So we haven't talked much about tax policy yet (don't worry, we will). And we don't like to take cues from the market or talk too much politics. But, I think it's of note that Trump's assurance that his "phenomenal" tax plan is almost ready caused markets to jump on the expectation of higher US growth.
No details of any kind about the plan were given. But Representative Kevin Brady (Chairman of the tax-law-writing Ways and Means Committee) assured us that "We're going in the same direction in a good way.". Color me skeptical about the whole thing. Three questions come to mind:
1. Will the administration present a "tax plan" in the next 60 days?
Trump said in the next three weeks, but we'll give him some breathing space. Even with 200% more time, it seems especially unlikely that he will be able to put a plan together. I'm reminded of the Obamacare replacement, which was promised to be "on day 1" during the campaign, because Obamacare was a disaster and fixing it was simple. But now, it probably won't be until 2018 - if at all.
Tax law is super complex. And there are a few key points that this group has been saying about the tax policy over the last 18 months:
Lowering corporate rate to around 15%, and encouraging repatriation through a one-time amnesty
A "simpler code," with 4 brackets (lower than the current ones) offset with fewer deductions
The "Mnuchin Rule" - "no absolute tax cut for the upper class"
Elimination of the estate tax
Any plan would also have to be revenue neutral: Trump has both made it his official position and it is necessary to get such a plan through through the Senate. It is very difficult eliminate enough "deductions" and "loopholes" to get the math to work. Home-mortgage interest and local/state tax deductions? Gone. Employer health-care deduction? Gone. A lot of corporations who use deductions to pay less than 15% today? Will fight it tooth and nail. By definition, in any revenue neutral tax plan, if some people pay lower taxes, others will have to pay higher taxes. I can't picture this crew telling half of the country that their tax bill is about to go up.
LobbySeven Odds: 5 to 1 against
2. If such a plan is suggested, can it pass congress?
Let's tell the story of Representative Dave Camp. Camp, a Republican from Michigan, was chairman of Ways and Means before Rep. Brady. He was an honest believe in tax reform; he spent years working to come up with a plan, famously working with Senator Max Baucus (D-MT), his rough counterpart in the Senate. In 2014, he presented what was universally considered a "serious plan." In this way, it stood in specific contrast to several plans produced by Rep. Paul Ryan whose numbers never added up. The document itself was long and complex, which is a requirement for any attempt to really change the fundamentals of the code. But it basically met all of the Trump requirements and was within spitting distance of revenue neutral. So what happened?
He was pilloried. By everybody.
No sooner had the details been released than the crony capitalists from the energy, real estate and financial services industries were out there criticizing the Michigan Republican for jeopardizing American jobs, American competitiveness and the American dream — every bit of their fulminations self-serving economic nonsense. There was also the predictable whining from the small-business lobby, already heavily favored by the tax code, about how there was nothing new in it for them.
But more important than the interest groups, his proposal was completely disdained by Republicans in Congress (Democrats and the Obama administration weren't much better). Here was a real plan, the starting point for a discussion to have a big reform like the last one in 1986. And everybody was afraid to touch it with a 10-foot pole. The Republican Party did not have the political willpower to tell any group that they would be the one to pay more tax under their plan. "Representative Dave Camp" is now known as "former Representative Dave Camp," and Ways and Means has a more compliant Chair.
If a serious proposal is made, this will happen again.
LobbySeven Odds: 7 to 1 against
3. If a plan of this type were passed, would it significantly increase economic growth?
For what it's worth, I am completely on board - this type of tax reform is a good thing. Some of my best friends are tax attorneys (literally), but I think that our country should try to find some ways to lower its aggregate tax compliance costs. We can do better things with these resources. I haven't gone through the Camp Plan in detail (why bother - it's 1000 pages and wasn't going anywhere). Still, I would probably sign it into law, sight unseen, if I had that power.
But, the economic literature is very mixed as to the effects of tax levels on overall GDP. You can find 1000 articles going both ways on this - but at rates around our current level, tax cuts haven't stimulated massive growth and tax increases haven't caused recessions. I want to pay less tax as much as the next guy - but if I am being intellectually honest I must admit that tax cuts are not exactly a panacea for the economy.
And if absolute cuts in taxes have only marginal effects on GDP growth, it stands to reason that these types of tax-burden-shifting will be even less likely to move the needle.
LobbySeven Odds: 3 to 1 against
So we have a promise from a person who is challenged in keeping promises, about a proposal which his own party has refused to accept in the past, which seems unlikely to produced an effect nearly as large as the market is expecting. Yeah, I'm skeptical.