Odds For Meaningful Tax Cuts Have Improved Significantly

In the last two months, the odds of Congress passing meaningful tax cuts this year basically plunged to near zero but have rebounded strongly in the last few weeks. As of today, the odds of significant tax cuts before yearend look pretty good, but it’s still complicated. Let’s revisit what’s happened over the last two months.

You will recall that Congress looked quite disoriented back in late July when the Senate failed to approve the “repeal and replace” of Obamacare – thanks largely to the unexpected defection of Arizona Senator John McCain.  At that point, the odds of passing tax cuts this year looked grim at best.

Fast-forward to August 12 when the city of Charlottesville, VA was engulfed by violence as white nationalists and counter-protesters clashed in one of the bloodiest fights to date over the removal of Confederate monuments across the South.

President Trump responded to the Charlottesville violence by saying it was an “egregious display of hatred, bigotry and violence on many sides — on many sides.”  This comment by Trump was heralded by the media as placing blame on both sides – the white supremacists and the counter-protestors. This set off a media firestorm chastising the president.

Members of Congress on both sides joined in the outrage over Trump’s comments. This, too, made it look like tax cuts were most likely off the table for this year.

Add to the mix the twin hurricanes: Harvey that made landfall in Texas on August 25, and Irma that devastated Florida on September 7 and afterward. President Trump was given high marks overall for his handling of the hurricane relief efforts.

Then there was President Trump’s surprise deal with Democrats Nancy Pelosi and Chuck Schumer to increase the debt ceiling in early September and avoid a government shutdown. While the debt ceiling agreement was controversial, to say the least, many in the media again gave Trump credit for reaching out to the other side to get a deal done.

The point is, President Trump’s credibility plunged over his Charlottesville comments on August 12 but has rebounded significantly following the hurricanes and his debt ceiling deal with the Democrats by early September. In the end, this has increased the odds of tax cuts this year.

Now let’s get into some specifics on why. As you know, most Democrats oppose Trump’s suggested tax cuts, especially his desire to cut the corporate income tax rate from 35% to 15%. The Dems have repeatedly said this is a tax cut for the “rich” and vehemently oppose it.

However, new data from the White House Council of Economic Advisers reinforce earlier studies which found that apprx. 70% of the benefits of corporate tax cuts ultimately go to wage earners, not corporate bottom lines. Surprise, surprise!

This news has more Democrats taking notice and coming around to the idea of tax cuts – especially those Democrats facing tough re-election fights in 2018. So, it now seems more likely that Trump could get at least some Democrat support to pass tax cuts this year. Maybe.

Ironically, there are some in the Republican “establishment” who oppose slashing the corporate income tax rate from 35% to 15%. This faction (who generally despise Trump) say the corporate tax rate should only come down to 25% at best. They argue that a drop to 15% would increase the budget deficit.

They are probably correct in the short-term. But in the long-term, slashing the corporate rate to 15% should result in stronger economic growth, renewed capital investment in the US, new plants and factories and millions of new jobs for Americans. It would be good for the economy and would generate more tax revenue for the federal government over time.

Add to that, if there is a one-time reduced tax rate for corporate profits held overseas, corporations could bring home $1-$3 trillion in profits now held offshore to invest in new US ventures to create even more jobs.

So echoing the president, if we want to significantly boost capital spending, jobs, wages, bring back overseas profits, stop American companies from moving overseas and make the investment climate in America among the best in the world, we need a big-bang slash of our corporate tax rate.

The bottom line is that the likelihood of meaningful tax cuts before the end of this year is looking more and more likely. Even some Democrats may come onboard. Let’s hope the Republican leadership doesn’t blow it.

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