- Criticism of Trump's tax proposal continues to mount, despite limited details
- Healthcare isn't proof that Trump is ineffective, with Paul Ryan mostly out of the picture
- A Reagan-style tax overhaul is not necessary to ignite the dollar given extremes in sentiment
As markets await further details from the White House regarding its tax reform proposal, criticism of the first draft continue to add up. Recently, even Republicans are expressing their disappointment with the plans. US Senator Rand Paul recently tweeted: “This is a GOP tax plan? Possibly 30 percent of middle class gets a tax hike? I hope the final details are better than this.” Paul was referring to the results of a recent analysis by the Tax Policy Center, a nonpartisan think tank.
A plan that many can agree with, part of Trump’s playbook
As the initial plan lacked a lot of detail, as we had suggested in our preview of the announcement, it has come under criticism as it appears to raise taxes on many middle and higher class individuals (particularly in high-tax states) while cutting taxes heavily for corporations. Yet much of the current criticism is misguided, as the initial plan was designed to rally broad support for the case of tax reform, as opposed to suggesting a solution.
These sentiments were echoed by Kevin Brady, chairman of the tax-writing House of Representatives Ways and Means Committee and a member of the ‘Big Six’ who are closely involved in drafting the plan. He remarked, “this is not the group [referring to the Tax Policy Center] you go to ... they have none of the key details that would allow an objective, complete analysis.” He also stated that “I will guarantee we are going to work hard to lower taxes on every American, increase their paychecks and dramatically simplify the code for them.”
Unlike healthcare, tax reform strategy led by the White House
While many have pointed to the failure to reform Obamacare as proof that Trump is ineffective, few have also noted that Trump did not lead the charge on healthcare. Instead, he left the task of healthcare reform primarily in the hands of key Republicans such as Paul Ryan. The Associated Press recently reported that the White House is angry at Ryan, given that he convinced Trump to lead the charge on healthcare, despite having the wrong strategy for change. As many in the Senate continue to believe that Obamacare has a chance of surviving in the future (despite its obvious failings), the two Republican bills had little chance of getting through Congress.
Unlike the healthcare debacle, the plan to reform taxes is being led directly by the White House. Trump has repeated his mantra of lowering rates while simplifying the tax code many times, both as a candidate and now as president. While concerns regarding increasing deficits are genuine, a good tax reform plan should be a much easier sell as most constituents end up as winners. With the ‘Big Six’ working on creating such a plan, tax reforms have a higher likelihood of getting through Congress. This is in sharp contrast to the healthcare issue, where many believed they had something to lose if Obamacare was replaced.
With details yet to arrive, it’s too early to turn bearish on the buck
While the dollar initially rallied following Trump’s announcement, today the currency has run out of steam as the market digests the ongoing debate regarding tax reform. Despite today's limited moves in the dollar today, our view remains that the bar to change the trajectory of expectations is quite low. While hoping for a Reagan-style overhaul of the tax code in time for Q1 2018 is unrealistic, even small improvements are enough to catalyze the dollar.
Despite today’s chatter, our preference would be to wait for more details from the ‘Big Six’ before turning more decisively bearish or bullish on the dollar in the longer term. If the team manages to strike a compromise that delivers Trump’s vision of tax cuts for the middle class and corporations while simplifying the tax code, the dollar has a lot of room to rally.