Why Trump's in a Hurry on Tax Reform

With mid-term elections scheduled for November 2018, it’s becoming increasingly important for the President to get something through Congress

David Brenchley 21 November, 2017 | 3:56PM
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President Trump

The possibility of Donald Trump being impeached will spur the US President to ensure tax cuts are delivered before the mid-term elections in November, according to Keith Wade at Schroders.

The former television star has recently celebrated his one-year anniversary in the White House. When the election happened, we saw a reflation trade across the pond. Interest rates started rising, the dollar was strong and the equity market began to fly.

Recently, that’s begun to reverse and the dollar has been weak. There’s been plenty of media coverage on one year of Trump that has pointed out that he has not achieved very much in that time.

That’s due to many forecasting zero tax cuts at all in 2018. With mid-term elections scheduled for November 2018, it’s becoming increasingly important for Trump to get something through Congress.

Wade, chief economist at Schroders, points out that there’s a firmly entrenched trend that the President’s party tends to lose seats at the mid-terms. The number of seats each President loses depends on his popularity – and Trump’s stock is currently extremely low.

“At the moment Donald Trump is heading for a record-breaking loss,” says Wade. He explains the Republicans could lose 50-60 seats. “That would really be a big wipe out.”

Wade says that if he continues in this vein he will lose control of the House of Representatives. “Even worse, it’s possible the Democrats would come in and try to impeach him.”

Bringing the Republican Party Together

As a result, the pressure’s on to get some kind of reforms through before then and Wade reckons predictions that tax reforms will be put on the backburner are “premature”. “There’s an incentive to get a proper fiscal package through Congress, so that could bring the Republican party together and bring about tax cuts,” he adds.

Forecasts for US growth going forward are now accelerating and the latest prediction for the fourth-quarter of 2017 is for 4%. Any political stimulus that comes through will add to growth next year, explains Wade.

Further, a Federal Reserve that will probably raise rates in December and then two or three times in 2018 makes for a relatively benign and supportive backdrop for US equities. That will be encouraging for those investors that have pumped the cash into US funds this year.

Fred Schaefer, head of US equities management at Schroders, says the tax cuts will “disproportionately benefit” small and mid-cap companies.

He points to predictions from broker Jefferies that suggests earnings per share (EPS) for smaller firms would jump from $12.6 at the current 35% tax rate to $58.5 if the rate drops to 25%. Should the rate go to 20%, it would have an even more positive impact. For larger companies, their EPS would rise more modestly, from $12.2 currently to $21.2 at 25% and $27.9 at 20%.

The biggest winners, Schaefer says, would be small companies, retailers and financials. The biggest losers would be highly indebted companies, high yielders and the private equity industry. For the high-flying technology names, the picture is unclear.


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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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