Trump’s Tax Plan: More Questions for USD Bulls

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One week after I warned that the US House of Representatives tax plan would be a disappointment for the US dollar due to a lower than expected tax incentive aimed at encouraging US firms to repatriate cash into the US, more disappointment emerged yesterday. This time from the Republican senators, who will officially delay the reduction of corporate tax cuts, risking to dilute the growth effect of President Donald Trump’s highly anticipated tax stimulus.

One goal

Republicans from the US House of Representatives and the Senate are rushing to put together a new tax legislation with the goal of spurring growth without exceeding the $1.5 trillion limit set by the 2018 fiscal budget resolution.

Two ways

Both chambers of Congress aim at the same goal of cutting taxes aimed at incentivising business and individuals to increase spending and investment. But there are two ways on how to raise the offsetting revenue: Delaying the introduction of the 20% corporate tax rate from 35%; or repealing Obamacare.

Cutting corporate taxes to 20% from 35% will add $1.5 trillion to the US budget deficit, which is clear. But the positive growth impact of the tax cuts remain in doubt, especially if the Fed raises rates next year and pushes up the Federal government’s credit card.  The growth impact would also be reduced if the tax cuts are phased in over a number of years.

But a delay would also enable Republicans to pass announce the tax cuts after the 2018 mid-term elections and avoid being accused of helping the rich during the elections.

Repealing the Obamacare requirement that individuals buy insurance is estimated to save $338 billion over 10 years, but would leave 13 million fewer Americans with health insurance by 2027.

In the trade-off between tax cuts and healthcare, most Republicans’ have clearly opted to stick with the former and give up the latter. But internal divisions, especially inside the Senate, risk standing in the way of passing the legislation into law. We will find out before the Thanksgiving recess.

More Questions

Last week I mentioned that USD must ask whether the much-anticipated tax reform contain enough USD boost considering the required jump in the budget deficit and the lower than expected tax holiday for repatriated earnings. Today, the question is whether the delay of the tax cuts prove to deliver the intended growth impact that it was designated to do?  By year-end, how many more questions will USD bulls have asked?

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Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". His insights on currencies and commodities appear in the Financial Times, the Wall Street Journal, Barrons, the New York Times, Bloomberg TV, and BBC.

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