Tax Reform On The Way: The Hope Of The New Administration

by: John M. Mason

Summary

As in other areas, President Trump is trying to deliver on the promises he made while campaigning and tax reform is a major issue he promised to address.

It seems as if the political forces are forming to achieve this tax reform as House Speaker Paul Ryan and Trump advisor Jared Kushner meet for dinner.

Investors remain optimistic that tax reform and other policies changes will be achieved in the near term although the particular outcomes of such policy shifts are highly uncertain.

There continues to be optimism that the Trump administration will pull off some kind of economic package that will be able to spur the US economy on to faster rates of growth.

Capturing the lead story in Politico Playbook is the recent dinner in Washington, D. C. between House Speaker Paul Ryan and Trump son-in-law, Jared Kushner.

"Trump has pegged Ryan as a tireless legislator, and has positioned Kushner as a dealmaker…."

Washington insiders believe that "Together, they might make a potent pair: someone who understands legislating, and the favored son in law who has the president's ear -- and trust."

Tax reform has been one of Trump's promises from the very beginning.

And, tax reform is just one part of the economic package, along with a rollback of regulations, especially on the financial industry, and a program of infrastructure spending.

Currently, this optimism over what economic policies might be putting together seems to be offsetting some of the uncertainty created by the Trump way of doing business. After the big stock market "take off" that immediately followed the election in early November, the stock market has paused to reassess any change in risk associated with the immediate future.

House speaker Ryan has been a substantial advocate of tax reform, so in this respect he is well prepared to move ahead on crafting a plan, one that will not require an extended period of time to put together.

Jared Kushner is, of course, getting lots and lots of attention in terms of the role he is now playing in White House deliberations. He really seems to have the President's ear and his trust.

As far as tax cuts, the publicity effort is well on the way as Trump advisors Larry Kudlow and Stephen Moore have argued in the Wall Street Journal.

Further attention is being given to revoking or revising the Dodd-Frank Wall Street Reform and Consumer Protection Act as opponents to the Act start to get their "ducks in line."

So, President Trump is following up, in one way or another, on the economic platform he presented on the campaign trail.

We still don't have a lot of specifics yet, but movement is underway. Writing bills take longer than just pushing out executive orders.

And, this movement continues to underwrite the optimism that many feel about future economic growth.

Still, there is not complete agreement that the things that are on the Trump agenda will accomplish exactly what Trump wants.

The economy is at or near full employment and, as so many have argued, the economic climate is not like it was in the early 1980s when President Reagan came to office with a plan to cut taxes and stimulate the economy.

In the current environment, the Federal Reserve System is in the position to raise its policy rate of interest to combat an economy that is heating up with expectations of inflation rising. For example, the break-even spread in the government bond market has been producing inflationary expectations of close to 2.10 percent over the next ten years, a level that is above the Fed's target rate of inflation of 2.00 percent.

Furthermore, the rising rate environment is stimulating talk of an even stronger US dollar, a situation that would be counter-productive in that the stronger dollar would hurt US exports and be a drag on the economy.

Finally, there is the concern that the US economy cannot really grow much faster, the reason being that the improvement in labor productivity is quite low at the present time and is not expected to increase much in the near term. That is, the slow growth of the economy is a supply-side problem and not one of inadequate aggregate demand.

Given these conflicting views of possible future economic growth, investors must stay nimble. The demand-side actions that the Trump administration is proposing give reason for the stock market to rise.

Whether-or-not, the supply-side of the economy is positively impacted by the tax cuts and the deregulation is another matter. If the supply-side of the economy cannot grow faster then there may be the problems of rising inflation and rising interest rates and a stronger dollar.

However, if the supply-side of the economy perks up, then there is reason for hope in a faster growth rate.

The dark cloud hanging over any revival of the supply-side, however, is the specter of a continued fall in manufacturing jobs due to continued technological innovation. This situation can only be solved by longer-term efforts of education and retraining and help in the provision of worker mobility.

This is a new age and the Trump administration is trying to make things better. The difficulty is that in a "new age" what worked at an earlier time may not produce the same results as before. This is why investors…and others…need to stay nimble.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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