Tax Bill Update

Previous articles have shown estimates of the GOP tax plan done by the Joint Tax Committee which have it leading to high deficits and not much economic growth. To counter some of its negativity, I have the chart below which shows that the CBO underestimated the GDP growth in 2003 after the Bush tax cuts were enacted. As you can see, actual nominal GDP growth was 1.2% higher than the estimate. The economic boost in the years following the tax cut might be better than the government estimates. Even though growth may have decelerated in 2018 because of cyclicality, it will probably end up being better than 2017 if the tax cuts are passed. This also means the estimates for the deficits in the next 10 years might be overzealous. I’m trying to look at all the analysis to figure out the most likely result of the tax plan. It’s a challenge because of how politically charged this topic can become.

President Trump is going to give a speech on Wednesday. Hopefully, he mentions how the Democrats and Republicans will agree on a government spending bill by the deadline on December 22nd. The debate remains centered on defense spending with the GOP wanting more and the Dems resisting. With the GOP tax plan, the Senate and the House have appointed conferees to form a compromise between both plans. It seems likely the corporate tax rate will be cut to 20%. The goal is to get the compromise plan done by this week. When the plan comes out, the market will have a swift reaction, with the winners which are likely the banks and the retailers moving up and the losers which are tech firms with low tax rates and little cash overseas moving down. Next both chambers will vote on the plan, needing a simple majority to pass it. The two questions remaining are what will be in the compromise bill and whether both chambers will vote in favor of it. That vote should occur next week, making it the last noteworthy event of the year which can cause volatility in the markets.