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Global Macro Weekly Digest (Issue 103):US Senate is expected to vote on tax reform this week

时间: 2017-12-06 18:08 来源:新浪财经

机构:招商证券(香港)有限公司  研究员:招商证券(香港)研究所

The US Senate is expected to vote on its tax reform bill this week, as early as Thursday (November 30th), two weeks after the House passed its vote. Unlike the House vote, which was largely non-event, the Senate vote attracts more attention, as the Republicans only hold a two-seat slim majority in the Senate and there are still notable concerns among Republican senators on the tax bill. If the Senate fails to pass the bill, it will probably mean the end of the tax overhaul at least before the midterm elections next November. Such a result would significantly damage the Republican Party’s chances of continuously holding majorities in both chambers after the midterm, and even the odds of Trump’s re-election in 2020.

The Senate finalized its own tax bill last week, and as we have stated in previous reports, the Senate bill has its own key features that differ from the House bill in many ways. The key features of the Senate tax bill included: 1) individual tax overhaul will expire after 2025, 2) the corporate tax cut will be permanent but only starting from 2019, 3) permanently repeal the “individual mandate” in Obama’s Affordable Care Act (ACA). The individual mandate requires most individuals and families to have a certain minimal amount of health insurance; otherwise, they have to pay a fine, called the individual shared responsibility payment, which is one of the ACA tax provisions.

Given this much more narrow 52-48 edge for the Republicans in the Senate, the Republicans still cannot afford more than 2 dissenters within the party for this week’s vote. However, currently, there are already more than two Senate Republicans who have expressed oppositions / concerns / reservations towards the Senate bill. Internal fissures are mainly focusing on three areas: 1) the repeal of ACA’s individual mandate could lead to about 13 million people losing their healthcare coverage in the next 10 years, and would possibly cause a significant increase in average health insurance premiums; 2) pass-through entities still face higher taxes compared to large corporates, and better treatments for small businesses should be implemented; 3) fiscal hawks still have notable concerns on the rising budget deficit caused by tax cuts. Although such concerns are already addressed in the Senate bill by adding a sunset clause on individual tax cut that will expire after 2025, some Senate Republicans are still worried about the possibility of temporary tax cuts being extended.

However, our baseline case is that the Senate will manage to pass its tax bill this week. 1) Unlike the healthcare reform earlier this year (which lacked a detailed and well-structured alternative plan), the tax reform bills are better prepared with more comprehensive and feasible contents that have gained more support within the Republican Party: the House voted 227-205 to pass its tax bill, which was more favorable than the House vote on healthcare reform (217-213) in May; 2) although there are notable concerns on the potential inequality of the benefit distribution arising from the tax cut, the tax cuts will still broadly lower tax costs for most individuals and corporates; 3) it is almost a “must-win-battle” for Trump and the Republican Party: with none of his election promises turning into reality, the tax reform could be Trump' last hope before the coming midterm elections in November 2018. If the tax reform, again, fails, it could significantly impact the Republican Party’s chances of continuously holding majorities in both chambers, and even Trump’s re-election in 2020.

Finally, even the Senate bill is eventually passed, the reconciliation process could be contentious, given the significant differences between the two bills. Thus, it is challenging for Trump to intend to finalize the tax reform before Christmas, and in our view, it could be delayed until 1Q 2018. For the final version of the tax bill, we see it more likely to be closer to the Senate bill. 1) The Senate bill is less aggressive and, to some extent, trying to scale back the rising budget deficit. 2) The two chambers still need to vote on the result of the reconciliation; given the slim majority in the Senate, the House may need to make some compromise to the Senate.




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