In Major Victory For Trump, Senate Passes "Sweeping" Tax Bill Which Nobody Read: Here"s What"s In It

Shortly before 2am on Saturday, the Senate passed "the most sweeping rewrite of the U.S. tax code in three decades, slashing the corporate tax rate and providing temporary tax-rate cuts for most Americans" handing Republicans a badly needed legislative and political victory. Senators voted across party lines in a 51-49 vote, ending days of debate and "hand wringing" as leadership worked frantically behind the scenes to win over holdouts and get the proposal in line with the chamber’s rules.

Tennessee Senator Bob Corker, who had cited concerns over the bill’s effects on federal deficits, was the only Republican dissenter. Corker, who is retiring after 2018, said in a statement ahead of the vote that he "wanted to get to yes" on the tax plan. "But at the end of the day, I am not able to cast aside my fiscal concerns and vote for legislation that I believe, based on the information I currently have, could deepen the debt burden on future generations,” he said.

Corker"s dissent however was not enough to halt passage, and shortly thereafter Vice President Mike Pence presided over the final passage vote. GOP senators, who stayed on the Senate floor until the vote closed after midnight, broke out into applause after Pence announced the bill had passed.  

"This is a great day for the country," Majority Leader Mitch McConnell (R-Ky.) said during a 2 a.m. press conference after the vote.  "We have an opportunity now to make America more competitive, to keep jobs from being shipped off shore and to provide substantial relief for the middle class."

The bill would lower tax rates for individuals through 2025 and permanently cut the corporate tax rate from 35% to 20% (more details below). The bill’s tax cuts for individuals are temporary in order to comply with budget rules that the measure can’t add to the deficit after 10 years. The bill would also repeal ObamaCare’s individual mandate, a priority for President Trump and many Republicans.

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The vote brings the GOP close to delivering a much-needed policy win for their party and President Donald Trump. After the vote, Trump said on Twitter that he looks forward to signing a final bill before Christmas. The president expressed gratitude to McConnell and Finance Committee Chairman Orrin Hatch for steering the measure through the Senate. “We are one step closer to delivering MASSIVE tax cuts for working families across America,” Trump wrote on Twitter.

We are one step closer to delivering MASSIVE tax cuts for working families across America. Special thanks to @SenateMajLdr Mitch McConnell and Chairman @SenOrrinHatch for shepherding our bill through the Senate. Look forward to signing a final bill before Christmas! pic.twitter.com/gmWTny3SfS

— Donald J. Trump (@realDonaldTrump) December 2, 2017

On Saturday morning, Trump followed up his praise to the Senate GOP, tweeting the "Biggest Tax Bill and Tax Cuts in history just passed in the Senate. Now these great Republicans will be going for final passage. Thank you to House and Senate Republicans for your hard work and commitment!"

Biggest Tax Bill and Tax Cuts in history just passed in the Senate. Now these great Republicans will be going for final passage. Thank you to House and Senate Republicans for your hard work and commitment!

— Donald J. Trump (@realDonaldTrump) December 2, 2017

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Amid the republican jubilation over the passage of a bill which is heavily weighted to benefit corporations and pass-throughs, and will encourage all self-employed businesses to become LLCs, there was juist one problem: nobody actually read the 479-page bill.

As Montana Senator Jon Tester wrote late on Friday:

I was just handed a 479-page tax bill a few hours before the vote. One page literally has hand scribbled policy changes on it that can’t be read. This is Washington, D.C. at its worst. Montanans deserve so much better. pic.twitter.com/q6lTpXoXS0

— Senator Jon Tester (@SenatorTester) December 2, 2017

NY Governor Andrew Cuomo showed what the "handwritten notes on the page" looked like:

Senate Republicans are so desperate for a win they are going to pass a tax increase on New York with handwritten changes to the bill. pic.twitter.com/pT2Xvubiy2

— Andrew Cuomo (@NYGovCuomo) December 2, 2017

Commenting on this, Senate Democrat Charles Schumer noted that a set of last-minute revisions to the bill changed it in ways that had yet to be analyzed by the Joint Committee on Taxation, Congress’s official scorekeeper for the effects of tax legislation. “Is this really how Republicans are going to rewrite the tax code? Scrawled like something on the back of a napkin?” However, McConnell said the bill, the first text of which was introduced on Nov. 20, went “through the regular order.” He dismissed complaints like Schumer’s. “You complain about process when you’re losing,” McConnell said.

Bottom line: the chaotic process was similar to how Obamacare was passed on Christmas Eve in 2009: in fact maybe a slight improvement: at least this time Congress didn"t have to "pass the bill to find out what is in it." And it"s not like anyone reads these bills anyway.

So what happens next?

Before it goes to Trump, lawmakers will have to reconcile differences between the Senate bill and one the House passed last month, a process that will begin Monday. Although both versions share common topline elements, negotiations on individual provisions inserted to win votes, particularly in the Senate, may be protracted and difficult. The final product will end up being a central issue in the 2018 elections that will determine control of Congress.

“We’re going to take this message to the American people a year from now,” Senate Majority Leader Mitch McConnell said after the vote.

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Among the major overhauls, both the House and Senate measures would cut the corporate tax rate to 20% from 35% - though the Senate version would set that lower rate in 2019, a year later than the House bill would. Also, the Senate bill, unlike the House version, would provide only temporary tax relief to individuals, ending tax cuts for them in 2026. Both bills are expected to add more than $1.4 trillion to the federal deficit over 10 years, before accounting for any economic growth. Bloomberg reported that last minute revisions to help shore up GOP support added about $32.5bn to the measure’s 10-year cost, according to a one-page analysis from the Congressional Budget Office.

The House and Senate bills also align on the contentious issue of individual deductions for state and local taxes: They’d eliminate all but a deduction for property taxes, which would be capped at $10,000. They differ on the home mortgage-interest deduction; the House bill would restrict that break to loans of $500,000 or less with regard to new purchases of homes. The Senate legislation would leave the current $1 million cap in place.

According to Bloomberg, the bills also differ on the tax rates they’d apply to multinational companies’ accumulated offshore earnings. The House bill would tax those profits at 14 percent for earnings held as cash and 7 percent for less-liquid assets. The revised Senate bill contains a lengthy section that has no direct mention of the rates, but a person familiar with the Senate plan said they’d be 14.5 percent for cash and 7.5 percent for less-liquid assets.

