What Have You Done For Me Lately? Dow Drops 21 Points as Tax Plan Fails to Inspire

Stocks dipped today after the release of President Donald J. Trump’s tax plan failed to impress investors after two days of big gains.

ON-CC053_nysene_D_20170413143117.jpgAgence France-Presse/Getty Images

The SP 500 dipped 0.1% to 2,387.45 today, while the Dow Jones Industrial Average declined 21.03 points, or 0.1%, to 20,975.09. The Nasdaq Composite finished little changed at 6,025.23.

What does Trump’s tax plan call for ? He’d like to simplify personal income taxes, by offering just three tax brackets, but he also wants to do away with the state and local income tax deductions that help lower taxes of residents of California, New York and the like. As for corporations, they’d pay 15%, a drop from the current 35%, and that includes partnerships and S-corps as well, a boon for small businesses.

But can it get through Congress? Capital Economics’ Paul Ashworth contends that Trump’s tax plan is “never getting approved.” He explains why:

The “new” tax plan that the White House unveiled today looks a lot like President Donald Trump’s old economic plan from the election campaign, with deep cuts to corporate and individual tax rates. Even with dynamic scoring, however, the old plan was expected to increase the Federal budget deficit by $7trn over the next decade. For that reason alone, this plan is never getting approved by Congress, particularly not through a budget reconciliation that requires ten-year revenue neutrality

This plan is so costly that it is hard to take seriously and, if anything, it leaves us more sceptical that even a modest package of tax cuts will eventually pass Congress early next year. Nearly six months after the election, the administration’s tax proposals amount to less than a single side of  paper. Neither the Democrats nor Republican deficit hawks will support these proposals and, because of the long-term cost, the plan would require a super-majority of 60 votes in the Senate. The best that can be said is that the President is laying out his opening bid in what could prove to be a very long and fraught negotiation.

Stocks aren’t the only asset class that appears skeptical about Trump’s tax plans, as the 10-year yield dipped to 2.312% today. The Lindsey Group’s Peter Boockvar offers his thoughts:

Bottom line, the action in US Treasuries is truly fascinating and if only we can make it talk. We keep talking about the differing messages all these markets are sending but it’s really glaring over the past few trading days since the French election. Yes, long end yields adjusted higher this week but with the 10 yr yield still only at 2.33-.34%, well below the upper end of the recent range of 2.60%, what is that telling us about the US economy and tax reform? The 2s/10s spread is only at 105 bps. It was at 100 bps the day of the election and thus we’ve essentially given back the entire 36 bps widening after Trump won. The spread peaked on December 22nd. What is going on here? We can say that Treasury buyers are focused on the here and now of slow growth at the same time the Fed is hiking rates and this explains the flattening. As to what it thinks about tax reform, it obviously still has questions on the size and timing of its implementation. I’m assuming this gets done late summer but the size is of course in question.

Same as it ever was.

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