For This Congress, Tax Cuts Are The Entree, Reform The Side Dish

One of the top priorities of President Donald Trump and Republicans in Congress is to ease the tax burden on American companies. Republicans will likely use a combination of tax cuts and tax reform to lower corporate taxes to 25 percent, Height Securities analyst Peter Cohn said.

In fact, Republicans may not even need to resort to politically challenging, revenue-raising proposals such as border adjustment taxes to do so.

“While dynamic growth effects and favorable baseline changes will ‘pay for’ much of the plan, actual revenue raisers will still be necessary, likely pulled from off-the-shelf proposals such as former House Ways & Means Chairman Dave Camp’s 2014 plan,” Cohn said.

“We think a lower pass-through business income rate of 30 percent is also achievable as well as modest personal income tax changes that would simplify the brackets, repeal the AMT, cut the top rate to 37–38 percent and expand child care benefits without major changes to the ‘big three’ itemized deductions (state/local taxes, mortgage interest, charitable donations).”

Paying For The Plan

The final tax reform plan will cost an estimated $3.25 trillion to $3.75 trillion, according to Cohn. Height believes Republicans will be able to offset up to $1.5 trillion of the cost via the repatriation tax holiday, the Sec.99 deduction phase out, Subpart F reform and a number of other measures. In addition, $500 billion of the cost will be recouped via economic growth, leaving up to $1 trillion of the cost to be added to the national deficit, Cohn said.

The first step in the process will be for Congress to pass a fiscal 2018 budget this summer.

Investors are certainly optimistic about the benefits that tax reform could provide. The SPDR S&P 500 ETF Trust SPY is now up 13.0 percent since Election Day.