US tax cuts: Later and smaller - Westpac

There is next to no chance of a bipartisan tax bill given Democratic objections to tax cuts for the wealthy and big business, according to analysts at Westpac.

Key Quotes

“Democrats can be expected to block any tax cuts in the Senate indefinitely. The GOP has 52 Senate seats but they need 60 under regular procedures. The workaround to such resistance is the “budget reconciliation process” which allows the Senate to pass bills with a simple 51-vote majority. But, there’s a catch. Republicans first need to pass a budget for 2018 yet Republicans are heavily divided over spending cuts and do not look like they will pass a budget anytime soon. The same budgetary processes contain additional constraints – no measures are allowed to add to the deficit beyond a 10 year window, necessitating offsetting revenue measures.”

“But, both Trump and the House envisage tax cuts that could cost $5-6trn over a decade. Almost all the major deductions that could be conceivably repealed benefit individuals rather than corporates and opposition will be mobilised quickly. Officials have openly discussed repealing the mortgage interest deduction for example but there are 33 Republican House members from the 10 states that are the biggest beneficiary of the deduction, larger than their majority in the House. There simply are not enough deductions and loopholes in any case to offset a package on the scale Republicans talk about.”

“Officials have talked about “dynamic scoring”, noting that tax cuts will boost growth and supply the needed revenue to fund tax cuts but that works only up to a point – the committee's responsible for “scoring” tax cuts can be cajoled into higher growth assumptions but the accompanying higher interest rate and inflation projections will be a major offsetting negative. In any case a large rump of the Republican party is genuinely concerned about the fiscal outlook and are unlikely to be moved by overly optimistic growth assumptions. Officials could move to a budget window of 20-30 years instead of 10 but the same house members are unlikely to be impressed by decades of red ink in the fiscal accounts either.”

“The most likely outcome then is a smaller package, with a 10-year sunset clause, an outcome that in all probability will leave markets wanting.”