Donald Trump’s core personality is not likely to change, says Capital Economics US Economist Michael Pearce. When his back is against the wall with few legislative accomplishments to show voters and a potentially stagnating economy before 2020 elections, he is likely to revert to his nativist roots and a global trade war could be the result. To avoid such a problematic future, success on a Trump legislative agenda, namely with taxes, must be achieved.
“It will be catastrophic if Republicans don’t pass a tax bill,” radio host Hugh Hewitt told CNBC Friday afternoon. “They have to do it.”
As tax reform in Congress is being debated – and wealthy Republican patrons in blue-leaning states are not feeling the love as they lose state and local tax deductions – what is likely to be accomplished through a negotiated settlement could end with more of a whimper than a bang as a watered-down result is likely.
Michael Pearce Asks Will tax cuts be Trump’s first example of actual “winning?”
All that “winning” that was initially promised by Donald Trump the campaigner hasn’t yet materialized.
“Trump’s team and Congress have been ineffectual even by the standards of new administrations,” Pearce opined in a November 9 Capital Economics research piece titled “What have we learnt since the election?”
The answer to his headline title is that, while the stock market is up over 20% on a year over year basis, he lays claim to this one tangible accomplishment that Pearce says is due more to global economic growth than US domestic events.
“Healthcare reform ended in failure, and many parts of the policy agenda have been stalled or subject to legal challenges,” he wrote while conceding that Republicans could be “edging towards their first major legislative victory.”
Republicans need to show their political backers they can deliver on tax cuts or “the financial contributions will stop” Senator Lindsey Graham said Thursday, laying down a motivational marker as corporate executives closely watch the outcome.
Gary Cohn notes corporate executives are “most excited” over tax cuts
A victory on taxes might not change much, however. Pearce expects tax reform to be “far from the sweeping reform Republicans promised.” He sees tax cuts as a whimper, not a bang, and providing a short-term boost to the economy but delivering any transformational change.
But there is one group who could see their taxes cut mightily.
Former Goldman Sachs executive turned National Economic Council Director Gary Cohn, who one year ago while at the bank showing corporations how to avoid US taxes through inversions, is now praising Republican tax proposals that slash corporate taxes.
“The most excited group out there are big CEOs,” Cohn told CNBC, pointing to a lowering of corporate taxes as an incentive to move money and investment on US shores.
While Cohn defends the trickledown economics aspects of the tax proposals, Pearce is not so positive about the potential for corporate tax cuts to find its way into the middle-class economy and financial deregulation isn’t likely to be a game changer either:
The tax package is unlikely to lift long-term GDP growth, however, because there are few meaningful measures to boost labour force participation or encourage greater investment. The de-regulation blitz may not deliver any tangible boost to economic growth, particularly now that Trump nominated Jerome Powell as Fed Chair, who prefers tweaking financial regulation rather than overhauling it.
If Trump’s efforts are successful, Pearce expects “deficit-financed fiscal stimulus” to boost GDP growth next year and then tail off. In need of a fiscal boost before an election in 2020 and without many fiscal arrows left in the quiver, he is concerned about Trump turning to restrictive trade policy risks that “are likely to build over time.”
We expect tax cuts to be passed by early next year, boosting economic growth. By 2019, however, the economy will probably be slowing again and Trump may well be at loggerheads with a potentially divided Congress. Against that backdrop, the risks that Trump returns to his instincts and pursues inward-looking and damaging protectionist policies would rise.
In the meantime, the Republican tax plan is expected to be rushed through the House and Senate next week, with votes taking place before the Thanksgiving holiday. Hewitt looks at the numbers and notes that the Republicans can afford to lose two votes in the Senate (although Rand Paul is still out following an assault) and 24 votes in the House, where compromise between the two proposals is required to make a tax cut reality.
Of course, considering how all the “expert predictions” about Trump winning and what would happen next were proved totally wrong, one has to wonder if the inverse of the Michael Pearce and Gary Cohn preidictions are a better bet.