The Senate also approved a 23% tax deduction on business income earned from partnerships, limited liabilities and other so-called pass-through businesses. The House version would create a 25% tax rate for such business income, with restrictions on which businesses could qualify. Small businesses would get extra relief under the House legislation as well.

The House bill would also eliminate the estate tax, while the Senate version would limit the tax to fewer multimillion-dollar estates, but leave it in place. And after 2025, the limits would lift. Under current law, the estate tax applies a 40% levy to estates worth more than $5.49 million for individuals and $10.98 million for married couples. The Senate bill would temporarily double the exemption thresholds. The House bill would double the exemption thresholds, and then repeal the tax entirely in 2025.

As discussed previously, the House bill would consolidate the current seven individual tax brackets to four, leaving the top tax rate at 39.6%. The Senate bill would have seven brackets - with lower rates, and a top rate of 38.5 percent. As Bloomberg notes, "studies have shown that many of the tax bill’s benefits would go to the highest earners - and some middle-class taxpayers might actually pay more - a finding that could impact the House-Senate talks."

Most importantly, perhaps, the Senate bill includes a repeal of Obamacare’s mandate that most Americans have health insurance or pay a penalty. The House bill does not.

Here is a side-by-side comparison of the two plans thanks to the WSJ:

Also while we have yet to get confirmation, below is a list of last minute changes and revisions that made it into the final bill per Reuters:

• PASS-THROUGHS: Senators Ron Johnson and Steve Daines announced their support for the tax bill after securing agreement on a bigger tax break for the owners of pass-through enterprises, including small businesses, S-corporations, partnerships and sole-proprietorships. An original 17.4 percent deduction would rise to 23 percent.


• FULL EXPENSING: Senator Jeff Flake, who was a holdout over deficit concerns, agreed to vote "yes" after Republican leaders agreed to change a provision allowing the full expensing of business capital investments to sunset after five years. Flake worried that Congress would be unable to eliminate the benefit cold turkey, allowing it to bleed red ink for years to come. But the Arizona Republican says the change would instead phase out full expensing over three years beginning in year six.


• RETIREMENT SAVINGS: Senator Susan Collins said she persuaded Republican leaders to retain catch-up contributions to retirement accounts for church, charity, school and public employees.


• MEDICAL EXPENSES: Collins also said she was able to include language to reduce the threshold for deducting unreimbursed medical expenses for two years to 7.5 percent of household income from 10 percent.


• STATE AND LOCAL PROPERTY TAXES: Collins has proposed an amendment that would retain a federal deduction for up to $10,000 in state and local property taxes.


• INDIVIDUAL ALTERNATIVE MINIMUM TAX: Rescinding a proposed repeal of the AMT and instead increase exemption levels and phase-out thresholds is also on the table.


• CORPORATE ALTERNATIVE MINIMUM TAX: So is rescinding a proposed repeal of the corporate AMT.


• REPATRIATION: Another change could be to increase tax rates on U.S. corporate profits held overseas to 14 percent for liquid assets and 7 percent for illiquid holdings, up from 10 percent and 5 percent, respectively

Attention now shifts to a House-Senate conference committee - a specially appointed, temporary panel that will be charged with hashing out the differences in the bills and preparing a final version for both chambers to consider. Party leaders will select a small group of lawmakers, likely from the House and Senate tax-writing panels in each chamber, who would then be approved by each chamber. That work could start as early as Monday, with many high-stakes issues to be worked through. The deadline of Dec. 31 is an artificial one, though - aimed partly at securing a victory well in advance of the 2018 congressional elections. Republicans would have until the end of 2018 before they lose their ability to clear final passage in the Senate without a filibuster.

Corporate Tax Cuts: "The Seen & The Unseen"

Authored by 720Global"s Michael Lebowitz via RealInvestmentAdvice.com,

Since Donald Trump was elected President, the S&P 500 has rallied over 21% or nearly 500 points. In our opinion, a good portion of the gain is attributable to his promise, as well as congressional efforts, to reform the tax code. In particular, the proposed sharp reduction in the corporate tax rate has the equity market’s attention. At first blush, the simple logic driving equity investors appears reasonable.

Appearances, however, can be deceiving, and history is littered with failed investors that banked on a faulty thesis. As such, instead of tripping head first into that same category, we decided to assume nothing and look at the proposed reduction in the corporate tax rate and historical data to better understand how the legislation might affect the economy and corporate earnings.

Corporate Tax Rates

The graph below highlights the statutory and effective corporate tax rates since 1947.

Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)

The statutory tax rate is the legally mandated rate at which corporate profits are taxed. As shown above, the rate has been consistent over the last 75 years except for one significant change as a result of the Tax Reform Act of 1986.

The effective corporate tax rate is the actual tax rate companies’ pay. One can think of the statutory rate as similar to the MSRP sticker price on a new car. It provides guidance on cost but consumers always pay something less. The effective tax rate, like the “discounted” price one pays for a car, is the actual percentage of profits that corporations remitted to the government. This rate is calculated by dividing a company’s tax payments by their pre-tax profit. Deductions of all sorts reduce the pre-tax profit, thus creating a difference between the statutory and effective tax base and therefore the amount paid. For purposes of this article, we aggregate corporate tax receipts and corporate profits to calculate an effective rate for all corporations.

From 1947 to 1986 the statutory corporate tax rate was 49% and the effective tax rate averaged 36.4% for a difference of 12.6%. From 1987 to present, after the statutory tax rate was reduced to 39%, the effective rate has averaged 28.1%, 10.9% lower than the statutory rate.

Based on this simple analysis thus far, it is easy to understand why equity investors are giddy over a sizeable reduction in the corporate tax rate. If the statutory rate is reduced to 20% as proposed, and the effective rate remains 10% lower, the amount of money corporations pay in taxes will be reduced sharply. Based solely on this assumption, corporate after-tax profits, in year one alone, should increase by almost $200 billion while federal corporate tax receipts will be reduced by the same amount. Such a boost in corporate earnings would increase the forecasted internal rate of return (IRR) on the S&P 500 by approximately .90%.  Holding everything else constant this equates to a price increase of 285 points for the S&P 500 or an 11% gain from today’s level. It is impossible to assess how much of the gain since the election is due to tax reform expectations and how much is due to other factors, but we wager a good portion of it has been based on the promise of tax reform.

