Wall Street's reaction to Trump's tax plan: Ho hum
Wall Street has been busily trying to decode the long awaited and finally delivered tax cut proposal from the Trump administration. After months of hype and flinty one-page outlines, the latest nine-pager was finally enough to start running an analysis on. So far, the response has been far from enthusiastic, especially with President Trump and influential Republican Sen. Bob Corker of Tennessee trading schoolyard barbs over Twitter in recent days.
"As investors gauge the chances that some form of tax reform will pass, we reiterate the old saying: Tax reform will die a hundred deaths before it passes," Keefe Bruyette & Wood analysts said in a note on Tuesday assessing the prospects for tax reform. "Despite some sophomoric tweets over the weekend, we view Sen. Bob Corker as a serious player on policy who is not going to tank tax legislation because of a spat with the president."
The Committee for a Responsible Federal Budget does a nice job of breaking down the detail and the fiscal impacts of the plan. Tax brackets will be consolidated. The Alternative Minimum Tax will be dumped. The standard deduction will be doubled. Most deductions will be dumped. And the corporate tax rate would be lowered to 20 percent while the "pass-through" rate would fall to 25 percent.
Overall, the CRFB estimates, the cuts will be worth a total of $5.8 trillion through 2027 while the tax increases will be worth $3.6 trillion. That would result in a net hit to the national debt of $2.7 trillion including interest. This doesn't factor in any potential boost to the economy, if any, leaving out what's known as "dynamic scoring," which tries to include such impacts.
This fact, along with the negative affect to residents in high-tax states like New York and California, has already brought out criticisms of the plan from both Democrats and Republicans. And that makes estimating the likely impact to the economy more difficult, since it's outlook for passage is murky.
That isn't stopping financial analysts from giving it a shot, however.
UBS economist Seth Carpenter splits the middle, expecting only minimal change to his baseline of 2.25 percent GDP growth, 4 percent unemployment, 1.75 percent inflation and two quarter-point rate hikes from the Federal Reserve for 2018. His skepticism flows from the fact that any tax reform plan that adds to the deficit will be tough to push through Congress given the need for another debt limit vote in the first half of 2018 and the midterm election next November.
And even if it passed, because of the relatively low "multiplier" effect of the proposed tax reforms, the economic impact would be relatively modest. As a result, the upside to 2018 GDP growth is only 2.75 percent if the plan is rapidly enacted, which is unlikely and would probably be offset by additional rate hikes from the Fed.
Goldman Sachs (GS) economists are of a similar view, illustrated in the modest lift to GDP growth estimates into 2018 and beyond in the chart above.