Tax Reform: The Sausage Factory Moment

The House legislative text for tax reform is moving the conventional wisdom away from “tax cuts will never happen” to “tax cuts won’t matter.” We continue to believe they will both happen and matter. Markets might take this moment to get lost in the messy details, which could trigger a long-overdue buyable dip. The centerpiece of the proposed bill is the cut in the corporate tax rate from 35% to 20%, a statically scored tax cut of about 10% of 2018 S&P 500 earnings, and $1.462 trillion over ten years. All the other hundreds of provisions effectively cancel out. The loss of the SALT deduction means that some higher earners in large blue states face an effective tax hike, but we continue to expect it will get bargained away in the Senate. There are problematic provisions, especially the “deemed repatriation” wealth tax on retained foreign earnings. A BAT-like excise tax on affiliate payments is already being amended away.