Trump Tax Plan Could Backfire

Wall Street is very, very excited about President Donald Trump's promise to slash corporate taxes. Investors are betting that the GOP tax plan will create a bonanza for Corporate America that will vault the red-hot stock market into the stratosphere. The Dow has already hit 63 record highs since Trump's victory last November.

But euphoria may be overdone, if not misplaced entirely. Yes, reforming the tax code is long overdue. And cutting the corporate tax rate from 35% to 20% would save companies billions, CNNMoney reported.

But the US economy may not need that much help right now, especially if it's paid for by adding to the budget deficit. After all, the unemployment rate fell in September to a 16-year low of 4.2%.

"The US economy does not need any fiscal stimulus here. It could be too much of a good thing," said Ed Yardeni, president of investment advisory Yardeni Research.

Already, the relentless pace of gains on Wall Street has raised concern that the market could be on the cusp of a "melt up"—an unsustainable rally that isn't supported by fundamentals.

Fiscal stimulus like a big corporate tax cut could fuel a bubble in the stock market, David Kelly, chief global strategist at JPMorgan Funds, warned in a recent research report.

This help from the federal government would also leave Washington with less ammo to boost the economy should it falter again soon.

Negative Consequences

Trump's latest ugly fight with a lawmaker from his own party could hurt and ultimately doom his push to reform the tax code, analysts say. Trump and Sen. Bob Corker of Tennessee, who is retiring after the 2018 election cycle, launched into a war or words over the weekend, Business Insider reported.

Trump tweeted that Corker is a "negative force", claiming he rejected an endorsement when the senator asked. Corker responded by charging that "the White House has become an adult day care center." Then, in an interview with The New York Times, he suggested Trump could drive the US into World War III.

The spat could have negative consequences for the tax reform push. Corker was already wavering on his support for the plan Trump and Republican leaders released on September 27, suggesting reservations about its potential to balloon the federal deficit.

Keynesian Dogma

Trump administration officials have doubled down on the plan to increase the deficit, said Greg Valliere, chief global strategist at Horizon Investments, putting deficit hawks like Corker in a bind over the plan before it even really gets off the ground. He pointed to Office of Management and Budget Director Mick Mulvaney's interview on "Meet the Press" on Sunday.

Mulvaney "said running higher deficits—at least $1.5 trillion of red ink over 10 years—is acceptable if it eventually jump-starts economic growth," Valliere wrote in a note to clients Monday. "This Keynesian dogma, coming from a former hard-line deficit hawk, has bewildered many Republicans like Corker, while supply-side Republicans are dismayed that abolition of the estate tax looks less likely. There's no margin for error on a tax bill, as Republicans waver and Democrats reject any compromise."

Issac Boltansky, an analyst at the research firm Compass Point, said the added friction between himself and Trump argument could endanger the tax effort, given the already slim majority for Republicans in the senate.

The tax bill is likely to go through the budget reconciliation process, which allows Republicans to avoid a filibuster by Democrats. But the GOP only holds a 52-seat majority in the chamber, meaning leaders can only survive two defections.

Chris Krueger, an analyst at Cowen Washington Research Group, said that Trump is either taking his frustrations out on Corker for endangering the agenda or unknowingly making it worse for himself. Either way, it's not good for the tax plan, he said.

"Either Trump realizes that Corker can sink the remainder of the Trump/GOP legislative effort and is upset by that reality, or he didn't/doesn't know and just made it a reality," Krueger said in a note to clients. "Either way, we see ZERO upside for the budget process/tax reform in this Twitter-tantrum with the policy downside limit-down."