15.12 Weekly Viewpoint : United States: tax reform at the finish line.

The Republicans are close to reaching an agreement on the tax reform bill: a vote next week in both the House and the Senate is increasingly likely, followed by the signing into law by the president before Christmas……

 The main compromises reached so far are as follows: the tax rate on corporate earnings is reduced to 21% (from 35%) and will come into force as of January 2018; the maximum tax rate on households’ income is cut to 37% (from 39.6%); the Alternative Minimum Tax on businesses is repealed, and pass-through businesses will benefit from a 20% deduction of capital income. Discussions are still open on other aspects (child tax credit, estate tax, tax rate on the repatriation of profits held abroad), but a reconciled bill should be agreed on by the end of this week. Although there are still no explicit declarations of voting intentions, and several senators have reserved their vote pending an assessment of the measures, at this point there is a very good chance of the tax reform being approved swiftly. The effects of the reform should be moderately expansionary in the next two years.

Based on the Joint Committee on Taxation’s dynamic estimate, the deficit should widen by 1 trillion dollars in 2018-27 (static estimate: +1.4 trillion), and growth should increase on average by 0.8pp in the period. The Treasury forecasts an (illusory) increase in growth of almost 1pp a year. Based on the information available, we think it is reasonable to expect a positive effect of around 0.3 pp per annum in 2018-19, declining thereafter. The macroeconomic impact of the reform is likely to be contained by the fact that many measures addressed to households will be temporary, and that part of the tax cuts enjoyed by businesses could be distributed to shareholders rather than invested.

Brexit: the British government’s remarkable concession on the customs regime at the border with Northern Ireland will buffer the fallout of exiting the EU on the United Kingdom’s foreign trade.

Last week, negotiations on the United Kingdom’s exit from the European Union brought a major surprise. The British government managed to persuade the DUP unionists, which support the government, to uphold a political declaration which commits the UK to keep Northern Ireland aligned with EU regulations on the internal market and the customs unions. The feared government crisis has been averted for now. Together with the concessions made on the exit bill and on the rights of respective expatriated citizens, this has allowed negotiations to move on to phase two, on the terms of the long transition period that will follow the formal exit from the EU. However, alignment will pose problems of no simple solution for the United Kingdom: unless the entire country agrees to guarantee the same alignment (which could happen, despite the affirmation that the decision has not implications in terms of the final agreement) Northern Ireland would be included in two different customs systems, creating an ambiguity which would have to be managed. In any case, such a political commitment empties out of any real substance the promise made by hard Brexiters that the country would have reclaimed its law-making sovereignty, what’s more without offering any guarantee at all of access to the single market for services. Another problem for the UK government emerged this week when Parliament approved an amendment imposing a meaningful vote in Parliament on the final agreement the government will sign with the EU, before it is legally enforced. But what could happen if the agreement is rejected? In theory, the United Kingdom would in any case exit the Union, with no forms of mitigation, if time were too short (and/or the EU unavailable) to revise the terms rejected by the British Parliament. Therefore, the ratification vote could prove to be more a formality than a key passage.

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Source: BONDWorld