"I'm just a bill, yes I'm only a bill, and I'm sittin' here on Capitol Hill." You knew history/civics class was going to be a winner when the teacher announced Schoolhouse Rock was on the agenda for the day.
Out of Washington (and the Ole Miss Rebels x New York Giants), there haven't been too many wins recently. A few attempts at healthcare reform fizzled and now the race is on to get some sort of legislation passed before year end. A failure would surely result in the loss of republican seats in Congress come midterm elections.
So what's the breakdown:
We currently have a 2,000 page tax code. Far too long and much too complex.
The first step to passing tax reform is to pass a budget. The Senate's was passed last week and now the House needs to pass the Senate's late this week/early next to get into reconciliation.
What's In It?
It's not entirely set yet, but some main pieces to the legislation are a cut in the corporate tax rate from 27% to 20%, repatriation from profits returning from overseas and the lowering of personal income taxes with an emphasis on helping the middle class.
The idea with cuts to the corporate tax rate, is lower taxes will lift firms profitability spurring reinvestment and will stimulate the overall economy. This in turn pushes up household incomes, spending and then tax revenues, albeit at a lower rate.
It is estimated that a 100 basis point (1%) tax cut will spur spending 50 basis points (.50%) in 5 years.
Looking around the world, the U.S. has one of the highest corporate rates.
It becomes a real Sophie's Choice for companies of whether they are forced to move their operations elsewhere, or be subject to a tax rate that simply isn't competitive with their foreign peers. Of course, you can argue large companies, like Apple, already find their way around these taxes via loopholes.
Britain for example has a 19% corporate tax rate, expected to fall to 17% in the years to come. A 10% margin makes it difficult to compete.
Who's Paying For It?
The trite saying of "there is no such thing as a free lunch" is all the talk amongst Congress, currently.
With all of these tax cuts, how will the lost revenue be made up? Through 401(k)'s? Through the BAT (Border Adjustment Tax)? Neither of those look likely.
Could we possibly be straying away from finding a way to make up for the deficit at all? Maybe. There will be lobbyists fighting in favor of their constituent's. Everyone wants lower taxes but no one wants to pay. Go figure.
It would appear the move, politically anyway, would be to simply let it run up the deficit. This avoids angering the American public as well as lobbying groups. However, our already $20T deficit would grow at a exponential pace should this be the resolution.
What About The Market?
The question on market prices is the wonder if the prospect of tax reform already baked in or if the legislation DOES in fact pass, do stock prices rise even more.
Analysts predict a 1% rate decrease would add $1.50 to EPS (Earnings Per Share.) Another consideration, are rumblings the Federal Reserve will raise interest rates 25 basis points (.25%) in December, which could trigger a flight into fixed income, especially if tax reform doesn't get passed.
A market correction is constantly discussed during this record high market.
Many believed a Trump election would send the country spiraling into a recession. The investors that predicted we would be approaching 24,000 on the Dow, are few and far between.
It seems the market is rising because of the potential of these legislation reforms. That, and we have a president that is no longer vilifying business.
This hasn't been a seamless administration, by any means. There have been tweets, controversies and interparty fights. But a successful passage of tax reform would bode incredibly well for 2018.
Hey, maybe the Giants and the Rebs will finish strong as well.