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Trade, investment and tax reform after the midterm elections

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The gains enjoyed by the Republican Party in November’s midterm elections were widely viewed by political pundits as a referendum on the Obama presidency. The GOP victories, most notably the party’s securing of a majority in the Senate, might suggest that Republicans now have the mandate and the means to roll back the Democrats’ legislative accomplishments, including the President’s signature legislation: PPACA.

With Republicans controlling both the House and the Senate come January, there will be just one thing standing in the way of this scenario: the president’s veto power. Absent a two-thirds voting majority in both the House and the Senate — which seems unlikely given the still-substantial Democratic caucus in the Senate — the Republicans will be hard-pressed to make good on their conservative agenda.

And this leads to the question du jour: Given the prospect of continuing legislative gridlock, will Republicans pursue a strategy of confrontation with the president to satisfy pent-up demands of their conservative base. Or will they reach across the aisle to support legislation on which both parties can agree?

The initial signals coming out of Washington appear promising. Incoming Senate Majority Leader Mitch McConnell expressed hope that Congressional leaders and the president can set aside differences over the most polarizing issues — PPACA, immigration reform, administration policy toward international hot spots — and coalesce around a modest legislative agenda.

What might be the areas of common interest? Three items on the Congressional docket could yield potentially huge economic dividends: trade, infrastructure investment and tax reform.

In respect to the first, President Obama requested Congressional authority to more easily negotiate international trade agreements. Of key interest to the Administration is the Trans-Pacific Partnership (TPP), a trade deal the U.S. is negotiating with 11 Asia-Pacific nations.

If realized, the trade pact will give U.S. companies greater access to fast-growing markets and impose strengthened environmental and labor standards. The TPP also promises to boost intellectually property rights, establish new rules on state-owned enterprises and allow for greater transparency and consistency of regulations governing international trade.

Political consensus might be most easily achieved on the second item. The nation’s aging infrastructure is badly in need of repair. If U.S. businesses are to remain competitive, there is no avoiding these essential investments.

The good news is that now is an ideal time for funding them. With interest rates at historically low levels, servicing debt incurred to pay for the upgrades should be less of a concern.

To boot, because of the budget sequestration of 2013 — automatic spending cuts imposed on both defense and non-defense appropriations that reduces federal spending authority by $1.1 trillion between 2013 and 2021 — the budget deficit is declining. The reduced red ink should make the needed infrastructure upgrades more politically palatable.

And this brings us to tax reform: potentially the most promising — and most difficult to secure — of the three initiatives. A simplification of the tax code, which would eliminate or scale back many treasured tax breaks, plus reduce individual and corporate income tax rates — could be a boon to the economy. Among other benefits, an overhauled tax code would reduce the misallocation of resources while also spurring saving and investment.

But assuming that most legislators favor reform, tax legislation could nevertheless stall because of business resistance to the loss of tax breaks. For the insurance and financial services sector, a revamped tax code could yield more than $3.2 trillion for the U.S. Treasury, including an estimated $158.1 billion from taxation of the build-up on life insurance and annuities.

Absent tax reform, there’s a powerful argument to be made for these longstanding and cherished tax benefits. The $64,000 question is whether Americans would actually be better positioned to realize retirement and other financial goals under a streamlined tax regime that, while offering few or no tax breaks, makes accumulating a nest egg a whole lot easier.