While full repeal of Obamacare is all but dead, tax reform is very much alive and it is tax changes — namely reduced tax rates — that the markets are craving, according to political analyst and former tax attorney Andy Friedman.
Friedman of The Washington Update notes in his Thursday commentary (and also told CNBC on Wednesday) that increased market volatility will kick in over the coming months as lawmakers struggle to meet fiscal deadlines in September (funding the government and raising the nation’s debt ceiling and a possible short-term government shut-down in early October) and then dive into “the morass of making wholesale changes to the tax code.”
However, Friedman says that he remains optimistic that, in the final analysis, “the markets will get what they most crave — a reduction in tax rates — suggesting that market pullbacks could be a buying opportunity.”
Greg Valliere, chief global strategist for Horizon Investments, opined Thursday that a tax bill will indeed come into form by late fall, with enactment likely by spring.
Valliere agrees that tax cuts could keep the Wall Street rally “percolating,” and “might add a few tenths of a percent to GDP by a year from now,” but “stronger GDP growth in the long term depends crucially on the labor force, which needs more workers.”
No question, Valliere continues, that President Donald Trump and Republicans “desperately need a legislative victory” in tax reform, “but if the path of least resistance is for a ‘sugar high’ tax cut — not true reform — the focus may shift to questioning whether a tax cut is needed in an economy that’s beginning to hit on all cylinders.”
As for a “substitute” for the Affordable Care Act: It’s dead, Friedman opines.
Why? Conservative Republicans wanted “greater cuts in government’s role in the health care system,” but moderates were concerned “about the deleterious effects those cuts could have on lower-income families.”
With “full-scale” ACA reform out of reach, “Congress may consider bipartisan changes to stabilize the current system, adding to its already crowded calendar,” Friedman opines.
Trump on Wednesday gave a speech in Springfield, Missouri, on tax reform in which he emphasized the need to reduce tax rates to stimulate growth, as well as simplifying the tax code, eliminating loopholes and complexity, Friedman said. Trump’s tax address also keyed on creating jobs for Americans by making American business more competitive worldwide, along with providing tax relief for middle-class families and fostering the repatriation of foreign earnings that remain overseas.
“Simply lowering tax rates is not terribly hard,” Friedman said. “But, as Trump notes, tax reform has a second element: simplification. Simplification means broadening the tax base by eliminating deductions and exemptions. Doing so helps ensure that tax changes do not significantly reduce the revenue the government derives from the tax system. But each deduction and exemption provides a benefit to a particular group or economic sector.”
Once a tax bill identifies a deduction or exemption as a candidate for change, those industries adversely affected push back strenuously, threatening Congress’s will to enact reform, Friedman continued. "It is instructive that Trump did not mention any specific 'base broadening' changes. Yet the House budget proposal calls for revenue-neutral tax reform."
Friedman doesn’t see that “the impediments to reaching agreement on a revenue-neutral rewrite of the tax code mean Congress will fail to pass tax relief.”
If GOP lawmakers are unable to agree on full-scale tax reform, Friedman said, Congress will likely “abandon the sweeping goal of simplification to pass streamlined legislation that simply reduces tax rates (more akin to the 2000 Bush tax cuts than the 1986 Reagan overhaul).”
Added Friedman: “It would be too embarrassing for the Republicans, having assumed control of Congress and the White House with the promise of lowering taxes, to fail to pass any tax relief legislation at all this year.”
However, there is a risk that tax cut legislation “standing alone will not be revenue neutral and thus could lead to higher deficits down the road, retarding future economic growth,” Friedman concluded. But “our guess is that consideration is too long term to affect market approval of business tax relief.”
--- Check out GOP Plan to Kill Estate Tax Sets Up Charitable Giving Conflict on ThinkAdvisor.