The health care reform efforts have disappointed. The House version has been all but forgotten about as the focus has shifted to the Senate. The challenge in the House has been repeated in the Senate, namely that the differences between different parts of the coalition embodied in the Republican Party are preventing the emergence of a working majority.  

The strategy for addressing tax reform is considerably different. It appears the negotiations are being hammered out by a special committee of six men. From the House of Representatives, Speaker Ryan and Chair of the Ways and Means Committee Brady are joined by McConnell the Majority leader from the Senate and Hatch, the Chair of the Finance Committee. Representing the Trump Administration is Treasury Secretary Mnuchin and Chair of the National Economic Council Cohn.  

In late April Mnuchin and Cohn provided a brief overview in a one-page summary of the Administration's main points. These were aspirational goals and negotiating points rather than a developed proposal. Mnuchin pushed against the Border Adjustment Tax (BAT). It is not thought to be workable in the Senate. Nevertheless, Ryan and Brady do not appear to have given up on it, though have modified and allowed for a phasing in on the tax on all imports and a tax break for exports. 

With the talks confined to the six officials, word on developments has been minimal. Judging from various press reports, there appears to have been an attempt to remind investors that progress is indeed being made. A more cynical assessment might see the purpose as partly a distraction from the health care morass and other less flattering news developments.

The first take away is that the proposal is a lighter version compared some of the aspirational notions. For example, reports suggest the corporate tax rate could be cut to 23%. Including state and local taxes, the current tax schedule puts the marginal tax rate near 39%, compared with a 24.8% on average in the OECD. This is not the 15% that had been previously suggested. Moreover, the effective tax rate, what is paid, is closer to 19.5%.  

Second, that is a natural segue into deductions and "loopholes" which explains how the tax schedule rate turns into the effective rate. Apparently, there is still a discussion to remove the deduction for debt servicing. This is one way that the current tax code provides an incentive to accumulate debt. Also under consideration is to make it easier for small businesses to pay a corporate tax rather than the individual tax rate.  

There is also some discussion about taxing the intellectual property of corporations, which is often placed in legal entity domiciled in a low tax jurisdiction. Tax inducement to bring back the couple of trillion dollars of earning kept overseas will also likely be included. One part of the plan may tax the repatriation of overseas earnings a rate of almost 9%, nearly twice the rate of the prior holiday, but offer a 3.5% tax rate on repatriation of funds already invested abroad.  

Third, personal income schedules may be cut, but here too many deductions will be eliminated. Currently, it appears that only the mortgage interest rate deduction and the deduction for charitable contributions will be trained.The other deductions, including for local and state taxes and medical spending are candidates for elimination, as are the personal exemption and the dependent exemption.   

A nonpartisan policy research group (Tax Policy Center) concluded with the details available that about 20% of American would end up paying more taxes. That would include the 2% that earn more than $3.4 mln a year, and also some who earn less $25k a year who would lose some tax credits, such as the earning income tax credit.Full three-quarters of the middle-income earners ($48.6k to $86.1k) could see their tax bills fall by an estimated $760 a year.  

Seven or eight months ago, the idea was the health care reform, and the border adjustment tax would be a net savings of $2 trillion that could be used to fund a once in a generation tax reform. It would not produce a greater deficit a decade out, and hence, support from the Democrat Party would not be necessary. However, neither the House or Senate versions of the health care reform save anywhere close to $1 trillion, and the BAT is in doubt.  

This has left many observers to conclude that the current thrust if implemented would result in more debt without adding much to growth. Some of the potential stimuli would be offset by rising rates on a rising debt burden. While the spin given to reporters seems to be for an ambitious schedule, the September goal may prove too optimistic. The debt ceiling and spending authorization of the next fiscal year's budget will likely suck up September's oxygen, some officials may already be preparing the market for disappointment by suggesting that even if the efforts carry over into early next year, it is not problematic.  

Although some partisans are making a big deal about the continued erosion of public support for President Trump, polls suggest that Trump's support is still holding up among his base. That said the first cracks are appearing. Some surveys found that sentiment is beginning to soften in counties that Trump carried in 2016 but had been won by Obama in 2014. It is not simply important for Republicans to show some legislative progress ahead November 2018 midterm election, but ideally, health care reform and tax reform would be accomplished before the primaries, which could pit Trump-supported candidates against more traditional Republicans.  

NEC Chair Cohn has been the subject of rumors that he is being considered as a candidate to replace Yellen, whose term is up as Chair, early next year. We are often interested in the motivation of such rumors. Could it be a distraction? Could it be Cohn himself campaigning for it the way that some suspect former Fed Governor Warsh is through speeches and op-ed pieces? Although President Trump does not appear constrained by tradition, Cohn's association with the Administration, and especially on such a keystone issue as tax reform, may raise questions about perceptions of his independence.