History

While the math and logic above seem sound, we can turn to historical data to understand the relationship between taxes and economic growth and profits. In doing this, we can better forecast the actual effects that lower corporate taxes might have on economic growth and corporate profits.

The graph below compares the effective corporate tax rate to the running three-year average GDP growth rate. The dotted trend lines smooth the data to allow for a clearer comparison.

Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)

As is clearly observable, GDP has trended lower at a very similar pace as the effective corporate tax rate. The graph below puts the data in a scatter plot format to evaluate the statistical relationship between corporate tax rates and economic growth rates.

Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)

The R² shown above (.3552), a statistical measure of correlation, is far from perfect, but there is a reason to believe that lower effective tax rates may partially explain the weakening trend in GDP growth.  Based on statistical regression, every 1% decrease in the effective tax rate should diminish GDP growth by 0.12%. 

The President, his economic team, and lawmakers are selling the tax bill with claims that a reduction in corporate taxes will boost economic growth. Based on data from the last 75 years, that has never been the case. In fact, the average annualized GDP growth rate in the five years before the major statutory tax reduction in 1986 was 3.90%. In the five years following the tax cut, the average annualized growth was reduced by more than half to 1.93%.

Next, we show a scatter plot comparing effective tax rates to corporate profits.

Data Courtesy: St. Louis Federal Reserve (FRED)/ BEA (NIPA tables)

As measured by a R² of .051, the graph above shows that over the last 75 years, there has been no measurable relationship between effective corporate tax rates and corporate profit growth.

Who Pays

The historical evidence above tells a different story than the bill of goods being sold to citizens and investors.

 Corporate tax rates are positively correlated with economic growth which means that lower corporate tax rates equate to slower economic growth. Further, there is strong evidence that corporate profits are largely unaffected by tax rates.

Investors buying based on the benefits of the tax proposal appear shortsighted. They value the benefits of corporate tax cuts, but they are grossly negligent in recognizing how the tax cuts will be funded.  

The tax bill, as it is currently proposed, will increase the deficit by $1.5 trillion over ten years. As such, the government will borrow an additional $1.5 trillion on top of current projections of approximately $1 trillion per year.

When the government borrows money to fund a fiscal deficit they effectively crowd out investment that could have funded the real economy. Said differently, the money required to fund the government’s deficit cannot be invested in the pursuit of innovation, improving workers skills, or other investments that pay economic dividends in the future. As we have discussed on numerous occasions, productivity growth drives economic growth over the longer term. Therefore, a lack productivity growth slows economic growth and ultimately weighs on corporate earnings.

A second consideration is that the long-term trend lower in the effective corporate tax has also been funded in part with personal tax receipts. In 1947, total personal taxes receipts were about twice that of corporate tax receipts. Currently, they are about four times larger. The current tax reform bill continues this trend as individuals in aggregate will pay more in taxes.

As personal taxes increase, consumers who account for approximately 70% of economic activity, have less money to spend.

Summary

As is often the case in economics and investing, there is a “seen” and an “unseen.” The “seen” is widely visible and, right or wrong, generally represents a consensus agreement about reality. The “unseen,” while equally important, largely goes under-appreciated. In time, it is the “unseen” that will affect economic growth rates and corporate earnings. It is the “unseen” that investors must grasp if they are to be successful. In this case, the “unseen” is the massive federal deficit. Its burden on the economy prevents traditional forms of stimulus from having their desired effects.

Given the historical evidence regarding the implications of corporate tax cuts, we are left questioning the so-called “Trump bump.” We would argue that a market rally based on that premise is incoherent, and the market should be discounting prices and valuations due to the tax cuts not inflating them.

The Republican Tax Plan Is Very Swampy

Authored by Mike Krieger via Liberty Blitzkrieg blog,

Unsurprisingly, the Republican tax plan moving forward in the U.S. Congress and championed by Donald “Drain the Swamp” Trump, is very swampy.

Today’s post will highlight a few examples.

First, let’s hear some of what billionaire fund manager Jeffrey Gundlach had to say. Via Bloomberg:

Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said the congressional tax plan would expand the federal deficit and help a small fraction of the U.S. population, including hedge fund managers.

 

“I’m very disappointed incidentally about the shape of this tax cut that is being proposed,” Gundlach told a gathering of industry participants at the Drake Hotel in Chicago on Wednesday. “I am just appalled that we are going to continue to have a carried-interest scheme for hedge funds.”

 

The House bill set to be voted on Thursday keeps the carried-interest tax treatment that benefits private-equity managers, venture capitalists, hedge-fund managers and certain real estate investors. During last year’s campaign, President Donald Trump had vowed to get rid of the loophole. White House top economic adviser Gary Cohn has said Trump is committed to ending the tax break.

 

“After I saw that tax bill, I lost hope with the drain the swamp concept,” Gundlach said. “The swamp keeps getting bigger.”

 

Carried interest is the portion of a fund’s profit — usually a 20 percent share — that’s paid to managers. Currently, tax authorities treat that income as capital gains, making it eligible for a rate as low as 20 percent. The top tax rate for ordinary income is 39.6 percent.

 

He called the tax plan “a cosmetic tax decrease for the middle class that will go away over time.”

Of course, none of this is really surprising. Donald Trump’s been a Wall Street bootlicker ever since he came into office, just like Barack Obama before him.

But there’s much more swampiness to be had. For example, there’s the fact that the corporate tax rate cut is permanent, while the individual cut is temporary. From the Los Angeles Times:

A gambit by Senate Republicans to make a large corporate tax cut permanent by having benefits for individuals expire at the end of 2025 created new problems for the legislation Wednesday as lawmakers were still grappling with the controversial decision to add the repeal of a key Obamacare provision.

 

The decision by Republican leaders to double down on risky maneuvers to overcome budgetary hurdles with their tax overhaul threatened to put the entire effort in jeopardy.

 

Sen. Ron Johnson (R-Wis.) declared he would not support the bill because it treats large corporations differently than many small businesses, which pay taxes through the individual code.

 

“If they can pass it without me, let them,” Johnson told the Wall Street Journal. “I’m not going to vote for this tax package.”

 

He later said he hoped “to address the disparity so I can support the final version.”

Here’s some more on what Ron Johnson’s complaining about, via CNBC:

Johnson said he’s been working for months behind the scenes to make changes, but he added that he’s not going to let his “version of perfect” sink tax reform. “I want to get this thing fixed, and vote for pro-growth tax reform that makes all American businesses competitive globally,” he said. “I care deeply about this country, I care deeply about this deficit.”

