The art of the deal and tax cuts for the US

Trump & Congress

President Trump promised the USA the art of the deal when he came to office. He conjured a view of a successful businessman cutting a better deal for working America, with a new approach to trade, tax, infrastructure spending and the rest to promote a more prosperous country. Seven months on, some are asking if the President understands the art of governing. It is proving more difficult than he expected to get his way. He recently condemned the Congress Russia sanctions bill complaining that “by limiting the Executive’s flexibility, this Bill makes it harder for the US to strike good deals for the American people, and will drive China, Russia and North Korea much closer together”. He asserted that “As President I can make far better deals with foreign countries than Congress.”

The media have been mesmerised by the comings and goings in the White House press office. Mr Trump has spent a difficult few weeks reshuffling his team as the infighting and adverse briefings have become too public. The result so far is a new Chief of Staff, John F Kelly, and a new Press Secretary, Sarah Huckabee Sanders. There is a stated intention to impose more discipline in future on the top team of advisers. Whilst these public spats and frequent changes of top personnel are not helpful, they are not the main issue.

The President of the USA is the most powerful man in the world because he commands the world’s largest military forces and has considerable scope to shape foreign policy and deploy the military as Commander in Chief. He has considerably less power over the important US domestic policy issues like healthcare, spending and taxes which he made his central case for election. Where a UK Prime Minister can set out in a party Manifesto a full range of spending plans, tax proposals and new laws with every intention of implementing that programme if they win a majority, a US President’s appeal on domestic matters is a statement of intent, not a firm promise.

A UK Prime Minister can usually count on the loyalty of governing party MPs to put through Manifesto pledges, as the MPs are elected on the same document as the Prime Minister. A US President has to broker and bargain with independently elected members of the Senate and House of Representatives to get his way. It is true that if a President starts his term with his own party in control of House and Senate he has more chance of success. Mr Obama was in this position at the start of his first term and used all his political credits to secure a watered down Obamacare law after much struggle. President Trump has tried to get through a reform of Obamacare but has failed twice now in the Senate after the House of Representatives agreed a compromise Bill.

Last week, the White House issued an important joint statement or manifesto on tax reform. The statement came from the Treasury Secretary on behalf of the Administration, issued jointly with the Speaker and Chairman of Ways and Means from the House of Representatives, with the Majority Leader and Chairman of Finance from the Senate, and the Chairman of National Economic Council. This shows a willingness to proceed in agreement between the “Big six” on tax matters. The carefully crafted words concentrated on what they agree about. At a high level they are very keen on lower tax rates on the incomes of individuals and companies. They said “We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower rate for small businesses, so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones”.

They made some progress on the details which still divides them. They agreed to drop Speaker Ryan’s proposal for border adjustment, a system designed to tax imports and to exempt exports. They are seeking a permanent system, which implies they can give away less because they will need to follow Budget reconciliation procedures and show how they are paying for any lost revenue. They favour some form of capital expensing to promote investment, and want a reform which encourages repatriation of earnings and jobs to the USA. All of this points towards a less radical and dramatic set of tax cuts than Speaker Ryan favours, and probably less than the President campaigned for.

The serious work begins in the fall. The task is being left to members of the Ways and Means Committee in the House and the Finance Committee in the Senate to craft a suitable compromise Bill in accord with the general aims. They stress the need to follow normal procedures and to take their time in seeking agreement. It is a reminder that a President has to work with the Congress and rely on them to pass legislation. Markets are not expecting much by way of tax reform having seen the difficulties President Trump faces in getting his way. It may just be the case that the Republican party wakes up to the imperative of the mid-term elections and decides it must come up with something.

Meanwhile, as a further reminder of how a President needs to work at influence where he lacks direct power, Mr Trump felt he had to approve the latest Congress sanctions bill against Russia when he himself does not want to impose them. He told us as he signed it that “the bill remains seriously flawed”. That was a more damaging moment for the Presidency than the antics of those passing through the revolving door of the press office. He needs a win. Tax reform is the most likely one, but it will take time and will not be under his control. It may, however, be the win the Republicans as a whole need so we cannot rule out them getting there after much delay and argument. Meanwhile the US market is performing well this year, thanks to the favourable trend of earnings. A tax cut would be bonus on top.

The above article  was first published by Charles Stanley on 4th August 2017