The analysis team at Nomura expects a modest personal tax cuts in US while they think that business tax reform is unlikely and expects only a slight response from the Fed.
Key Quotes
“Rhetoric and speculation about tax policy are now likely to increase in view of the dimmed outlook for passing health care reform. By using reconciliation for tax reform, Republicans will need to include reconciliation instructions in the upcoming FY 2018 budget.”
“The incentives and hence likelihood that Congressional Republicans will pass a tax package before the next mid-term elections have increased.”
“However, we expect tax cuts, not reform. Significant tax reform has not occurred since 1986 (31 years ago), and the political landscape today is likely to keep that clock ticking. Passing comprehensive tax reform takes considerable time, and a high-level agreement has yet to be reached within the Republican ranks. Moreover, passing reform requires near unanimous agreement within the Republican caucus, a high bar given that special interests would lobby aggressively against any roll-backs of existing tax preferences, a key ingredient to true tax reform.”
“We are sticking with our forecast of top-line modest tax cuts of 0.5% of GDP per year (about $100bn/year), in line with history.”
“Factors limiting the push for larger tax cuts include the state of the economy (unemployment, currently at 4.4%, and many, including us, forecast it to drift lower) and the deteriorating deficit/debt outlook. Historically, sizable tax cuts have been passed either to ameliorate an economic downturn or because the fiscal outlook was much more favorable.”
“We expect the tax cuts to center more on individuals than on businesses and the package to be signed into law by late 2017 or early 2018.”
“A tax cut of 0.5% of GDP would have little to no supply-side effects on the economy, and instead would have modest effects on growth, financial markets, and on Federal Reserve policy. Based on simulations, we find:
- GDP would be boosted by 0.1pp in Q1 2018, with diminishing effects thereafter.
- Yields on 10yr Treasuries would increase less than 10bp, but it is unclear the extent to which that is already priced into the market.
- Tax cuts would raise the expected Federal Funds rate by 10bp by the end of 2020.”
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