Take Trump’s tax plans with a grain of salt

Donald Trump made plenty of promises during his primary campaign, and so far, most of them have failed spectacularly. 

ig player - trump

The border wall to Mexico — unaffordable. The Muslim immigration ban — blocked by the courts as unconstitutional. Repeal of the much-hated Obamacare programme — blocked by his own party. But all of this has had only a short-term effect on stock markets, if any, since their real hopes were pinned on the ‘biggest tax reform of all time’. By the time Republicans shot down Trump’s proposed alternative to Obamacare, the markets had shifted their hopes to a quick implementation of his tax reform proposals. But here again, it’s clear that if there’s one thing the Trump administration is good at, it's blowing hot air.

A one-page plan for tax reform

This week, Treasury Secretary Steven Mnuchin and chief economic advisor Gary Cohn presented their ‘plans’ for the ‘biggest tax reform of all time’. But the plans were so hastily assembled that they fit on a single sheet of paper. Let us be honest: the last annual self-evaluation form you filled out for your employer was probably longer than one page. Once again, the reason for this incomplete plan can be traced back to the President’s thin skin: Trump wanted to have something to show off in a hurry for his 100th day in office. Yet despite repeated questions from the journalists in attendance, neither Mnuchin nor Cohn were able to provide hard numbers to prove that their tax plans would be revenue-neutral and pay for themselves — a basic prerequisite for Congressional approval of the proposed tax reform. The administration’s hopes are based on an assumption of strong, sustainable economic growth of over 3% per year to make up for lost tax revenue. But America’s experience under Bush and Obama shows that such robust growth after tax cuts cannot always be guaranteed. What does seem clear already, however, is that Trump’s plans could lead to a $2.4 trillion drop in tax revenues over the next 10 years — a steep price to ask Americans to pay in advance for not guaranteed economic growth.

A political stalemate would be a risk for the market

For now, it seems clear that the Trump administration have no concrete plan. Instead, they want to work out a plan in collaboration with Congress, potentially leading to a stalemate that could go on for months. In that case, the question of how to pay for tax reform would surely become a persistent political issue. The longer negotiations go on, the greater the risk that the ‘biggest tax reform of all time’ might wind up as little more than tax reform ‘light’.

To save his political fortunes at home, Trump would then have no choice but to seek refuge in foreign policy — leaving all of us to pick up the tab. So let’s hope that tax reform is a big success!

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.