 

As a former small business owner, Johnson said he’s particularly concerned about the so-called pass-through rate, in which the profits and losses of sole proprietorships, partnerships, and S-corporations “pass through” to their owners who are then taxed at individual income-tax rates, currently as high as 39.6 percent.

 

“We can’t leave anybody behind, which is why they came up with the 25 rate for pass throughs,” he said. “The problem is, neither the House or the Senate version really honored that commitment to pass-through businesses, which I argue are a huge engine of economic growth.”

 

“I don’t have the information on how much it would cost, how many pass-through businesses are being left behind that do compete globally. I can’t get the information. I’ve been asking. They don’t give it to me,” said Johnson, chairman of the Senate Homeland Security Committee.

Moving on, if you’re still in denial that this “tax reform” was written for oligarchs and mega corps, take a look at the reaction of former Goldman Sachs executive and Trump’s White House Economic Council director, Gary Cohn, when his audience of corporate executives were asked a simple question.

As Zerohedge perfectly summarized:

The eagerness to shift incentives away from buybacks to capex is also the basis for much of Trump’s economic policy as designed over the past year by his top economic advisor, former Goldman COO Gary Cohn who is the White House Economic Council director. In fact, the motive behind the administration’s entire push for tax reform (cutting corporate tax rates) and offshore cash repatriation, is to the funds domestically, though not on buybacks and M&A (which also leads to “synergies” and other headcount reductions), but on reinvesting the funds in growing one’s business and hiring.

 

Which is why we were amused to observe the following brief interchange yesterday between Gary Cohn and an audience made up of executives, where in the span of a few seconds Gary Cohn realized that his entire economic policy had been a disaster.

 

During an event for the Wall Street Journal’s CEO Council, an editor at The Wall Street Journal asked the room: “If the tax reform bill goes through, do you plan to increase investment — your company’s investment, capital investment?” He asked for a show of hands.

 

Alas, as the camera revealed, virtually nobody raised their hand.

 

Responding to this “unexpected” lack of enthusiasm to invest in growth, Cohn had one question: “Why aren’t the other hands up?"

 

 

Ironically, Cohn’s epiphany took place just as tax reform is approaching the final stretch in Congress and it increasingly appears that at least some form of corporate tax cut will be enacted. We say ironically, because the only thing Trump’s reform will achieve is to dramatically accelerate recently slowing buybacks, which in turn will push stocks to new all time highs as price-indescriminate CFOs and Tresurers tells their favorite VWAP trading desk to just “wave it in.” Which means that the White House paper suggesting corporate tax cuts will boost household income is correct… if it focuses only on the incomes of the richest 1% of households.

Don’t despair, I promise there’s something in there for the average joe. For instance, after years of repression, owners of private jets will finally get that tax break they desperately need.

The Hill reports:

The latest version of the Senate Republican tax reform bill includes a break for companies that manage private jets.

 

A measure in the Tax Cuts and Jobs Act would lower taxes on some of the payments made by owners of private aircraft to management companies that help maintain, store and staff those planes for owners.

 

The language would exempt owners or leasers of private aircraft from paying taxes on certain costs related to the upkeep and maintenance of the jets, according to a description from the Joint Committee on Taxation.

I know, Congress sells out to special interests pretty cheaply. Fortunately, Rep. Joe Barton of Texas is looking out for the plebs.

Texas Rep. happy about tax bill because he gets to build a new colosseum. pic.twitter.com/eeq88tLJB5

— Michael Krieger (@LibertyBlitz) November 16, 2017

Meanwhile, a recent Quinnipiac showed that this oligarch giveaway isn’t particularly popular. How surprising.

The WSJ reported:

In a new Quinnipiac poll, 25% of American voters approve of the Republican tax plan, compared with 52% who disapprove.

 

Among Republicans, support was 60%.

 

President Donald Trump has cast the tax plan as a boon to middle-class households. Nearly 60% of American voters in the Quinnipiac poll believe the Republican plan favors the rich at the expense of the middle class.

 

About 24% of American voters say the middle class will mainly benefit from the tax plan, while 61% say the wealthy would be the primary beneficiaries.

 

About 36% of voters believe the tax plan will propel economic growth, while 52% don’t believe it will.

But here’s the best part. Former Goldman Sachs partner, Steven “Let them Eat Cake” Mnuchin, doesn’t want to hear it.

Asked whether Senate Republicans have 51 votes to pass the bill as it stands, Mr. Mnuchin said, “I am confident we are going to get this passed in the Senate.”

 

Mr. Mnuchin brushed aside suggestions that the bill is unpopular, refusing to comment on a Quinnipiac poll showing 16% of voters believe the bill will reduce taxes.

 

He also said “virtually everybody in the middle class will get a tax cut,” and that only “people who are making more than $1 million in high-tax states who will be making more.” Even people in high-tax states would reap the benefits of a lower corporate tax rate and other changes meant to help businesses that will boost economic activity, he said.

Guess he missed the recent video of his buddy Gary Cohn.

The more people learn about this monstrosity, the less they like it. Unfortunately, by that point it’ll be too late.

You lose again America. Make Wall Street Great Again.

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Futures Slide On Report Corporate Tax Cuts To Be Temporary, Phase Out After A Decade

When the NAR won the battle over keeping State and Local Tax deductions "as is", in the process denying the proposed GOP tax reform more than a trillion in revenue over the next ten years, it effectively doomed the most important provision of the republican tax bill set to be unveiled tomorrow: the reduction in the corporate tax rate from 35% to 20%. Or rather the permanent reduction in the corporate tax rate. Because according to House Ways and Means Chairman, Kevin Brady, what will be revealed on Thursday is a tax proposal with a temporary corporate cut, one which reverts back to the original 35% tax rate after a decade.

Brady says tax bill will only have TEMPORARY cut in the corp rate from 35% to 20%. Couldn"t not make permanent cut comply with Senate rules

— Damian Paletta (@damianpaletta) November 1, 2017

As Bloomberg confirms there have been conflicting reports about when the rate cut would take effect, or how long it would last, and according to a Republican lawmaker, House tax writers will phase out the proposed corporate rate of 20% after a decade. While cutting the corporate tax rate to 20% from 35% is a key provision of the Republican tax legislation that set to be unveiled tomorrow, no matter how hard they tried, GOP legislators could not get over a key hurdle: lack of revenue.

