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If Corporate & Individual Tax Cuts Fail, Stocks Will Plunge

by Gary D. Halbert
November 14, 2017

1. Corporate Tax Cut is Baked Into Stock Market Cake

2. “The Cynical Trick That Could Save the GOP Tax Plan”

3. Tax Bill Could be Compromised Down to Next to Nothing

4. Webinar: ZEGA Buffered Index Growth Strategy

Corporate Tax Cut is Baked Into Stock Market Cake

I was planning to lay off the tax reform topic today but as we all saw late last week, the stock markets could tank if it turns out we don’t get tax cuts passed this year. When the Senate released its tax plan on Thursday showing the corporate tax rate would not be cut to 20% until 2019, stocks reversed sharply lower.

Dow Jones Industrial Average

It should be clear to all that a big corporate tax rate cut this year, and other goodies, are fully baked into today’s equity markets. As a result, I think we could see a significant downward correction should the Republicans fail to pass something meaningful this year. Given that reality, I think we should keep our focus on the status of tax reform, at least for now.

I also say that because I believe there is a very good chance the Republicans are going to blow this opportunity. As you will read below, neither the House bill nor the Senate bill has any chance of becoming law as currently written. Most importantly, both violate the “Byrd Rule” in that they both add a lot to the budget deficit over the next 10 years.

Plus, the House and Senate tax bills are very far apart, and there’s no guarantee that the Conference Committee can reach a viable compromise just ahead. If that’s what happens, there’s little doubt that the stock markets will punish investors.

Given that, I planned to spend last weekend studying what will have to happen to get either one of these flawed tax plans, or some compromise, to pass under “reconciliation” where only a simple majority vote can work in the Senate (as opposed to 60 votes).

That was going to be tough for me since I had a house full of company all weekend that were expecting plenty of Dad’s smoked meats and home cooking. Fortunately, Jim Newel over at SLATE had done all the work for me by late Saturday. I’ll reprint his very good analysis for you below. All emphasis is mine.

by Jim Newel, 11-11-17

As you read various articles about the twin tax plans offered by the House and Senate in the past couple of weeks, here’s one not-minor detail to keep in mind: Neither bill, as written, can pass Congress. I’m not talking about vote-counting issues, a wholly separate field of land mines. At least with votes, arms can be twisted, side deals can be cut, and so on.

I’m talking instead about the rules. The intractable rules. Both bills would violate those.

The Byrd rule governs what’s allowed under reconciliation, the budget process that allows the Senate to consider bills not subject to a 60-vote filibuster. This rule, among other things, bars bills that would increase the deficit outside of the 10-year budget window. In other words: The tax reform plan, if it’s to be passed with a 50-vote majority in the Senate, could not increase the deficit in 2028.

GOP leaders

Though an official public estimate of the effects in 2028 and beyond hasn’t been released yet, it’s clear enough that both the House and Senate bills would not only increase the deficit by then, but flagrantly so.

The last estimate of the House bill from Congress’ official number-cruncher, the Joint Committee on Taxation, projected that it would increase the deficit by $88.9 billion in 2025, $121.8 billion in 2026, and $155.6 billion in 2027. As you can see, those numbers are nowhere near budget neutrality—and they’re trending in the wrong direction, too. This plan would definitely increase the deficit in 2028.

The somewhat more generous Senate bill is even further away from its marks. It increases the deficit by $127.1 billion in 2025, $167.3 billion in 2026, and $216.7 billion in 2027. Follow that trend line and predict 2028. Rules would prohibit it from passing with 50 votes.

So what, you may be asking, are they even bothering with here?

Republicans have a few options for getting around this problem. One option would be to start from scratch and write new bills that don’t egregiously violate the rules or to throw in some massive revenue-raisers that would bring in hundreds of billions of dollars per year. Don’t count on it.

Another would be to play one of several parliamentary games that effectively would amount to killing the Senate filibuster, thereby allowing the Senate to pass whatever it wants with 50 votes. [Gary here: this is a very bad idea.]

Senate Majority Leader Mitch McConnell has been unequivocally against such moves, though. And even if he did have a sudden change of heart, it’s unlikely he could bring the rest of his conference along with him.

Instead, Republicans will likely rely on gimmickry to ensure the plan that eventually passes the Senate complies with the rules. The overarching gimmick in these situations is to “sunset,” or eliminate, certain provisions after a number of years and then bank on Congress renewing them in the future.

Think of the Bush tax cuts, also passed through reconciliation, which sunset after 10 years. Its authors knew that there would be major political pressure on Congress to renew at least its middle-class tax cuts. They were correct.

