Sunday, April 30, 2017

Trump Tax Plan Has a Long Way to Go, and the BAT is Still Breathing . . . .

The one-pager released by the White House is all there is for the Trump Tax Plan so far.  The plan is long on candy (much lower corporate rates) but does not overdo it with details or any effort to address obvious issues.  As Barron's notes in this weekend's edition, the Trump plan's effort to imitate Reagan era cuts (and the Laffer Curve effect) fails for, among other reasons, because we are in a far worse situation on our national debt.  At the time of the Reagan cuts, we had national debt of 25% of GDP, whereas today we have a ratio of 80%.  In today's political environment, despite Trump bluster, this point is hardly likely to be overlooked.  The mantra in Congress is "revenue-neutral", so you can expect little flexibility on this point.

One must differentiate between Trump's bravado, and Mnuchin's confidence, and actual legislation. There is NO Republican coalition in the House to speak of, and one is not likely to appear anytime soon.  If there were a reason to come together, the Republicans would have done it for Obamacare already.  And that didn't happen . . . twice.  Saying that they are together, and actually voting together, turns out to be two different things.

In the absence of another solution, the BAT continues to breathe, however faintly. The reason is that there are few alternatives on the table to fund a reduction in corporate rates.  Kevin Brady is still planning to hold hearings on the BAT, sometimes later in May.  He hasn't given up, no doubt because he hasn't been released from his pledge by Paul Ryan.  The absence of the BAT from the Trump plan is apparently no impediment to Mr. Brady.  So please don't count the BAT out just yet.

The Republicans are making a mess of governing, on many levels, and this will have consequences. One interesting sidelight here is the impact of the ban on earmarks.  Paul Ryan held the line against earmarks with a "drain the swamp" justification last November.  This sounds like a good idea but it also hobbles the Republicans from disciplining Congressmen who go their own way.  When earmarks were part of the way of life in Congress, political bosses could rein in outliers like the Freedom Caucus by withholding local funding.  Today, without such a lever, the rank-and-file have less reason to fall into line.

At some point, this state of chaos and tail-chasing will result in some form of change.  Will Ryan and Brady turn their attention elsewhere and drop the BAT?  Will entitlements be restructured to balance out the tax cuts?  [I think this is a golden opportunity, personally.] Will Ryan and/or Brady lose their job?  Will the BAT make a comeback to solve a political problem?  Let's hope not, but until another solution gains traction, the BAT remains Ryan's and Brady's solution to the many impediments to tax reform.

Hey, they can't even line up on Obamacare reform so who knows how Republicans will get through tax reform.  But until it's resolved, you can't rule out the BAT.

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