According to Bloomberg, "Congressional tax writers are struggling to find enough revenue to help the tax package adhere to the 2018 budget Congress adopted last month. That budget would allow the legislation to add no more than $1.5 trillion to the federal deficit -- before accounting for any economic growth that might result."

The problem is that the corporate tax cut is estimated to cost just over that, or $1.6 trillion over the next decade according to the Tax Foundation. One solution to the dilemma, is the notion of phasing in the corporate rate cut.  Furthermore, the congressional Joint Committee on Taxation said in an April letter to House Speaker Paul Ryan that a corporate tax rate of 20 percent would create deficits in the long run even if it remained in effect for just three years, adding further complication to the current revenue-less predicament.

Another problem: making the rate-cut temporary would limit its ability to spur economic growth, a key selling point cited by President Donald Trump and others. It is also a key factor in explaining the recent market surge, especially since Trump"s "Biggest tax cut ever" would have a 10 year shelf life, at which point things would revert back to the way they were.

And while stocks have been slow to grasp the significance of this major disruption to the GOP tax bill, the USDJPY is - gradually - waking up, or rather down, and so are futures...

Tax Reform Moves Forward As House Adopts Senate"s $4 Trillion Budget Resolution (20 Reps Vote "No")

Update: President Trump is pleased...

Big news - Budget just passed!

— Donald J. Trump (@realDonaldTrump) October 26, 2017

But not everyone is...

• *TAX REFORM WON"T ADVANCE W/O STATE,LOCAL DEAL: GOP"S MACARTHUR


• *MACARTHUR SAYS CONFIDENT GOP CAN REACH STATE, LOCAL TAX DEAL


• *KING: NO EVIDENCE OF GOOD FAITH YET ON STATE, LOCAL TX DEAL


• *KING: DON"T SEE STRONG PROSPECT FOR FINAL TAX PLAN THIS YEAR

*  *  *

As we detailed earlier, despite feuds and furore, the House has adopted the final version of the 2018 budget.

As Bloomberg reports, House Republicans narrowly adopted a budget resolution Thursday unlocking a fast-track process to achieve their long-sought goal of cutting Americans’ taxes by the end of the year.

Adopting the budget resolution, which has already cleared the Senate, will put the House Ways and Means Committee on track to release the long-awaited tax bill as early as Nov. 1. Simply passing the Senate version of the resolution, rather than going to conference and hammering out the differences, will also save weeks on the legislative calendar and keep alive hopes of passing tax reform in 2017. Republicans were broadly supportive of moving quickly to get to the tax package.

"Our members know what this means in terms of getting the process started, working with President Trump to provide middle-class tax relief," House Majority Whip Steve Scalise, the man responsible for rounding up votes to pass the budget, said on Fox Business just before the vote.

The 216-212 vote (20 Republicans voted against the budget plan) allows Congress to enact tax cuts later that increase the federal deficit by up to $1.5 trillion over 10 years. The bill could pass the Senate with just 50 votes -- plus a tie-breaker from Vice President Mike Pence-- bypassing the need for any Democratic support.

As The Hill reports, some conservatives still joined with centrists wary of the fate of the SALT deductions out of concern for the budget’s impact on the deficit.

“Passing a budget that doesn’t address out-of-control spending and adds trillions of dollars to the national debt just to achieve some policy goal — which also could be accomplished with a responsible budget — is an endorsement of a warped worldview where the end justifies the means,” the libertarian-minded House Liberty Caucus said in a statement urging members to vote against the budget.

Democrats excoriated the budget for outlining plans that would cut programs such as Medicare and Medicaid in an effort to balance the budget over a decade.

“There’s a lot of unjustifiable provisions in this budget. On top of massive tax cuts for the rich, it cuts vital national investments, threatening our economic progress and our national security,” said House Budget Ranking Member John Yarmuth (D-Ky.), citing over $4 trillion in mandatory spending cuts and almost $2 trillion in cuts from Medicare and Medicaid.

 

“The enormity of these cuts and the severity of the consequences for American families cannot be overstated,” he added.

Finally, as a reminder, the government is running on a three-month spending extension of 2017 spending, which will expire on December 8th.

Republicans and Democrats are gearing up for intense negotiations over a final spending package. Without a deal or another extension, the government will shut down. Even an additional stopgap measure will only be able to take the government into late January when strict budget caps will kick in and curtail spending across the board.

Trump "Angry" After Learning What State And Local Tax Repeal Really Means

In what may be the final nail in President Trump"s tax reform proposal, months after the White House proposed ending a tax break for people in high-tax states - which would suggest Trump had more than enough time familiarize himself with how it all works -  Trump reportedly "grew angry" when he learned that the change would hurt some middle-income taxpayers, Bloomberg reports citing people familiar with his thinking.

As Bloomberg amusingly adds, "It’s not clear why the president didn’t know the implications of the SALT deduction for middle-class taxpayers when the plan was released."

Trump"s confusion appears to have led to even more confusion everywhere else: according to Bloomberg, Trump’s concerns led him to say this week that “we’ll be adjusting” the tax-overhaul framework, but it’s not clear how he and congressional leaders would make up for the $1+ trillion in revenue that would be lost without ballooning the deficit or torpedoing support for the plan among hard-line conservative Republicans. Meanwhile, Trump’s top economic adviser Gary Cohn said Thursday morning that the president "is not rethinking his position on repealing the state and local tax deduction" contradicting what Trump himself said previously.

In any case, while the plan to eliminate State and Local tax deductions may have been prompted by an initial assumption that such a move would mostly hit blue states as shown below...

... the realization that it would have a dire impact on republican politicians in NY, NJ and CT may have given Trump reason to reevaluate.

The White House press office on Wednesday night declined to comment on internal deliberations, but released a general statement that said in part: “The president has made it unequivocally clear that a key priority for tax reform is to cut taxes for America’s hardworking middle class families.”

But Trump"s chief economic advisor, Gary Cohn, said Thursday that the president is not rethinking his position on the state and local tax deduction, which allows households to deduct state and local taxes on their federal returns. Cohn declined to take other questions. Cohn had previously suggested that the White House was open to negotiation on the issue.

With many - among them Goldman - speculating that Trump"s tax plan may be phased in (if it even passes) amid revenue offset concerns, the so-called SALT deduction has emerged as a key flash point in the tax debate, "one that could determine whether Trump has enough votes or will fail again on one of his top legislative priorities."