There’s already an element of this practice in the House bill. In order to get its bill in compliance with another budget rule—that the bill could only increase the deficit by $1.5 trillion in the first 10 years—the Ways and Means Committee chose to sunset a new $300 family tax credit after five years.

House Republicans argue that we shouldn’t believe the law they’ve written, and that there’s no way a future Congress would allow those credits to expire. You can decide whether to believe that or not.

textIf Republicans ultimately followed this model to get their final product in compliance with the Byrd rule in the long run, they would have to sunset a lot of the popular individual tax cuts.

This could come as soon as next week’s Senate Finance Committee consideration of the bill—probably near the end of the process, so as not to draw a lot of attention to it.

Once a lot of attention is inevitably drawn to it, they will argue the following: This is just a technical thing, and there’s no way Congress would let the popular individual tax cuts expire as they’ve written them to.

But here’s the messaging problem on that: Republicans, in order to appease their corporate allies who argue that temporary corporate tax cuts wouldn’t provide the “confidence” necessary to spur new investment, would be making the popular individual tax cuts temporary to pay for permanent corporate tax cuts.

How likely are things to play out this way? The tax reform bill that eventually passes, if one does, will have to look very different than the ones that have been released so far to get it in line with Senate rules. The Great Gimmick is nigh.” END QUOTE

Hat tip to Jim for walking us through the details!

Tax Bill Could be Compromised Down to Next to Nothing

As I said at the beginning today, I will not be surprised if the Republicans fail to pass any meaningful tax reform just ahead. As noted above, the House and Senate tax reform bills are very different and in some ways not easy to reconcile.

Senator John McCain (who might as well be a Democrat lately) said last week that he would not support the House tax reform bill; remember he cast the deciding GOP vote not to repeal Obamacare. Several other Republican Senators said they will not vote for either plan last week. That means we’re probably in for weeks or months of compromise on important tax issues. 

The risk is that the tax reform plan – regardless what comes out of the Conference Committee that reconciles the House and Senate plans – is so watered down that it provides very little, if any, stimulus for the economy. As noted above, this will not be good news for stocks.

So, let’s look at the most likely areas which could lead to compromises that water down the tax reform plan. First of all, there is the argument over whether the tax cuts have to be “revenue neutral,” meaning they supposedly can’t add to the budget deficit over the next 10 years.

As I wrote last month, most of the outfits that “score” these tax cut plans in terms of the deficit assume no additional growth in the economy as a result of lower tax rates. If that is the case, then lower tax revenues automatically mean higher deficits. Adhering to the revenue neutral requirement automatically means watering down (i.e. – reducing) the tax cuts.

As an aside, politicians on both sides of the aisle never consider reducing spending when it comes to balancing the budget. That was one of my main “soapbox” issues earlier in my career, but I have long since given up on this issue. Spending goes up every single year no matter who is in the White House.

Another reason tax cuts get compromised down to next to nothing is the continued drumbeat from the mainstream media that “the rich don’t pay their fair share” of income taxes. Never mind that the richest 20% of Americans pay almost 70% of federal income taxes, while the bottom 45% of income earners pay no federal income tax, and many receive refunds.

I could go on and on, but the point is that politicians (in this case Republicans) are likely to compromise the tax reform effort down just ahead to the point that it is effectively meaningless in terms of the economy. That is if they pass anything at all. I’m not optimistic.

This is especially disappointing considering that the GOP controls both houses of Congress and the White House. If the Democrats controlled all three branches, there’s no question that we’d have higher taxes by now. Yet the Republicans may not end-up doing much, if anything, to get lower taxes. It’s very frustrating!

Webinar: ZEGA Buffered Index Growth Strategy

In case you missed it, I suggest you watch a recording of our recent webinar featuring ZEGA Financial and their ZEGA Buffered Index Growth (ZBIG) Strategy. This strategy seeks to provide upside market exposure when the markets go up, while also using a buffered zone to protect against market declines.

This unique strategy has a goal to help reduce or eliminate some market losses should the markets drop, which is especially important now with all the uncertainty regarding the proposed tax cuts and other uncertainties. 

ZBIG gives you the potential to participate in market gains, but with protection to avoid moderate market losses. (As always, keep in mind that past performance is not necessarily indicative of future results.)

I highly recommend you watch this webinar to learn more about this very innovative strategy. You can also call us to learn more about ZBIG at 800-348-3601.

Wishing you profits,

Gary D. Halbert


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Read Gary’s blog and join the conversation at

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