We’re About To Go Off The Central Bank Cliff

Tax Bill Debate Is Heated

Like it or not, the tax plan is still dominating the headlines. It’s arguably more important to figure out what will be in the bill than determining whether it will pass. There is heated rhetoric coming from the House. For example, conservative Representative Kevin Brady said, “I think that both the individual and the corporate AMT — it’s costly, it’s complex — really on the business side, undermines many of the pro-growth and pro-American provisions in the tax code.” As you can tell, he’s angry with the Senate’s plan because it includes an alternative minimum tax. The AMT is important because the provision raises over $300 billion which means the GOP will need to take the Senate bill to conference instead of just having the House pass it. The over $300 billion comes from repealing the R&D credit which is $113 billion and the participation exemption which is $216 billion. The participation exemption is an exemption from taxation for a shareholder in a company on dividends received and potential capital gains from sold shares.

It makes sense that the House would be angry because they are going to need to give in to the Senate’s demands. The Senate bill is close to what we have now, so it’s not surprising to see them unhappy. As you can see from the table below, the Senate bill starts cutting corporate tax rates in 2019 which is one year after the House bill. Moving it back makes sense to because the economy is doing well now. It might start to falter in 2019, meaning the tax cut could act as a stimulus. That’s not the reason the Senate has that in the plan; it’s more about managing the deficit increase. One bright side of the Senate plan is the individual tax cuts expire after 2025. The key credit expires in 2022 for the House bill. It would be great if all the benefits from each plan were combined, but that wouldn’t be fiscally responsible. I think the market has a good understanding of what the final plan will be. That might not be so great because the market sold off throughout yesterday and had a poor performance on Tuesday. The S&P 500 was down 0.37%. It was down for the 3rd straight day which is the longest losing streak since August.