“This is probably the biggest obstacle they have to overcome to get to 218,” the number of votes needed to pass a tax bill in the House, said Representative Peter King, a Republican who represents Long Island. “Right now, they can’t get there without us.”

As Bloomberg put it, the numbers are daunting for Trump: Roughly two dozen House Republicans are concerned about eliminating the deduction - and he can’t afford to lose too many more votes than that in the House.

Predicably, republican lawmakers from the states that would be most impacted from the SALT deduction are worried, and are scheduled to meet Thursday with the House’s chief tax writer, Ways and Means Chairman Kevin Brady, to discuss the issue. Many come from the high-tax states that would be hardest hit, including New York and New Jersey.

King on Wednesday floated the idea of limiting the use of the deduction to people with incomes less than $400,000 -- a cap that that has drawn some support, including from New Jersey’s Tom MacArthur. MacArthur was one of the key Republicans who forged a compromise in the House over a bill to repeal Obamacare. That effort ended last month when the Senate failed to vote on its own repeal-and-replace legislation.

MacArthur said he’s taken his concerns to House leaders and the White House “because I think it’s important that everyone involved understands -- you can’t gloss over this, this is a big issue, and we can’t do tax reform on the backs of six or seven states. It’s just not fair.”

House Speaker Paul Ryan defended the repeal of state and local tax deductions at an event in Washington on Thursday, criticizing the break for “propping up profligate big government states.”
“People are going to be better off no matter what state you come from,” Ryan said, citing the tax plan’s call to double the standard deduction and increase the child tax credit.

Trump’s White House first proposed ending the SALT deduction in April, in a one-page outline of the president’s tax goals. Its repeal is estimated to generate about $1.3 trillion over 10 years, making it an important way to help pay for the business and individual tax-rate cuts Trump and congressional leaders propose.

Representative Chris Collins, a New York Republican who’s close to Trump said he thought the president has been more focused on cutting taxes for corporations and pass-through businesses to stimulate the economy. “And he’s left it to others for the details of how we get there” and “how we pay for it,” a confused Collins said.

At the same time, many conservatives argue that the tax break should be abolished because it subsidizes state and local governments that tax their citizens heavily - a view Trump echoed during an interview that Fox News aired Wednesday night. “It is finally time to say, ‘Make sure your politicians do a good job of running your state,”’ he told interviewer Sean Hannity.

* * *

Of course, should the SALT provision be amended, absent any additional government revenues, it would greatly increase the federal deficit that would result from Trump"s tax bill - endangering the legislation’s support among some lawmakers or limiting the size and duration of its cuts.

In the White House, Trump’s point-person on tax policy, Shahira Knight, met Wednesday with representatives of groups that want to preserve the tax break, including the National Association of Realtors. But earlier in the day, Kevin Hassett, one of the president’s top economic advisers, said the administration still expects to see a tax bill with permanent rate cuts and no deduction for state and local taxes. The state and local tax deduction primarily benefits high-income people in high-tax states, including New York, New Jersey and California - i.e. largely blue states as shown in the chart above. But about 10 percent of tax filers with incomes less than $50,000 claimed the deduction in 2014, according to the Tax Policy Center, a Washington policy group. People who make more than $100,000 a year accounted for about two-thirds of the SALT deductions claimed that year.

Meanwhile, in its latest assessment of the Trump tax plan, Goldman said that "it seems likely that Congress will phase in the tax cut over time. Congressional Republicans are likely to try to provide some near-term tax benefit to individuals ahead of the midterm election, but the greater emphasis in our view will be to reduce statutory tax rates while keeping the overall cost within the parameters laid out in the pending budget resolution. This would argue for a somewhat backloaded tax cut."

In any case, judging by the market, and specifically the ratio of "High tax" corporates to the overall market, as of this moment, the market is once again convinced that Trump"s tax reform is effectively dead.

Flatliners - Dead Market Walking

Authored by Sven Henrich via NorthmanTrader.com,

In the movie Flatliners aspiring medical doctors tried to unlock the mysteries of death by, well, killing themselves. It was meant to be a controlled death of course, to flat line on the heart rate monitor for a few minutes to find out what wonders where to be found “on the other side” only to then return safe & sound thanks to medical intervention. Well, they soon found out the other side wasn’t everything it was cracked up to be and the main character soon got regular beatings as the sins of his past came back to haunt him.

In my view markets find themselves in a very similar script. The promise of investor nirvana where the pains of real life no longer matter. If you only pay attention to the record highs headlines it all looks rather fantastical these days.

Prices only go up no matter what time frame you look at.

Annually:

Quarterly:

Monthly:

And still central bankers can’t find any evidence of inflation. Funny.

Indeed all risk has been flat-lined in this grand central bank experiment as the following chart of the $VIX shows:

Oh I’m kidding of course, but any trader staring at the tape knows that we find ourselves in the most compressed price environment in history.

This is not normal, there’s no heartbeat:

As I’m writing this I’m fully aware I may be viewed as the bear who cried wolf. After all I’ve been outlining structural risk factors for a while and markets have moved past my technical risk zones of 2450-2500 and most recently 2530. That’s what bubbles do. They blow past anyone’s expectations, they make believers of the unbelievers, make bears look like idiots and the most reckless look like geniuses.

But an extreme market that only becomes more extreme is not any less extreme, it is just more extreme. As no risk is apparent these extremes are then dismissed as the new normal.

Yet momentum driven price appreciation has absolutely zero predictive value of future price appreciation, it only appears as such at the time.

Here’s the $NDX leading up to the 2000 top:

It looked fantastic.

It meant absolutely nothing:

For traders of course the key is how to trade set-ups (I’ll post more on this in the near future, but I’ve talked a bit about it in The Relevance of Technical Charts) and for investors it is a matter of how to take advantage while at the same time know when things change.

At this time I want to document a bit of what I see here in markets and the structural world as I don’t want anyone to be surprised when the flat risk line we currently see brings about those nasty consequences.

Let’s be clear.

We find ourselves in a very unique point in history and in a world dominated by false narratives. It is a challenge to keep an analytical grip on reality, but I’ll try to tie a few threads together here to put everything in a macro context.

Firstly the underlying base reality: Free money, easy money, whatever you want to call it, permeates everything we see in financial markets. Indeed I would argue price appreciation has been paid for with unprecedented and, in my view, unsustainable volatility compression.

