Still a long way to go for tax reform - Danske Bank

"Yesterday, the ‘Big 6’ Republicans published the tax framework for tax reform. The release is nothing more than a blueprint in the sense that we have not got any details about estimated costs, for instance," notes Danske Bank Senior Analyst Mikael Olai Milhøj.

Key quotes:

"The Committee for a Responsible Federal Budget (CRFB, a non-partisan organisation analysing US fiscal policy) estimates the proposal will cost around USD2,200bn over 10 years (i.e. approximately 1% of GDP per year over 10 years) although this is based on a number of assumptions as the blueprint is missing a lot of details. However, easier fiscal policy may not increase growth, as it would most likely be offset by tighter monetary policy, although uncertainty remains high about which direction the Fed will go in next year due to the vacant seats in the Board of Governor."

"A headache for the Republicans is that USD2,200bn is more than there is room for in the Senate draft budget (reportedly USD1,500bn over 10 years), which also by the way is not aligned with the House yet. So, unless changes are made, Republicans cannot pass all of the elements in the framework via budget reconciliation (which the Republicans need to in order to pass tax legislation with only 51 votes and avoid Senate filibusters by Democrats as it will become too expensive. Two other problems are that tax reform may not add to deficits after 10 years (‘sunset provisions’)."

"Although the troublesome House Freedom Caucus (conservative Republicans, usually fiscal hawks) has supported the tax framework in a statement, the question is whether the caucus remains supportive if tax reform increases government deficits and hence government debt. While the Republicans agree on the goal, they disagree on the means. We still think the two most likely scenarios are a smaller tax reform or no deal at all, not least given that Congress is in session for less than 50 days this year, meaning that the Republicans are running out of time. As we might face a new government shutdown in December when the short-term government funding deal ends, Trump also has other topics on his agenda and the mid-term election is coming up in November next year, the Republicans need to act fast and the Republicans’ attempt to repeal and replace Obamacare indicates this is easier said than done."

"It is worth noting that Trump and the White House are still working on a bipartisan tax reform with moderate Democrats (something for example House Speaker Paul Ryan has rejected completely) in order to side-line Republican ‘troublemakers’. After the debt limit deal with the Democrats, this scenario has become more likely, not least given that one reason why Trump struck the deal was because he has become increasingly frustrated with the Republicans’ inability to govern. Previously, the Democrats sent a letter to Trump writing that they will not participate in tax reform cutting taxes for the wealthiest, which is something Trump can live with, at least according to his recent tax speeches. The Democrats also want a revenue-neutral tax reform, which means it is still very difficult. One advantage though is that tax reform would become more permanent, as Trump can avoid sunset provisions if he is able to find 60 votes in Senate."