US: Final voting on the tax bill awaited - Rabobank

The final vote – this time for real – on the US tax bill is scheduled in the House of Representatives and will be a key event for today’s session, according to analysts at Rabobank.

Key Quotes

“After it passes, it can finally be sent to the White House to deliver President Trump’s first major legislative victory. While Democrats are trying to discredit the tax bill as a handout to large corporations and the rich, the Republicans trust that once the tax cuts become effective they will deliver them a strong result in the midterm elections in November next year.”

“Our own simulations with a large macroeconometric model suggests that while a large corporate tax cut could provide a substantial boost to GDP growth in the first two years of implementation, the impact on growth will fade. And although the level of GDP will remain on a higher level than in the absence of the tax cut, the ratio of public debt to GDP will continue to rise. Perhaps a good reason for the Republicans to start downsizing the welfare state next year?”

“Anyway, the Republicans in Congress are finally delivering legislation for their President. In fact, the tax bill also contains a repeal of a crucial part of Obamacare – the obligation for individuals to purchase health insurance –, making up for the painful failure earlier in the year to repeal and replace Obamacare. While clearly a legislative victory, it is now up to the American voters to either reward or punish the Republicans in November’s midterm elections, when the entire House of Representatives and a third of the Senate is at stake. Note that while the corporate tax cuts are permanent, the income tax cuts are only temporary. What’s more, the income tax cuts appear to benefit higher incomes more than middle and lower incomes.”

“Finally, as this bill has no Democratic support the tax bill could have the same fate as Obamacare if the Democrats take back the Senate or the House in the coming years. In the Obama years the Democrats did not want to reduce the corporate tax rate below 28%. Therefore, it remains to be seen how permanent the corporate tax cut to 21% is. This could also dampen its beneficial effects as investment decisions require a long planning horizon.”

“Meanwhile, the US Congress is not done for the year yet after today’s House tax vote, because there is still a temporary spending bill to be approved to avert a government shutdown before the end of the week.”