Market Insider

Goldman sees slimmed-down Trump tax plan with smaller cuts, less bang for economy in 2018

Key Points
  • Goldman economists expect Congress to approve a stripped-down tax plan with much smaller tax breaks than the reforms proposed by Republicans.
  • The plan would also have less of a positive punch for the economy than the economists prior assumption.
Speaker of the House Paul Ryan with President Donald Trump.
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Goldman Sachs economists expect Congress to approve a stripped-down tax plan with much smaller tax breaks for individuals and corporations than the sweeping reforms proposed by Republicans.

The plan would also have less of a positive punch for the economy than the economists' previous assumption, with GDP gaining just 0.3 percentage points, rather than 0.4.

The investigation into the Trump campaign's ties to Russia further clouds the prospect for policy changes — already slowed by the fact Congress is dealing first with health-care legislation, they said. Based on that, they expect agreement on a smaller tax cut, amounting to $1 trillion over 10 years, instead of the $1.75 trillion plan they had previously assumed.

Goldman now projects a "modest" personal tax cut and a corporate tax rate of 28 percent, instead of the 20 percent proposed by the House, the economists said. The current corporate rate is 35 percent. The House proposal is "revenue neutral," but it also contains the controversial border adjustment tax, opposed by a number of senators and Democrats.

"We continue to believe that some type of tax legislation is more likely than not to be enacted in early 2018, but this is also now a much closer call than it used to be, in our view," the economists said. They noted they had viewed the House tax reform plan as too controversial, and they already had anticipated a plan that would be split almost equally between corporate and personal taxes, with few of the controversial elements. They also expected international corporate tax reform, which would reduce the tax rate on foreign profits, encouraging corporations to bring their cash back to the U.S.

They also expect the plan to be considered close to revenue neutral, meaning it should not result in deficits. President Donald Trump proposed his own plan which Goldman estimates would cost $3 trillion to $4 trillion over 10 years, but Congress is pushing for revenue-neutral tax cuts.

On the positive side, the fact that there is now a special counsel running the investigation into the Trump campaign may mean there will be less sparring with Democrats around the Sept. 30 expiration of spending authority and the debt ceiling. The economists had expected Democrats to use the deadline as a lever to force an independent investigation.

Republicans also could be motivated to act on a smaller tax plan by the simple fact that they would be looking for a legislative win that could help them hold onto their House and Senate majorities in the 2018 midterm election.

"A political self-preservation instinct could drive Republican agreement on a simplified tax cut," the economists wrote in a note Friday. "A tax cut is the easiest economically meaningful policy to enact prior to the election. To the extent that recent events have changed this calculus at all, they might make it even more important for Republicans to present voters with an accomplishment for next year."

Stocks sold off and the dollar weakened Wednesday after it was revealed that Trump may have asked former FBI Director James Comey to end his investigation into former national security advisor Michael Flynn.

"Market expectations appear to have declined even more, and do not imply much if any expectation of tax reform, infrastructure spending, or financial regulatory easing," the economists wrote in the note.

While expectations are dramatically diminished for a major tax plan, many market pros still look for some kind of reduced plan and most see it in now coming in 2018, if at all. The administration had promised a plan this year, and Trump, in comments Thursday, reiterated that he expects tax reform this year.