With a host of early legislative failures pockmarking the record of President Donald Trump, a win on tax reform could materialize, says one analyst. The US tax reform initiative, for instance, is heading for legislative success, predicts CLSA’s Christopher Wood. But the reason for success may come at the hands of the established order rather than through a populist revolt.
There have been many cautionary notes about the potential for a Trump victory in Congress. Moody’s, for its part, warned that age-old concerns about increasing debt levels might bog down Republican efforts.
"The extension of debt ceiling and government funding debates into fourth-quarter 2017 may limit Congress’ ability to pass tax reform," Moody’s analysts wrote in a September report.
But a KPMG report noted that the “first step towards tax reform” has been taken, as House Republicans passed a budget resolution.
For CLSA’s Wood this is just one of several signs that, when reading the political tea leaves, helps him draw the conclusion that the “Trumponomics trade” is back on.
It is easy to dismiss the Trump administration’s legislative potential when considering their lack of accomplishment to date. But this time it is different.
While the nuanced undercurrents of a President elected under a populist mandate concern the established order, looking at what is happening on US tax reform paints a different picture. The “Big Six” are coming together while a nest of “huge vested interests” swirl.
CLSA notes Republican leaders -- Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, House Speaker Paul Ryan, House Ways and Means Chairman Kevin Brady, Senate Majority Leader Mitch McConnell and Senate Finance Chairman Orrin Hatch – are all rallying around the prospect of tax reform.
Not only are the big six coming out in force, but CLSA detects a high level of professional coordination ahead of the release of a nine-page tax reform blueprint. This paints a very different picture than what occurred during the Obamacare debate, Wood says.
But it’s not just the established political wing that is embracing US tax reform.
Congressman Mark Meadows (R-NC), head of a group of Republicans known as the “House Freedom Caucus,” has been a staunch critic of government spending that meaningfully increases the deficit. When US tax reform is on the table, however, all pretense towards defending the budget appears to have vaporized. Meadows is now indicating his group will not “dogmatically” insist on the tax package being “revenue neutral,” a key sign that Wood uses to line up the tea leaves on this issue. Forget those pesky bond vigilantes, there is nothing holding back interest rates for rising.
A win in Congress would likely lift a White House that often finds itself under siege, potentially turning momentum. But victory in this issue might not happen quickly.
In the next two months analysts are watching for passage of the 2018 budget, a move that is likely to increasingly wet investor appetites that tax reform is soon to come. After this passage, which could clear the deck for a simple majority to pass US tax reform, the process is expected to slowly move its way through the Congressional process. If tax reform passes, it is likely to retroactively backdated to start in 2017, further cheering investors that already are starting to cheer the move. Corporations that currently pay a high tax rate are seeing their stock prices moving higher in anticipation of meaningful US tax reform passing through Congress and being signed into law by President Trump.