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Kicking the Tax Legislation Can up the Congressional Road – the President’s Surprise Deal – back to the Trump Bump?

Date Posted: September 11, 2017

Clearing the Path for Congressional Consideration of Tax Legislation
President Trump’s unexpected deal with Democratic leaders postpones the debate over spending and raising the debt limit until December. It extends government spending authority and the debt limit to December 15. That clears the September Congressional calendar and brings consideration of tax reform or tax cuts front and center. The need to deal with the Democratic leaders underlines the President’s focus on tax legislation. The need to make this deal, in part, reflects that fact that Congress scheduled only 12 legislative days together in September.

Moving the Debate on Spending and Increased Debt Limit Closer to the 2018 Election Year
At the same time, it moves the debate on spending and raising the debt limit to year-end. As a side note, the December 15thdate comes two days after the December FOMC meeting and just before the Congressional Christmas recess. Of greater import, it will move the debate on top of the 2018 election year. As result, this timing will likely increase the difficulty in coming to speedy agreement on the unresolved partisan issues facing Congress. On a positive note, perhaps the President’s agreement with the Democratic leaders may open the lines of  communications to resolve some of those partisan disagreements. Interestingly, Republican leaders and some of the Republican sub-groups maybe put off by the President’s surprising agreement with the Democrats. In any case, it opens up unforeseen possibilities that could finally move some of the President’s agenda forward.

Investment Conclusions
If tax reform or tax rate reduction legislation moves through Congress, it could bring investors back to those stocks that benefited from the initial Trump bump. One focus would be on companies with primarily domestic incomes. A broad stock group meeting that standard would be medium and small cap companies.
The other possible change that reflects tax reform rather than tax rate reduction would be shifting the taxation of U.S. global corporations from global to a territorial tax basis. Without getting into the weeds on that change, U.S. global companies, with over $2.5 trillion of cash held “outside” the U.S., could repatriate some part of those funds. The immediate net result would likely be increased share repurchases and eliminating the need to borrow to increase dividend payments. In  addition, it could also lead to increased capital investment in this country with improved productivity being one long term benefit.