Concerns about Trump's tax cut plan - arguably the biggest catalyst behind the market's daily record highs - are mounting.
Yesterday, when discussing the rising opposition to a simple "repeal and replace" of Obamacare, Goldman Sachs explained that any turbulence in resolving the Obamacare problem would spillover into other domestic policy targets, most notably tax reform, to wit:
Delays in addressing health legislation are also likely to set back tax reform procedurally. The ACA repeal/replace bill is being addressed as part of the FY2017 budget resolution, which would have normally passed last year but which Congress passed several weeks ago in order to create a procedural pathway for passage of ACA repeal legislation via the budget reconciliation process, which allows it to pass with only 51 votes in the Senate. Once the ACA legislation is enacted, congressional Republicans hope to pass the FY2018 budget resolution, which will lay out tax and spending plans for the coming ten years and provide a second set of reconciliation instructions, this time for tax reform. Since Congress follows whatever budget resolution has passed most recently, passing the FY2018 resolution before the ACA bill has passed would remove the procedural protections from the repeal/replace bill, subjecting it to a 60 vote threshold in the Senate.
Beyond the issues of timing and process, the current situation highlights the difficulty that congressional Republicans are likely to encounter in trying to make significant structural reforms on a party-line basis. If legislation addressing a longstanding political priority like Obamacare repeal is having difficulty attracting 51 votes in the Senate, it suggests Republican leaders will need to scale back their ambitions on other issues too, including tax reform. Ultimately, we continue to expect an expansion of the deficit of around 1% of GDP, with nearly all of this coming in the form of tax cuts. However, as we noted recently, the current debate suggests that tax legislation might not be finalized until late 2017 or early 2018. Along with the potential for a phased-in tax cut, this would likely spread the growth effects between 2018 and 2019.
Today, in the aftermath of Mnuchin's statements on both CNBC and Fox, where he failed to provide any details on the administration's tax reform, or to convince markets that Trump's "phenomenal" tax plan is indeed imminent and even went so far as to warn that the "new policies will have at best a limited impact in 2017," and adding that he "doesn't expect to see growth until 2018", more skeptics emerged.
One is Beacon Policy Advisors, who in a note after Mnuchin's comments, said that Treasury Secretary Steven Mnuchin’s prediction tax reform will be completed by August is "highly aggressive" and unachievable given Congress’s legislative demands.
Quoted by Bloomberg, Beacon said it expects the House to approve its version by August, leaving Senate to craft/pass its own approach in the fall.
Beacon also warned that it doesn’t see Trump offering near-term clarity on border adjustment tax (BAT), even though markets are anxious for insight and points out, as we did, that Mnuchin told CNBC Trump administration is "looking closely" at BAT.
Furthermore, Beacon writes that it doesn't expect Mnuchin to play "defining role" on tax reform and instead, Pence, with relationships with Congress members, may be the pivotal player.
In summary: the market may soon pull a Wile E Coyote - having scrambled too far, too fast, only to find itself suddenly with no firm ground below it, and the realization that any hope for a Trump tax plan to validate the recent move, will not be forthcoming for a long time.