Will Tax Reform Boost Economic Growth?
James Picerno | Mar 30, 2017 07:45AM ET
The near-term outlook for the US economy isn’t terrible, but assuming that growth is destined to accelerate sharply due to Trump administration policies looks challenged in the wake of last week’s failed efforts to repeal Obamacare. The question is whether the White House and Republicans in Congress can find legislative success by pivoting to tax reform. The stakes are high because another failure would deal a hefty and perhaps fatal blow to the notion that the so-called Trump bump for the economy is still plausible.
The stock market, by contrast, remains confident that positive change is coming. Although last week’s implosion on health care reform weighed on equities, the market has firmed up in recent days and ticked higher yesterday (March 29), closing at just 1.5% below the record high reached on March 1.
The bull run in the market is matched by rising optimism on Main Street. Earlier this week the Conference Board reported that its says Richard Curtin, the chief economist for the survey.
The bubbly mood among consumers and investors contrasts with tepid expectations for first-quarter GDP growth. Economists are expecting that economic activity will increase by a sluggish 1.9% in Q1 – unchanged from the pace in last year’s final quarter, according to this month’s survey of economists via The Wall Street Journal.
A pair of dismal scientists at Morgan Stanley point out that a large gap has opened up recently between so-called soft and hard economic data – economic surveys such as sentiment readings vs. figures that track real economic activity. “The divergence is stunning,” Ellen Zentner and Robert Rosener advised in a note to clients on Monday, as reported by Business Insider. “Upside surprises appear to be completely driven by the soft data while hard data are simply coming in about as expected.”
The question that some analysts are asking is whether the Trump administration can boost the real economy with tax reform? Maybe, but the failure to repeal Obamacare doesn’t boost confidence that legislative success will be easy, as House Speaker Paul Ryan admitted. “Yes, it does make [tax reform] more difficult but not in any way impossible,” he told reporters on Friday.
Difficult or not, Trump’s economic legacy may be defined, for ill or good, on the outcome of the tax-reform legislation. The basic plan: cut taxes far and wide. There are few details at this point about the official legislation that will be presented, but the Trump campaign’s document from last September promises that “Tax Reform That Will Make America Great Again.”
Get The News You Want
Even if the White House is successful in its tax-reform plans, will the legislative victory lay the foundation for substantially faster economic growth? It’s fair to say that expectations differ, largely along partisan lines. Trump supporters contend that trimming the tax burden will, among other things, spur new investment in the business sector, which will juice job growth. But that’s hardly a consensus view.
A recent Brookings Institution study, for example, notes that “it is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy in the long run.”
But Mr. Market thinks otherwise, at least for the near-term outlook. And a number of corporate executives agree. “I don’t think anyone at my level needs a tax cut,” Yum Brands CEO Greg Creed told CNBC earlier this week. “But if we can deliver tax cuts to the middle income in the US and below, people will spend money.”
The stock market’s rise since Trump’s election appears to be pricing such a future. But even if you agree, there’s the matter of political risk as the White House navigates the treacherous legislative road ahead. By some accounts, overseeing major tax reform through Congress will be a much tougher job for the administration than repealing Obamacare.
“I really can’t think of a consequential piece of legislation written in the White House in decades,”
Democratic former Senate Majority Leader Tom Daschle tells Politico.
“You’ve got to have legislators at the table. Legislators have to feel invested. If they’re not invested they have no stake in the game. They have no real reason to be cooperative or supportive, other than the issue itself. I think it’s a huge mistake to drive any legislative effort solely from the White House.”
But failure isn’t an option in wake of the healthcare debacle. That, at least, is the underlying assumption in the stock market. The details of tax reform could get messy, however.
“The boost to S&P 500 earnings from a lower corporate tax rate is likely to be smaller and to occur later than investors originally expected,” strategist David Kostin at Goldman Sachs wrote last Friday.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.