Viewed as the most important legislative effort by President Trump and the Republicans, the tax reform has been a major uncertain factor for the global market. Stock prices fluctuate as reactions to each of the major steps on the tax overhaul path. The Trump tax reform is intended to entail significant changes to American taxation structure and may have profound impacts upon the U.S. and global economy, making it the most significant tax reform since 1986. Here are some crucial issues that we should focus on before the initial Senate vote around early Dec: Where is the tax bill now? How likely is the Republican tax plan to become law? And more importantly, what are the potential impacts on the market and the U.S. economic growth?
The US Senate is expected to vote on its tax reform bill this week, as early as Thursday (November 30th), two weeks after the House passed its vote. Unlike the House vote, which was largely non-event, the Senate vote attracts more attention, as the Republicans only hold a two-seat slim majority in the Senate and there are still notable concerns among Republican senators on the tax bill. If the Senate fails to pass the bill, it will probably mean the end of the tax overhaul at least before the midterm elections next November. Such a result would significantly damage the Republican Party’s chances of continuously holding majorities in both chambers after the midterm, and even the odds of Trump’s re-election in 2020.
With the September Fed meeting behind us, market attention will turn toUS tax reform prospects. Since January, the market has steadily loweredexpectations for such reform. Despite a tough legislative process and thelooming 2018midterms, there are potential avenues for targeted reformsthat could be a positive for longer term GDP growth, if designed properly.There are two avenues for tax reform. Regular process in Congressrequires 60Senate votes to avoid filibuster. The Republican leadershipis currently pursuing the reconciliation process, which only requires amajority, allowing legislation to be passed without the minority party.For the most part in reconciliation, legislation must be scored as deficitneutral, although there are ways to exempt legislation from deficit neutralrequirements.
From Washington, this is VOA news. I'm David Byrd reporting.
The Senate finalized its own tax bill last week, and as we have stated in previous reports, the Senate bill has its own key features that differ from the House bill in many ways. The key features of the Senate tax bill included: 1) individual tax overhaul will expire after 2025, 2) the corporate tax cut will be permanent but only starting from 2019, 3) permanently repeal the “individual mandate” in Obama’s Affordable Care Act (ACA). The individual mandate requires most individuals and families to have a certain minimal amount of health insurance; otherwise, they have to pay a fine, called the individual shared responsibility payment, which is one of the ACA tax provisions.
There are some constraints that limit the scale of tax reform. First,Congress has a busy calendar, including repeal / replace of the AffordableCare Act and government funding that expires December 8th. Second,the grim long-term fiscal outlook could act as a binding constraint, asRepublican deficit hawks may be reluctant to sign up for tax “reform”that adds to the deficit. Third, finding additional revenues or offsettingspending cuts to limit the impact on the deficit will prove difficult. Inthis respect, as market participants parse the upcoming headlines out ofCongress, particular focus should be on how measures are paid for.
The House of Representatives votes to overturn former President Obama's health care law.
Given this much more narrow 52-48 edge for the Republicans in the Senate, the Republicans still cannot afford more than 2 dissenters within the party for this week’s vote. However, currently, there are already more than two Senate Republicans who have expressed oppositions / concerns / reservations towards the Senate bill. Internal fissures are mainly focusing on three areas: 1) the repeal of ACA’s individual mandate could lead to about 13 million people losing their healthcare coverage in the next 10 years, and would possibly cause a significant increase in average health insurance premiums; 2) pass-through entities still face higher taxes compared to large corporates, and better treatments for small businesses should be implemented; 3) fiscal hawks still have notable concerns on the rising budget deficit caused by tax cuts. Although such concerns are already addressed in the Senate bill by adding a sunset clause on individual tax cut that will expire after 2025, some Senate Republicans are still worried about the possibility of temporary tax cuts being extended.
While there is still uncertainty, we conclude that the lowest hanging fruitfor tax reform may lie at the corporate level. Along with corporate tax ratecuts, one example of achievable corporate tax relief could be a permanentextension of business bonus depreciation, previously extended four timessince its enaction in 2008. The Trump administration and CongressionalRepublicans may also seek a modest household tax cut ahead of the midterms.Trump’s recent overtures towards Democrats may help passage inthis area if cuts are skewed toward the middle class.
After some last minute debate on Thursday, the House narrowly passed the bill.
