Analysts divided on Trump tax cut proposals
Economists were optimistic that some form of tax relief would pass Congress in 2017, despite the lack of detail in the White House's proposals announced overnight.
As guiding principles, in a one page document the White House said it wanted to grow the economy and create millons of jobs, simplify the tax code, provide tax relief for families - especially middle income ones - and lower the tax burden on firms.
More specifically, the top individual income tax rate will fall from 39.6% to 35.0% and the corporate tax rate from 35.0% to 15.0%.
However, when it comes to funding the tax cuts, the White House's proposal states that a one-time tax will be levied on trillions of dollars held overseas. Nothing else.
Trump's plan also includes a shift towards a so-called 'territorial system' of taxing overseas income, which means that US companies will pay taxes at the same rate that they would pay overseas.
Despite that lack of detail, Michael Levy at Berenberg Capital Markets is optimistic regarding Capitol Hill's ability to deliver tax cuts before the end of the year.
Levy told clients, "despite President Trump's erratic approach to policymaking, the positive news is the differences between the Administration and Congress will be debated and reconciled, which should facilitate progress on tax legislation. Accordingly, we maintain our view that tax legislation will be enacted later in 2017 and maintain our forecast of significantly stronger economic growth, with momentum building in 2018."
Perhaps most significantly, Levy believes that even if the eventual package of tax cuts is 'deficit neutral' at least in the early years following approval it will entail some "old-fashioned up-front fiscal stimulus involving higher deficit spending".
Nonetheless, given the lack of details regarding the 'costing' of the proposals, the possibility exists that it will not be deficit neutral, meaning that they would expir after a decade.
Indeed, US Treasury Secretary Steve Mnuchin said: "The goal is to make it permanent but there are a lot of levers there. If we have them for 10 years that is better than nothing."
Worth noting, Mnuchin's words were met with quick opposition from the Republican chair if the House Ways and Means subcommitee on tax policy, who said on CNBC he did want to see "temporary" measures.
As well, Levy is of the opinion that Trump's plans are "way too aggressive and way too costly in terms of US treasury tax receipts, but clearly are points of negotiation."
On a more critical note, Russ Mould, investment director at AJ Bell, points out how US corporations are already paying historically low tax.
US companies' tax bills represented just 7.5% of pre-tax profit and 3.4% of sales in 2016, Mould said referencing Federal Reserve data.
In any case, Mould thinks Wall Street may have gotten ahead of itself because Congress may not approve the tax cuts in their original form.
Lowering the corporate tax rate to 15% would boost US corporates' aggregate post-tax profits by 13% or roughly $225bn, while the S&P 500 had already risen 11% since Trump's election, Mould said.