A couple of charts really highlight this.

Most clearly perhaps is the precise trend line tagging we can observe in the correlated picture of price appreciation and volatility compression since the February 2016 lows:

The $VIX’s corollary, the inverse $XIV, embarked on an explosive near one way journey since the US election coinciding with over $2 trillion central bank intervention in just the first 9 months of 2017:

And it has continued to this day and just made another all time high this past week on a massive negative divergence. It is the magnitude of this volatility compression that explains the current trading environment we find ourselves in.

Aside from the obvious artificial liquidity avalanche we’ve had speculated about the driver of all this and the answer may simply be the promise of even more free money, specifically tax cuts.

As some of you may recall from my analysis over the past year  I’ve been very clear that math ultimately will bring out truth in any narrative. In this case that notion that tax cuts pay for themselves is a fantasy. It always has been. Can it result in a short term bump in spending or even growth? Yes it is possible, especially if structured right. But any historical analysis will show you that tax cuts, especially already coming from a relatively low base, will just add to debt via larger deficits.

Recently the White House budget director finally acknowledged this very reality:

“a tax plan that doesn’t add to the deficit won’t spur growth”

My criticism has been that all this marketing talk is simply a lie and will structurally put the country further at risk of trillion dollar deficits and a massive debt explosion that is already baked in even without tax cuts.

Indeed the further one digs through the details the bigger the expense of these tax cuts become:

“We have a lot of businesses… I don’t think any of them are non-competitive in the world because of the corporate tax rate,” Buffett, the chairman and CEO of Berkshire Hathaway Inc told CNBC.

Fink said a corporate rate as high as 27 percent could satisfy U.S. businesses’ need for tax relief, while avoiding an increase in the federal deficit.

“What is being proposed is a pretty large expansion of our deficits,” Fink told Bloomberg TV. The plan contains up to $6 trillion in tax cuts, according to independent analysts.”

I bet you if you ran these tax cuts through a budget that accounts for a recession case somewhere in the future this entire budget would be an utter disaster and they could never sell it. And this is why you won’t see a stress tested scenario, all you will see is happy steady 2.9% growth projections in perpetuity. Nonsensical. Unrealistic. And frankly intellectually insulting to anyone that insists on any base line of intellectual veracity to any budget process.

Running the numbers it’s clear who actually benefits:

So I ask, how will any of this change this trend?

The answer is it won’t despite public narratives to the contrary. People will choose to believe what they want, but math is independent of beliefs and the math is very clear on this.

Put this proposal in context of standing trends:

Real disposable personable income growth remains meager at best:

Debt expansion at low rates continues to sustain the illusion of real prosperity for the 90%:

A meager set of rate hikes is already putting pressure on revolving credit obligations and personal interest payments:

Why does all this matter for us here?

Look no further than to the earlier quoted Warren Buffett who may have explained much of the reason we see no sellers in these markets currently:

“Buffett also said he would wait to see how the tax push played out before doing any significant selling of Berkshire Hathaway stock to avoid paying unnecessary taxes on his gains.

“I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” Buffett said.”

I get it, why sell anything if you can save on taxes and while central banks keep pushing markets higher with record liquidity? Steady as she goes after all.

And we have to acknowledge that the combined effect may be here to stay until clarity has emerged. If current legislative efficiency is any indicator then this may drag on for months with perhaps nothing accomplished.

Health care? Still nothing has happened. And let’s be clear: Not a single health care proposal (and there have been multiple efforts) have had anything to do with health care. They have been proposals that would have knocked millions off health care coverage and financially benefitted the 1% in form of tax reversions. That’s the analytical reality.

I don’t know why anyone still believes this administration will implement anything substantive to help the middle class. Previous administrations (both Democrat & Republican) have failed miserably on the wealth inequality front. And this administration looks no different and perhaps only worse. Every proposal looks to disproportionally benefit the top 1% and this latest tax cut proposal is no exception. Every analysis I have seen shows disproportionate benefit going to the wealthy. And how will that stimulate growth for the middle class? Or the bottom 50%?

And don’t think I’m alone bemoaning wealth inequality & associated inbred dynastic economic structure as an increasing drag on society and its future prospects.

Here’s Buffett himself again:

Ironically it is those 400 that would benefit the most by getting rid of the estate tax that is currently proposed as part of the tax cut package.

Bottom-line, it’s all tied together in a package that promises more and more debt.

Central banks do whatever it takes to keep reality at bay:

And hence I’ve called this entire central bank talk of “normalization” a fantasy. They can’t do it, they’re trapped and even the quants at JPM are out in force warning of it:

As central banks begin shrinking their balance sheets, they risk triggering another financial crisis, something that may be sharpened by the shift away from active investing, JPMorgan’s top quant strategist has warned.

“Such outflows (or lack of new inflows) could lead to asset declines and liquidity disruptions, and potentially cause a financial crisis,” said Mr Kolanovic (who, it is worth noting, has issued such warnings before). “The timing will largely be determined by the pace of central bank normalisation, business cycle dynamics and various idiosyncratic events, and hence cannot be known accurately.” Mr Kolanovic pointed out that “this is similar to the 2008 [Great Financial Crisis], when those that accurately predicted the nature of the GFC started doing so around 2006.”

“The shift from active to passive assets, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns,” Mr Kolanovic said. He added that the move towards passive and momentum strategies, where traders chase market cues as opposed to company fundamentals, has “eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.”

And this is precisely why we won’t see any real normalization ever again. Or perhaps only after a massive reset in the financial system.

This new administration wants massive tax cuts. This year the military budget was already increased by $80B to $700B. The costs of the recent hurricanes are providing the perfect excuse for running larger deficits and you can already see the narrative creeping in:

“I hate to tell you Puerto Rico, but you’ve thrown our budget a little out of whack,” said Trump as he introduced his budget director Mick Mulvaney.

Not the $80B increase in military spending of course.

Look, I can read between lines with the best of them and the message is clear.

Low rates are here to stay and the administration needs low rates to keep it all going and justify tax cuts.

The writing is on the wall, no, actually it is coming to you courtesy Jeffrey Gundlach:

“Bond King” Jeffrey Gundlach has an unusual pick for who President Donald Trump will choose to be the next Federal Reserve chief.

“I actually have a very non-consensus point of view. I think it’s going to be Neel Kashkari,” the the CEO of DoubleLine Capital told the Vanity Fair New Establishment Summit on Tuesday in Los Angeles. “He happens to be the most easy money guy that’s in the Federal Reserve system today and that’s why he may win.”

