US: Train wreck on Capitol Hill - Rabobank

According to Philip Marey, Senior US Strategist at Rabobank, the failure of the American Health Care Act underscores their view that financial markets –and the Fed– have been too optimistic about the feasibility of the fiscal policy plans of the new administration.

Key Quotes

“After complaining about Obamacare for seven years, the Republicans failed to pass a health care bill to repeal and replace it in a House of Representatives where they hold the majority of seats.”

“Now that the health care bill has failed the attention of fiscal policymakers has shifted toward tax reform. While at first sight tax reform is about fiscal policy, it is also about trade policy. The House Republicans intend to replace the current corporate tax system –in which net income is taxed at 35%– by a system that taxes cash flows. In the current system foreign sales revenues are taxed, while import costs are deductible. This means that the tax system is biased against exporters. In fact, since US exports are often also subject to value-added taxes abroad, they are taxed twice. In contrast there are is no VAT in the US that affects imports. The Republicans want to flip this bias around by taxing import costs at a new and lower 20% corporate tax rate and by exempting foreign sales.”

“This border adjustment tax (BAT) should help reduce the US trade deficit. At the same time, the lower tax rate would not lead to a higher federal budget deficit because the US is a net importer, instead tax revenues would increase. At the macro level this sounds appealing, but it is dividing corporate America into importers and exporters. This means that the Republican base is divided on this issue, which could lead to a repetition of the health care bill disaster. Of course, exportminded Republicans could seek a coalition with Democrats. However, the rise in the domestic price level caused by the tax on imports would also hurt consumers. Therefore, it remains to be seen whether a BAT is politically feasible. This would further slow down the fiscal policy agenda of the Trump administration.”