US: Senate Tax Bill fine print set to include a ‘deficit trigger mechanism’ – ING
Viraj Patel, Research Analyst at ING, suggests that with the Senate Finance Committee advancing their version of the Tax Cuts and Jobs Act to the floor, a vote on the bill this week has just edged closer – and so too has the likelihood that it is thinly voted through, with GOP Senators Corker and Johnson reported to both now be on board (note that Collins and Flake are still on the fence).
“But there's a catch: not only are we hearing of big spending cuts being rolled back – begging the question of how a large corporate tax cut will be funded – the bill is set to include a ‘deficit trigger mechanism’ to appease the fiscal hawks. In principle, this means that tax cuts would be reversed in the future if the superficial 3% US GDP growth projections underpinning the tax plan did not materialise – and the fiscal deficit therefore ended up being much larger than the Republicans currently foresee (which is arguably an inevitability).”
“On the real economy side, Ricardian equivalence comes to mind here; the idea that taxes will rise during any future economic downturn boosts the incentive to save any marginal income gains received today. For consumers this equates to little impetus to spend more, while businesses will also question the merits of investing in long-term projects.”
“Similar logic can be applied to the dollar – which in theory is the price that clears all future expected capital flows. If any short-term inflows into the US economy are expected to reverse, then there is little us analysts to make sweeping assumptions to our fundamental outlook for the $. As such, we retain the view that any implemented tax cuts will generate some sort of inverted V-shaped profile for the US dollar – with the rise and fall likely to be fairly short-lived in nature. DXY to stay below the 100-dma (93.43) for now.”