However, our baseline case is that the Senate will manage to pass its tax bill this week. 1) Unlike the healthcare reform earlier this year (which lacked a detailed and well-structured alternative plan), the tax reform bills are better prepared with more comprehensive and feasible contents that have gained more support within the Republican Party: the House voted 227-205 to pass its tax bill, which was more favorable than the House vote on healthcare reform (217-213) in May; 2) although there are notable concerns on the potential inequality of the benefit distribution arising from the tax cut, the tax cuts will still broadly lower tax costs for most individuals and corporates; 3) it is almost a “must-win-battle” for Trump and the Republican Party: with none of his election promises turning into reality, the tax reform could be Trump' last hope before the coming midterm elections in November 2018. If the tax reform, again, fails, it could significantly impact the Republican Party’s chances of continuously holding majorities in both chambers, and even Trump’s re-election in 2020.
Even if a modest tax cut passes, there are forces that will likely limit thegrowth impulse. Reduction of tax expenditures, offsetting spending cuts,and tighter monetary policy would all work to limit the tax cuts' positiveimpact on growth, though it is uncertain how pre-emptive next year’sFed will be after it is overhauled with Trump appointees. The current Fedwould want to tighten policy to prevent an overheating economy, a morelikely prospect if Janet Yellen is reappointed.
"The ayes are 217. The nays are 213. The bill is passed. And without objection, the motion to reconsider is laid upon the table."
Finally, even the Senate bill is eventually passed, the reconciliation process could be contentious, given the significant differences between the two bills. Thus, it is challenging for Trump to intend to finalize the tax reform before Christmas, and in our view, it could be delayed until 1Q 2018. For the final version of the tax bill, we see it more likely to be closer to the Senate bill. 1) The Senate bill is less aggressive and, to some extent, trying to scale back the rising budget deficit. 2) The two chambers still need to vote on the result of the reconciliation; given the slim majority in the Senate, the House may need to make some compromise to the Senate.
The major difference between Obamacare and the new bill is coverage for pre-existing conditions. Obamacare barred insurance companies from charging customers more because of such illnesses. The new bill would allow states to have the choice to opt out of that condition.
Critics say people who were sick because of no fault of their own may no longer be able to afford health insurance.
Republican leaders traveled down Pennsylvania Avenue to meet with President Trump after the House vote.
On the South Lawn, the president said that the American health care act will be a better deal for patients.
"It's been a catastrophe and this is a great plan. I actually think it will get even better. And this is, make no mistake, this is a repeal and a replace of Obamacare, make no mistake about it."
House Democratic leader Nancy Pelosi said on Capitol Hill that Republicans will have to deal with all the consequences of this legislation.
"But, it's an opportunity. It's an opportunity because the public will now see what they gave their name to. They have put their name next to your paying more for less."
The measure has to pass the Senate, where it is likely to undergo significant changes. Republicans control 52 of 100 Senate seats and the new bill could have a difficult time finding support from moderates.
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President Donald Trump loosened the government's enforcement of a rule that bars tax-exempt churches from participating in political activity.
In a White House ceremony to mark the National Day of Prayer service day, Trump announced the executive order.
"We will not allow people of faith to be targeted, bullied or silenced anymore. And we will never, ever stand for religious discrimination, never, ever."
Trump said the order gives "maximum enforcement discretion" to the Internal Revenue Service in tracking the ban on political activity by religious groups.
It does not directly repeal the so-called Johnson Amendment, which forbids political activity from religious organizations because of their tax exempt status.
The order gives "regulatory relief" to conservative religious groups that object to provisions of the national health care reforms that required them to pay for health insurance plans that cover birth control and other measures they feel go against their faiths.
Asian-Pacific foreign ministers say that North Korea must abide by all U.N. Security Council resolutions, demanding it give up its nuclear ambitions.
The ministers were in Washington Thursday for a special ASEAN meeting hosted by U.S. Secretary of State Rex Tillerson.
Tillerson and the Trump administration are courting Asian support for U.S. efforts to pressure Pyongyang into scrapping its arms buildup, including efforts to build a nuclear-tipped missile capable of hitting the U.S.
Much of the attention has been directed at China, North Korea's chief ally, but all 10 members of the Association of Southeast Asian Nations have diplomatic relations with North Korea. Washington believes they can also put pressure on Pyongyang, including economic pressure.
Russia, Turkey and Iran have agreed to a Moscow-proposed deal to establish the so-called "de-escalation" zones in Syria to try to end the six-year conflict there.
Representatives of the three Syria cease-fire guarantor nations signed a memorandum to that effect at the end of the latest round of peace talks in Kazakhstan.
The proposal calls for taking measures to reduce fighting in four designated areas of Syria where rebels not associated with the Islamic State terror group control significant territory.
No details were released on how the three countries, which support different sides in the conflict, would attempt to end the violence.
A mixed day on Wall Street, with the Dow Jones Industrial Average closing lower, but the S&P 500 and the NASDAQ up. European markets were higher. Asian markets were mixed.
I'm David Byrd in Washington.
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