Kashkari is the president of the Minneapolis Fed and happened to say Monday that the central bank is making a mistake by continuing to raise rates, comments Gundlach referenced as helping him possibly get the job.

“I think there is no chance that she wants to be chairwoman, nor do I think the president wants her to be,” said the manager of $109 billion.

Gundlach said that Trump needs someone who will keep rates low in order to keep his populist reputation and help his base voters and that’s why he’ll pick Kashkari.

“A stronger dollar is not good for achieving that agenda,” he said.

And there you have it. We need an easy money guy. Now I don’t know if Kashkari will be it, but it’s pretty clear Yellen is toast and some version of an easy money guy is coming and the Fed’s balance sheet reduction plan may be out the window shortly after February.

But that’s the combined message, massively more debt is coming, normalization is at best a marketing ploy, and easy money will continue to be part of the equation with perhaps more coming in form of tax cuts.

So yes, I get and receive comments about how it’s different this time, how price discovery as we know it may be a thing of the past.

An asset price inflation world, without core inflation, where valuations don’t matter and debt flows continue unabated and consequence free…

…and market caps rise in asymptotic fashion every quarter, month and week:

The end result: The $SPX is now 18.8% above its annual 5 EMA:

As far as I can tell this is the largest, or one of the largest disconnects ever.

And I’ve shown the chart of $MSFT as an individual stock example of how historically extreme the current disconnect is:

$MSFT is now 35% above its annual 5 EMA. There’s been only 1 year prior to 2017 when it did not touch its 5 EMA: 1999. Did it have any predictive value of future price appreciation? Nope.

Speaking of 1999: Greed is back with a vengeance.

It is all around us:

Central bankers have flat lined risk and investors have crossed to the other side expecting nirvana & free money forever.

So far so good it seems. Just remember in Flatliners the allure of nirvana turned into a running nightmare:

What would be signs of nirvana turning into a nightmare?

Keep an eye on this thin red line:

It will get tested again. Currently the trend line is barely 2% below current prices and it is rising steeply.

When price breaks below this line it’s time to return to real life.

After all you do want a heart beat:

Don’t you? I know I do.

"Credit Negative For U.S. Government": Moody's Threatens Downgrade If Trump Tax Plan Is Passed

As various institutions continue to publish very detailed estimates of how Trump"s tax plan will impact the federal budget, which is somewhat amazing since income brackets haven"t even been assigned yet, Moody"s published a note today threatening to finally strip the U.S. of its AAA credit rating if the tax plan is ultimately passed as currently contemplated.

President Donald Trump’s tax proposal would probably weigh on the U.S. government’s credit outlook, on concerns that it would cause the federal deficit to swell, according to Moody’s Investors Service.

“The Trump tax framework is likely credit negative for the U.S. government,” Moody’s said in a statement. “Tax cuts would not be offset by equivalent cuts to spending, which would put upward pressure on the federal budget deficit and debt,” while “the tax reform’s effect on economic growth and, in turn, federal government revenue would also affect U.S. credit strength.”

By contrast, banks, insurers and asset managers would benefit from a lower tax rate, Moody’s said.

As we pointed out last Friday, the Tax Policy Center found that Trump"s plan would cost $2.4 trillion over the first decade, assuming no spending cuts, and result in federal deficits soaring by several hundred billion dollars each year. 

• The proposal would reduce federal revenues by $2.4 trillion over the first ten years and $3.2 in the second decade. This means that absent a matched deduction in spending, US deficit and debt will increase by a similar amount. This is a problem as a Senate GOP budget resolution unveiled on Friday only allows for adding $1.5 trillion to the debt, implying a revenue shortfall of just under $1 trillion.
  
  • The business income tax provisions—including those affecting corporations and pass-through businesses—would reduce revenues by $2.6 trillion over the first ten years. Elimination of estate and gift taxes would lose another $240 billion. The individual income tax provisions (excluding those related to business income) would increase revenues by about $470 billion over the same period.
  
  

So, just to summarize Moody"s position on this issue, a ~$1.5 trillion budget deficit in 2009 was no problem at all but a ~$1 trillion budget deficit today would suddenly merit a downgrade.

Of course, the Trump administration has argued that increased GDP growth will offset lower tax receipts and actually result in lower deficits rather than higher. 

To that end, Deutsche Bank"s economists took a shot a estimating what kind of GDP boost could be expected from the Trump tax plan and found that a 0.4% - 0.5% boost might be reasonable...

Given the size and scope of the tax plan presented, it is worthwhile to investigate the potential macroeconomic implications of the bill. We use the Fed’s model of the US economy (FRB/US) to do just that.

The full tax plan provides a meaningful lift to growth in the coming years (Figure 7). Year-over-year growth in Q4 2018 and Q4 2019 is about 0.4pp and 0.5pp higher than the no ?scal stimulus baseline.  Higher growth leads to a tighter labor market. The unemployment rate falls to 4% by end-2018 and 3.85% by end-2019 under the full plan, 0.2pp and 0.35pp below the baseline with no tax cuts (Figure 8). The more modest, and in our view more realistic, tax plan intuitively produces more modest results for growth and the unemployment rate. Growth is higher by about 0.2pp and 0.3pp, and the unemployment rate is 0.1pp and 0.2pp lower, by end-2018 and end-2019, respectively.

...that said, they also found that any increase in growth expectations would just be offset by quicker interest rate hikes from the Fed.

Despite assuming a gradual response by the Fed, the implied fed funds rate is significantly higher in response to the tax cuts, as the Fed at least partially o?sets the further decline in the unemployment rate below NAIRU (Figure 9). By end-2018, the fed funds rate would be 13bp higher in response to the full tax plan and 5bp higher under the more modest tax plan scenario. The gap between the no-stimulus scenario and tax cut scenarios is considerably wider further out. By end-2019, the fed funds rate would be 40bp higher in response to the full tax plan and 20bp higher under the more modest tax plan scenario. These differences rise to 60bp and 30bp by end-2020 – more than two hikes more under the full tax cut scenario and more than one additional hike under the modest stimulus compared with the baseline.

Of course, the most comical part of all of this is that, after years of exponential debt growth, Moody"s has finally decided that Trump"s tax cuts will be the final straw that forces them to strip the U.S. of its pristine debt rating...