US: Trump to finally deliver tax overhaul plans - ING

US President Donald Trump looks set to finally deliver his tax overhaul plans, which will include large tax cuts for individuals and corporates, according to James Knightley Chief International Economist at ING. However, as we have seen with healthcare proposals, nothing is guaranteed to pass, he further adds.

Key Quotes

“President Trump and leading members of the Republican party will today unveil their long-awaited plans to overhaul the US tax system. Leaks ahead of a speech in Indiana suggest it will involve large scale cuts to tax rates for households and businesses.”

“For the latter, corporation tax would be cut from 35% to 20% together with the ability to immediately write-off capital spending for five years, possibly more. Significantly, there will also be a one-off tax on repatriated foreign earnings. These have been stockpiled with estimates suggesting around $2.6trn earnings are currently sat offshore, which if brought back could boost investment in the US. The dollar impact may be relatively limited given much of the holdings are already in dollars or dollar denominated assets held overseas.”

“For individuals it proposes that the seven income tax brackets are reduced to three – 12%, 25% and 35%. However it allows Congress to introduce a fourth, higher tax rate, for high earners should it choose – the current top tax rate is 39.6%.”

“There are other proposals, such as eliminating the alternative minimum tax rate, corporate interest deduction, the estate tax and some other relatively minor taxes and deductions. However, we have to remember that making proposals is one thing, getting Congress to agree is another. These proposals will be debated for many weeks and could get significantly amended. We already know that Washington is deeply divided and that significant compromise will be needed.”

“Administration officials suggest that they are prepared to use “dynamic scoring”1 in order to help facilitate a revenue neutral budget projection for the next ten years. This would mean the tax reforms could pass with a simple majority in the Senate rather than the 60 seat threshold typically required. This would obviously make legislation easier to pass, but it still may take longer than the president hopes.”

“Nonetheless, any tax cuts that put more money in the pockets of households and businesses is likely to be seen as a positive for the economy. Hopes of a massive stimulus have faded since Trump’s inauguration, but this could help to nudge expectations back in a more positive direction. With Janet Yellen already strongly hinting at the need for tighter monetary policy these tax changes could help push financial markets into pricing in a greater chance of rate hikes.”