If all else fails in this grand experiment in governance-by-cable-news known as the Trump administration – the Wall, Syria, trade with China, Mar-a-Lago's kitchen – at least we'll still have tax reform. Right? Like, that helped lay the foundation for this whole Trump rally in the first place...right?
It might be time to temper even that modest hope. In the wake of the Ryancare's collapse, fewer and fewer observers can maintain hope of actual tax reform meeting the hopes that were kindled on November 9. Here's Leon Cooperman:
With the failure of the White House and Republican Congress to repeal and place the ACA, there is a risk that President Trump and Republicans will be unable to deliver the economic agenda promised – a lower corporate tax rate, repatriation of foreign earnings at a low (10%) tax rate, added spending on infrastructure, and reduced regulation of the private sector ... More broadly, there is a tail risk to markets that the ideological split in the Republican party denies their ability to effectively govern and deliver on their economic agenda. This tail risk is further lifted by the complete absence of any cooperation between Democrats and Republicans.
Many of the S&P 500 earnings estimates from strategists for 2018 reflect an incremental $8 to $10 from a lower effective corporate tax rate and added share repurchase from repatriated earnings. Without question, there is sizable risk to estimates of S&P 500 earnings if the Trump/Republican Congress economic agenda is not delivered.
Bank of America is not much more optimistic. Looking back at the last major tax overhaul attempt in 1986, BofA Merrill Lynch's analysts came to some sobering conclusions – particularly in light of the recent healthcare debacle:
The recent failure to even get a vote on health care reform reinforces and adds to the '86 lessons, in our view. It underscores the difficulty of passing complex, controversial legislation in a short period of time. The 1986 tax reform took two years from start to finish and the Affordable Care Act took 13 months. It shows that a party sweep in the election does not guarantee legislative success since there are a number of factions within each party. And it shows the difficulty of passing legislation that significantly widens the income distribution: the health care reform included both big tax cuts for upper income families and sharp reductions in subsidies for low income families.
With the air of a doctor delivering tough news to family members gathered in the lobby:
These history lessons suggest that the current proposal has a low chance of passage absent major changes. It is not deficit neutral even under very generous "dynamic scoring." It widens the income distribution significantly; for example, according to Tax Policy Center it raises the after-tax income of the top 1% by 13.4%, but the bottom 20% by only 0.4%. There are several other bones of contention in this bill that were not in the '86 bill: (1) the Border Adjustment Tax creates winners (big export companies) and losers (import companies, retailers and consumers); (2) the elimination of net interest deductibility hurts real estate and other highly levered companies; and (3) elimination of deduction of state and local taxes creates a split between members of Congress from high- and low-tax states. Finally, the leadership driving the effort forward is much less experienced than the 1986 team.
The perspective isn't too much prettier over at Goldman. Analysts there list four big bright shiny legislative objects that might divert the attention of Congress between now and whenever tax reform is supposed to happen, including the risk of a government shutdown April 29, a potential debt limit fight later in the year, a possible attempt at infrastructure, and the swirling farrago of global diplomatic strife. Congress needs to pass a budget resolution before any of this can proceed, not an easy task. The tax efforts of the 1980s are an object lesson, Goldman says, but the health bill is a better indication of tax reforms' chances.
As noted above, the main political lesson to be drawn from the health debate is that legislation that creates winners and losers is difficult to pass along party lines, particularly when the majority party has only around 21 votes to spare in the House and 2 votes to spare in the Senate. Even more than in healthcare, tax reform involves policy changes that do not fall neatly along party lines, as opposition to the border adjusted tax (BAT) among some Republicans has demonstrated.
In other words, tax reform has to unite the Freedom Caucus, moderate Republicans, and the Ryan wing, maintain some semblance of revenue neutrality, and dodge a bevy of other legislative obstacles far more pressing than digging into the tax code for what's guaranteed to be a bruising and grueling battle of all against all.
Happy Tax Day!