‘The haggling will only intensify’ — Wall Street’s wary of the Republican tax plan

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  • Wall Street is wary of the Republican tax plan because of the concessions and compromise that will be necessary to pass it
  • The economic impact is still expected to be positive, specifically for companies and their stock prices
  • The plan’s proposed mortgage-interest deduction isn’t beneficial to new home owners, some analysts said

 
The Republican’s massive tax plan is getting a cautious response from Wall Street. Analysts are wary about what it will take to get this passed and note that any concrete progress will require heavy concessions and compromise from all involved.

Analysts also noted a few provisions of the plan that aren’t quite as appealing as they appear on the surface. Morgan Stanley in particular had such an issue with the plan’s proposed mortgage-interest deduction — which has also drawn the ire of the National Association of Home Builders.

From an economic perspective, Wall Street is still bullish on what a corporate tax rate cut would do for both companies and the overall market. Both highly taxed US companies and multinational corporations with large overseas cash holdings rallied as traders bought assets expected to benefit most from a change in tax policy.

Without further ado, here’s a roundup of Wall Street commentary on the tax plan:

Morgan Stanley: in an all or nothing scenario, legislative failure is the base case

Morgan Stanley reiterated its base case that the Republican tax plan will spur modest stimulus and “plenty of execution risk,” while noting that it’s “still at the drawing board.” Here are some select comments from the firm:

• On corporate tax cuts: “Corporate tax rate could still go higher … Many pay-for provisions in the bill are likely to be challenged by members and lobbyists. Hence, proponents of an immediate corporate rate cut may still be disappointed … A rate closer to 25% (our base case) could also be a necessary maneuver to compel votes.”

On pass-throughs: “The influential National Federation of Independent Business (NFIB) has already come out against the bill because they believe the pass-through provision does not help most small businesses. This may continue to be a subject of debate.”

On repatriation: “As expected, the bill proposes a one-time favorable repatriation rate … However, a 12% mandatory tax on cash-backed foreign retained earnings is higher than expectations and prior Republican proposals.”

On mortgage interest deduction: “On the surface, the plan preserves the mortgage interest deduction. However, the devil, as always, is in the details. While the current mortgage interest deduction is preserved for existing mortgages, for homes purchased going forward, the mortgage interest deduction will be capped at $500k, reduced from its current cap of $1 million.”

• “A key risk to our view is that producing a limited deficit-expansion bill becomes politically untenable as contentious pay-fors deny leadership the votes to pass one or either chamber of Congress. In this case, Republicans could attempt the ‘Hail Mary’ option, pursue an ‘all cuts’ bill that substantially increases the deficit and implied stimulus.”

On possible failure and market impact: “In this ‘all or none’ scenario, we think legislative failure would likely become the base case, as there may be enough deficit hawks and rules purists in the Senate to deny passage. But it would also signal an increased probability of meaningful stimulus. This dynamic could encourage rates volatility.”

UBS: Pushback from drug and energy companies will be large

UBS reiterated Morgan Stanley’s view that tax reform is “far from a done deal,” but adopted a more negative stance. The firm identified several sticking points that will prevent tax reform from getting done this year or next. It said:

On expensive proposals: “The combination of lowering the corporate tax rate to 20%, the increase in the family tax credit, and the elimination of the alternative minimum tax are all costly plans that will require substantial revenue offsets to keep the overall size of the tax plan within the Senate’s $1.5 trillion deficit over ten years.”

On eliminating special-interest deductions: “We believe this line is likely to reduce the subsidies to the energy sector, the pharmaceutical sector, and other large corporate interests. Push back from these groups will be large.”

On state and local tax deduction, and the mortgage interest cap: “Although these states are predominately Democratic, a substantial number of Republican representatives hail from those states and have already stated opposition to these reductions.”

• “We have long held the view that finding the revenue offsets for the ambitious tax reform plan will be difficult. The combination of lowering the corporate tax rate to 20%, the increase in the family tax credit, and the elimination of the alternative minimum tax are all costly plans that will require substantial revenue offsets to keep the overall size of the tax plan within the Senate’s $1.5 trillion deficit over ten years.”

Deutsche Bank: this won’t turn up in S&P 500 earnings

Deutsche Bank shares a similar view to the firms outlined above, expressing concern that tax reform will be implemented without considerable compromise. It also dove deep into the potential impact on corporations and the overall market. The firm said:

• “Republicans urgently needing something they can present as a success currently appears to be the main reason why the reform has a chance of being implemented.”

On the cost of the plan: “According to the budget draft, the tax package is allowed to have a maximum net cost of $1.5 trillion over the coming decade. And several Republicans think that this amount is considerably too high.”

On public interests: “Citizens are considerably less interested in a tax reform than in the healthcare issue. They might still be outraged if the tax reform turned out to be nothing more than a tax cut for corporations and top income earners.”

On the corporate tax cut: “We expect that the corporate tax rate will be reduced from 35% to 25% (the Republicans are currently aiming at 20%). However, this tax relief will not be directly reflected in the S&P 500 earnings.”

On the effect of repatriation: “The effect on earnings after tax might be reinforced by new provisions on the repatriation of U.S. corporate earnings held abroad. This might lead to higher equity buybacks. However, much will depend on the details. We believe that earnings per share might rise by up to 1.5% as the number of outstanding shares is reduced.”

On Fed impact (or lack thereof): “The tax cut alone (i.e. unaccompanied by additional fiscal stimulus or deregulation) is unlikely to have a significant impact on the interest-rate decisions of the Federal Reserve. We continue to expect up to three rate increases in 2018.”

On competing pressures: “The haggling will only intensify, as further details become available. So might conflicts among Republicans within the Senate and the House of Representatives, and between both chambers. Interventions from the White House add another source of uncertainty. And of course, various lobby groups will vehemently try to influence the final package. In the midst of all this, hammering out the many remaining details will not be easy.”

• “The term ‘tax cut’ appears more appropriate than ‘tax reform.'”


See the rest of the story at Business Insider

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