US tax reform in jeopardy - BBH

Analysts at BBH suggest that the focus in the market is shifting away from the Federal Reserve as the focus is shifting to fiscal policy.  

Key Quotes

“President Trump speaks to a joint session of Congress on February 28.  It could be the most important speech of the first 100 days of the Administration.”

“The most important part of the speech for investors and businesses will talk about tax reform.  Treasury Secretary Mnuchin still seems optimistic about tax reform and hopes to have it completed by the Congressional recess in August.  He did not provide a full-throated endorsement of the border adjustment.    Without the estimated $1 trillion revenues that it was supposed to generate, the ambitious tax cuts must be scaled back in terms of size or duration.”    

“Parliamentary maneuvering can allow the tax reform be passed with a simple majority if it would not generate a larger deficit on a 10-year horizon.  This is why you may recall, why Bush's tax cuts expired.  Mnuchin created some wiggle room suggesting that the dynamic calculations by the White House may be more optimistic (on growth) than Congress (e.g. nonpartisan Congressional Budget Office).”    

“The Republicans plan on two main sources of revenue.  Abolishing taxes associated with the Affordable Care Act (Obamacare) and the border adjustment.  However, the replace and repeal of the national healthcare is caught up on the replacement component and may not generate the tax savings that had been anticipated.”

“Moreover, at least two Republican Senators have come out against the border adjustment (Perdue from Georgia and Cotton from Arkansas).  Mnuchin's words were guarded, but it did not sound as if it would be endorsed by the President next week. Without it, Republicans will either have to scale back its ambitious efforts or to find a compromise with some Democrats.”

“Rather than a large-scale once in a generation tax reform, without the border adjustment there will either be a more common tax cut plan and/or a larger deficit.  A larger deficit would conflict with another concern of some of Trump's team, as well as some Republicans in Congress.    At the same time, some of the largest foreign holders of US Treasuries, including China and Japan, are paring back on their Treasury holdings.”