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US Tax Reform Moves Forward

4 December 2017USA
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  • On November 16, the House passed its version of a tax plan while the Senate passed the bill by a narrow margin of 51-49 last Saturday. President Trump would like to complete the process by the holidays but an early 2018 completion date seems more likely in Citi's view.
  • Now that both chambers have passed their separate plans, they will go to a conference committee to reconcile their differences, write a joint plan and bring a final bill to the president's desk.
  • Lower taxes on businesses: Both plans reduce taxes on corporations from 35% to 20% but the Senate version would delay a corporate cut until 2019. A 20% corporate tax rate would bring the US in line with other developed countries and below the tax rates of China and Mexico in a bid to improve competitiveness. The House version reduces the tax rate on pass through businesses to 25% (from 39.6% for high earners) while the Senate plan would give those business tax breaks but not lower the rate.
  • Lower taxes on individuals: The two plans differ in terms of personal tax rate schedules as well as deductions. Of the two, the Senate plan is more consistent with a middle class tax cut. According to the Joint Committee on Taxation, as of November 15, the Senate's version would produce a 2.8% cut for millionaires in 2027, a 6.1% cut for those earning $50,000-$70,000 and a 10.3% cut for those earning $20,000-$30,000. The Senate proposal doubles the estate tax exemption but does not repeal after six years it as the House version does.

  • Upon completion, tax reform should provide some late-cycle fiscal stimulus. As for S&P 500 earnings per share growth, Citi analysts expects 10-11% gains in 2017 to moderate to 6-7% in 2018 before tax cuts are taken into account.

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