US: New tax reform framework has still further to go – HSBC

Analysts at HSBC suggest that US tax reform framework is a first step as the legislation may take until 2018 to enact but mild growth boost is still possible.

Key Quotes

“A new framework, but still no firm plan

The Trump administration’s “framework” for sweeping changes in US tax policy would cut both corporate and individual tax rates and eliminate many deductions and exemptions that lower taxable income. It also includes the full expensing of business capital expenditures for a five-year period in an effort to boost investment and productivity. The deductibility of corporate interest expenses would be partly limited as well. A key difference with previous proposals is the absence of an important revenue-raising reform, namely, a border tax adjustment meant to mimic the effects of a value-added tax. Without that, some of the proposals for tax reduction have had to be scaled back.”

“Short-term growth boost possible, but higher deficits loom

The base-broadening effects of the proposed cutbacks in deductions and exemptions would not be enough to offset the revenue losses from lower tax rates, in our view. If fully enacted, the framework plan could spur faster economic growth in the short run through both demand-side and supply-side effects. However, the proposals would likely lead to significantly higher budget deficits over time. We expect a modest fiscal boost from the eventual tax changes and forecast GDP growth at 2.4% in 2018, above the 2.1% average so far in the current expansion. Growth in 2018 will depend to a large extent on the timing and scope of the actual tax changes that Congress eventually enacts. We break down the proposals and their potential impacts.”

“Enactment of even a diluted reform could take until Q1 2018

The framework lacks specific details that will determine exactly how the incidence of tax will change for different individuals and businesses. Working out these details will take time and could delay the enactment of tax reform until Q1 2018.”

“Proposals appear generally supportive of the corporate sector’s performance

Under the framework’s various proposals, we expect the US corporate sector to show improved reported earnings, to invest more in plant and equipment, to repatriate significant amounts of its accumulated foreign earnings and to rely less on debt to finance their balance sheets (i.e. issue fewer corporate bonds).”