US: Kneeling Before Congress

Published on September 29, 2017

The single most important takeaway in the unveiling of the “Big Six” tax blueprint earlier this week is not its much criticized lack of detail — there aren’t any, frankly — but rather what is promised to be a fierce focus by the White House to help propel the eventual tax bill to passage.

*** Learning a hard lesson from the debacle over health care reform, the White House (and by that, we mean President Trump) is committed to be more disciplined in staying on message and to work in close coordination with the GOP leadership on Capitol Hill in selling the tax cut plan and to keep the Republican Party from fraying as it has repeatedly this year. In particular, the hope is that President Trump can use the bully pulpit of the presidency to pick off a handful of Democratic votes by the time the tax cuts come down to the crucial floor votes. ***

*** The blueprint certainly lacked detail — the politically difficult pay-fors for one — which will instead be handed off to the tax writing committees on Capitol Hill. But that is probably a net positive and in fact preferred by the Republican Hill leadership. Confident they won’t be undermined by a storm of tweets, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell are vowing to deliver the necessary votes, beginning next week in a first stab at passing FY2018 budget, with the crucial resolutions that will include the essential reconciliation instructions. Execution will be everything. ***

*** Political determination aside, however, passing tax cuts by year-end on the scale being proposed — some $5.8 trillion before at least some payfors — is going to be immensely challenging, even for limited tax cuts, which we still think is more likely (see SGH 5/5/17, “US: From Here to Tax Reform”). Senate Democratic Minority Leader Chuck Schumer holds considerable leverage over the final shape of a tax bill, and the lobbyists have not even started to ramp up. Tellingly, the White House is privately conceding February next year, with no backdating for 2017, for eventual passage. ***

Trump’s Tax Cut Priorities

The lack of detail in the “Big Six” tax blueprint released on Wednesday was more or less on purpose to limit the time the lobbyists have in scrambling to protect coveted exemptions and tax breaks. At this early stage in any case, it would be a low reward to speculate which bits will be dropped, forced out, or negotiated away over the coming months as the legislative language is debated and the bill drafted and working its way through the committee process to eventual floor votes.

Instead, when it comes to the President’s priorities, there are three:

The first is cutting the corporate tax rate. President Trump announced this week he reluctantly agreed to drop the corporate rate from the current 35% to 20% instead of his original vows of 15%. To be fair, he was always conceding in private the 15% target was a starting point to the art of the deal, and in this case, most believed him because it was so far from realistic that few believed it anyway.

The new “red line” is 20%. But that is likely to be bent upwards in the coming months to be more in line in its final version to the 22%-24% (probably a bit higher) the tax staff has projected will be needed at minimum. Despite the red-line claims, if there is tax deal the White House would be happy with, a rate anywhere in the low 20% would be accepted as victory in bringing US rates competitively close to international standards.

The second priority is the repatriation of corporate earnings held overseas. Coupled to a lower overall corporate tax rate, the windfall of corporate cash flowing back into the US is a signature sign of the Trump campaign promise being delivered to the electorate in bringing companies and jobs back home.

There has been talk floated of two, unspecified, incentive rates, a lower one for illiquid assets and a higher one for liquid assets. No number has in fact been penciled in yet for either and especially for the prized liquid assets, in part because its tax rate represents one of the few windfalls of the tax plan that can and will be traded off in multiples of its revenue worth for other prized parts of the tax package before a hard number is finalized. A best guess for now is a 10% one-time tax incentive for the estimated $2-3 trillion dollars parked offshore.

And there is yet any final decision on where the broader, permanent territorial corporate tax system will go, though we suspect it may fall by the wayside given its complexity, the politics of the one-time repatriation, and lowering of the overall rate. Ironically, a one-off as opposed to permanent repatriation solution would help in the CBO scoring of a windfall for the inner years of the conventional ten year baseline, since there will be no need to offset lost revenues for the outer years that a more permanent lower territorial rate would entail.

Finally, the President’s third priority on taxes is on the individual side, namely the doubling of the “standard deduction” for taxes for lower and middle-income tax payers who do not itemize their deductions.

Retooling individual tax rates is always the most politically sensitive and difficult, enough so that House Speaker Ryan and House Ways and Means Committee Chairman Kevin Brady were arguing to go for corporate tax reform first and only tackle the individual tax reform in a second stage. President Trump said no, refusing to separate the two, and is pushing hard on the standard deduction reform, in particular to politically neutralize Democratic counter attacks.

The simplification and collapsing of the tax rates into three tiers is equally high on the President’s agenda, but is also likely to be even more politically difficult than the doubling of the standard deduction. It may fall to the wayside in the final negotiations. Likewise, another tax “reform” that may fall to the wayside for the White House is the repeal of the estate tax. A red meat issue for the Republicans, to be sure, but it also has little significance in revenue terms, and that it is so highly charged politically in the eyes of the White House, makes it an ideal item to bargain away if needed.

Trump’s 2018 Nightmare

The reason for the unusually determined and focused White House is pretty straightforward: there is no small amount of concern around the President that yet another legislative disaster like failing to push through the promised tax cuts could lead to political rout in the November 2018 mid-term elections.

Interestingly, what keeps the White House (i.e., the President) up at night is not, as may be generally assumed, on the Senate side, where the GOP has the slimmest of two seat majorities; rather the political vulnerability is seen on the House side.

Despite conventional wisdom about the gerrymandering of “safe” GOP seats, and a much more comfortable 22 seat GOP majority, political operatives worry the Republicans are far more vulnerable to a national “wave” of anti-Trump and anti-do nothing Congress votes translating into a wholesale loss of the House to Democrats.

In something of a haunting parallel in the aftermath of Newt Gingrich’s sweep of the House into Republican hands with his “Contract with America” in 1994, the first agenda item for a newly Democratic control of the House — and its all important investigative committees — could be a concerted investigations into the alleged Russian collusion and a fast track to enter Articles of Impeachment against President Trump – in effect killing the second half of his term.

In Clinton’s case, the divided government did eventually lead to positive legislation, economic growth, and a successful presidency, but along the way it also included the humiliation of the Monica Lewinsky scandal and an impeachment vote that only killed off in the Senate that may not be as forgiving this time round should it come to that.

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