17.11 Weekly Viewpoint : United States: tax reform on the move!

The House approved its version of the tax reform bill, which introduces tax cuts worth 1.4 trillion dollars in 2018-27……..

The Senate is working on a different version of the bill, which should be voted by the end of November and then reconciled with the House version. Quite a few hurdles remain: it will not be plain sailing, but at the end a reform should be law by early 2018.  

The House approved the Tax Cuts and Jobs Act, with 227 votes in favour and 205 against. All the democrats voted against, joined by 13 republicans, of which 12 representing states with high tax rates: California, New York and New Jersey. Household taxation is modified as follows: a reduction in the number of tax rates from seven to four (safeguarding the highest, at 39.6%), abolishes most deductions (including health care expenses and student loans), limits the interest deduction to mortgages of less than 500k dollars, and the deduction of state and local taxes (ceiling of 10k dollars on real estate property). The abolishment of deductions is balanced by a higher standard deduction (roughly doubled) and child tax credit, with the addition of a deduction for dependent family members (expiring in 2025). Furthermore, the estate tax is repealed starting in 2025, while the Alternative Minimum Tax is repealed as of 2018. According to the estimates of the Joint Committee on Taxation (JCT), the TCJA would reduce taxes on average for all income brackets; however, given the widespread change in the system of deductions, the JCT estimates that 8% of households would incur a higher tax burden in 2019, a percentage which would increase to 20%. For what concerns businesses, the main beneficiaries of the TCJA, the corporate tax rate is cut to 20% from 35% at present, and the top rate for pass-through businesses is cut to 25% (with rules to limit potential abuses). Total expensing of investments in machinery and software is introduced for five years, interest deductions are limited to 30% of the total (with slacker limits for small companies). Corporate taxation is now defined on a territorial basis, removing incentives for fiscal inversions, and profits held abroad at the time of the entry into force of the new law will be subjected to lower tax rates (7% for illiquid assets, 14% for liquid assets). The reform implies a higher cumulated deficit of 1.4 trillion dollars in 2018-27, plus higher interest costs of 260 billion.

The ball is now in the Senate’s court, with Senate Committees discussing a different version of the bill, with an overall effect on the 2018-27 deficit of 1.5 trillion dollars. The Senate’s text also includes a measure tied to healthcare matters, which removes the individual mandate. The Senate leadership expects to vote the bill in the last week of November (next week Congress will be closed for Thanksgiving). However, the outcome of the vote in the Senate is far from sure. Senator Johnson has already expressed his dissent for the preferential treatment of corporations over passthrough businesses. Furthermore, there could be dissenters among senators elected in high-tax states (in the Senate’s version, state and local tax deductions are totally repealed). The senators that blocked the healthcare reform (McCain and Collins) have still not given their view, although Collins has already expressed doubts. Two other senators (Flake and Corker, who have been openly in conflict with Trump for some time now) are concerned about debt and deficit increases. The situation is still not firmly under the control of the leadership, as was the case with the attempted healthcare reform, and voting margins are much more limited, with a majority of 52 to 48 (plus the possible vote of Pence in case of a tie).

Even in the event of an adjustment of the proposed measures to guarantee a majority vote in the Senate, there is still work to do to reconcile the two different versions of the House and the Senate into a single bill, to be voted and brought before the President. In the meantime, the spending law will also have to be extended, beyond its expiration on 8 December. We stick to our forecast that an agreement on the tax reform will eventually be reached, although the coming weeks will be rife with suspense. In our view, the effects of the reform will be limited on growth in the medium term (1-2 tenths at best), and most of the expansionary impact should be concentrated in 2018-19, mostly as a result of the reduction of the tax burden for businesses, and of investment incentives. The effects on deficit and debt will be substantial, both in the short and medium term. 


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Source: BONDWorld