Budget Ceiling Looms as Congress Discusses Taxes
May 30, 2017
Tax reform is next on the agenda for Congress and the White House and the details are beginning to prove difficult. The GOP has a variety of options to complement their proposed tax cuts, but the approaching debt limit may slow progress. The ceiling may also affect the policies of the Federal Reserve, which may now hold off on raising rates in June. All this as consumer spending is up, inflation is down, and oil prices continue to stay low.
- Republicans begin to weigh their options on reforming the tax code. As the party begins to pivot away from healthcare reform towards tax policy, members of Congress are struggling to find sources of revenue to pay for their proposed tax cuts. They are faced with a situation where every 1% cut to the 35% corporate rate results in $100 billion in lost revenue over the next ten years – and they want to cut it to 20%. President Trump wants a cut to 15%. Secretary Mnuchin has suggested that a temporary cut could be a possibility and Representative Kevin Brady has reluctantly signaled that the cut might only be feasible at 25%. A signature proposal of President Trump, a border readjustment tax, has recently come under fire from corporations, and many Republicans have soured to the idea, as well. Some Republicans have signaled that removing the interest reduction might also provide the needed revenue, however, Secretary Mnuchin has signaled that a full cut would not work, but that a cap might. The White House has removed a few other options from the table, including cutting the mortgage interest or charity deductions, raising a carbon tax, or changing anything regarding 401(k) retirement plans. [WSJ]
- Federal Reserve plan will be affected by debt limit. The Fed’s policies during the Obama Administration were often affected by uncertainty over agreements to raise the debt limit. While the Fed is likely to raise rates to 1-1.25% in June, its plans for September will be largely shaped by how the Republican-held Executive and Legislative branches approach this issue. After the March meeting, most observers did not anticipate that there would be a halt in the raising of rates in September, but if markets are reasonably shaken by the debt limit, Janet Yellen will likely hold off. The Fed is also expected to begin reducing the balance sheet of Treasury securities in June, however, there is no expectation that an ending balance will be announced. The Fed currently holds $4.5 trillion in Treasury securities. The Federal Reserve will also be looking closely at how inflation adjusts, as the recent slowdown was predicted to be temporary. The labor market continues to be very strong, with unemployment at 4.4% in April. [WSJ]
Economic Indicators & News
- Consumer spending hit largest one-month rise since the end of 2016. After depressed spending in the winter months, the economy is beginning to warm up. The mild winter and delayed income tax returns are seen as the reason for the lower spending levels. The measurement for household spending, personal-consumption expenditures, increased .4% in April from March. The Commerce Department also reported that personal income rose by the same amount. Inflation is still below Fed goals, with prices rising 1.7% from April 2016, which is lower than the 1.9% annual gain seen in March. [WSJ]
- OPEC’s pact fails to raise oil prices. The oil cartel decided last week to continue their pact for another 9 months to depress oil supply by 1.8 million barrels compared to last year. The pact was meant to raise prices, which have been depressed for roughly three years. U.S. shale oil production is largely to blame for the low prices, with a total number of rigs equaling 722, the highest since April of 2015. [Reuters]