Now they are worried about it.  Total BS.

bpgnp210 JimmyJones Fri, 11/17/2017 - 12:07 Permalink

Obama inherited 2 wars from Bush that weren't paid for..... one of which should never have happened.  Also inherited an economy in January 2009 that was collapsing.... so BO could have done more to reduce spending (welfare has gotten out of control) but a lot of that debt should go on Bush's tab.......and I'm not a Bush hater..... I'd have a beer with him..... and ask him what the phuck he was thinking invading Iraqistan.... .... guess who else doubled the national debt on their watch...... Ronnie Reagan. I personally would like to focus on expenses and spending.... especially Medicare and Social Security before we're completely f'd.

In reply to by JimmyJones

JimmyJones bpgnp210 Fri, 11/17/2017 - 12:11 Permalink

I thought Bush and Obama were basically the same.  Scum.  we are already F'ed, Social security is totally F'ed no one believe it will be there for them under 50 yet they still take it.  We all know that the cost of goods that make up the majority of their spending has increased big time yet those items are in the inflation calculation.  Might as well put more money back into peoples pockets if we are already F'ed.

In reply to by bpgnp210

Everybodys All… bpgnp210 Fri, 11/17/2017 - 12:38 Permalink

That Marxist pos con man whether he inherited a bad economy or Iraq had no fucking idea how to self correct the country. Look I am no fan of Barack Hussein Obama clearly but as a reminder what changes to our economy did he advocate for the US to grow again. None. This mother fucker spent more than all the other prior US presidents and their administrations combined. At the end of it we had not a damn thing to show for it either while doubling our debt.

In reply to by bpgnp210

francis_the_wo… The_Juggernaut Fri, 11/17/2017 - 14:49 Permalink

Estate tax is a cash cow for the insurance and legal industries and their very influential lobbies will fight to the end to keep it around.It's also a very interesting moral question, as it is double taxation while also (tries to) prevent(ing) consolidation of wealth.  To be quite honest, I've struggled with this one from an ethical point of view for a very long time and have yet to read a solution that sits well with me.

In reply to by The_Juggernaut

1st Amendment Fri, 11/17/2017 - 11:56 Permalink

When you force me to watch 10-15 second ads that completely block my screen - I stop liking your site.  I understand this is a business but when the consumer experience gets too intrusive - I'll just stop visiting the site

Deep Snorkeler Fri, 11/17/2017 - 12:07 Permalink

America's Working ClassExploited, powerless, rentier's cattle,tattooed dimwits, cognitively awry,TV-intoxicated, adrift in an opiate haze.A ballooning military, monstrously large corporations,the new Christo-America is crushing you. 

3-fingered_chemist Fri, 11/17/2017 - 12:24 Permalink

I still don't understand why the tax code treats income differently all across the board. Wouldn't it make more sense to treat all income the same when it comes to taxation? Say a flat 15 % tax no deductions, loopholes, etc. First 20000 in income is tax free or something like that. Of course, any tax reform would be even better with SPENDING REFORMS at the same time.

jin187 3-fingered_chemist Fri, 11/17/2017 - 14:03 Permalink

What you described is pretty much the core of the Fair Tax, which is a plan worked up Neal Boortz and others probably 30-40 years ago at this point.

Congress will not pass it for one simple reason; the tax industry. If taxes suddenly got so simple that not even megacorps needed tax preparers, it would put millions of tax compliance leeches out of work. We'd barely need an IRS, while H&R Block, Jackson Hewett, and the rest would be out of business. So those guys spend obscene amounts every year lobbying congress to make sure our system gets more complex, and never changes.

Lobbying government to create a problem, just so you can swoop in and solve it...IMO it's just fucking treason against humanity in general. If I had my way, the executives of tax companies would be going to the guillotine even before the Wall Street guys and bankers.

In reply to by 3-fingered_chemist

PitBullsRule Fri, 11/17/2017 - 12:30 Permalink

Get ready for your employer to shower you with raises and bonuses once they get their taxes reduced. You're going to have so much money you won't know what to do with it, but you won't have to, because you can use it to pay your higher taxes.Because, after all, they are looking out for you, right? 

zzzz88 Fri, 11/17/2017 - 13:45 Permalink

please mark my words---the tax reform only makes the economic and society problem much much worse.why?wealthy is just a relative idea, if we all make one million dollars /year, no rich/poor difference.the tax plan will make the society inequality much much worse

jin187 Fri, 11/17/2017 - 13:47 Permalink

This plan is bullshit anyway. No one that isn't already rich is going to benefit from this shit, and the people footing the bill will be in the 50k to almost rich range. Gotta hit up those 10%'ers cause the .1% needs their tax cut.

I can't even believe it's being called "tax reform". What are they reforming? Last I checked, this still results in a Marxist progressive income tax full of loopholes for their buddies, and enforced by jackbooted extralegal federal thugs. If anyone in Washington really wants tax reform, and knows how to read and count, they would just pass the fair tax, and call it a fucking day. All the people from H&R Block, and the IRS sitting in the unemployment line getting their just desserts would be a nice side benefit to doing so.

Jack McGriff jin187 Fri, 11/17/2017 - 14:36 Permalink

Loopholes?  What loopholes?  That's the kind of shit the covetous wage slaves say when the top income tax bracket is in play for a reduction.  But anyway, here's your chance to prove how smart you are with all those "loopholes" you think exist:Imagine you are the sole owner of an S Corporation and $2million passes through and therefor must be reported as income.  Please enumerate all the "loopholes" with specificity that will allow you to avoid paying the top 39.6% income tax rate.Yeah, that's what I thought.  THERE ARE NONE!!!    

In reply to by jin187

Chauncey Gardener Jack McGriff Sat, 11/18/2017 - 14:47 Permalink

You hit a nerve. About two weeks ago, Mark Levin had audio clips of Ryan from an appearance on Fox news stating that "only the rich with their expensive tax attorneys and accountants take advantage of these loopholes for state income tax, property tax deductions, and mortgage interest." My ass...each 'income group'--WHAT exactly is an income group? Each income group as he stated in those quotes. What a pompous ass, and how ironic that the House version makes more sense than the Senate's? Unfuckingbeleiveable. Class warfare at it's finest...screw the small business owners of America, who employ and hire most of us. And, what about the House version's new 46% income bracket--did that get buried in the bullshit of the bill, or did it get eliminated? We, who itemize, demand to know.

In reply to by Jack McGriff

pparalegal Fri, 11/17/2017 - 16:22 Permalink

As much as I hate progressive pervert Democrats I am thinking Republicans, aside from stuffing their own pockets, have no ability to even assembe an IKEA chair. How can anyone write this stuff up when CPA's have yet to comprehend and advise clients on what the proposals are and are not?