How will Trump’s policies affect taxes and the markets? (Part 1)

Andrew Friedman, Principal, The Washington Update, and Jeffrey Bush, The Washington Update

This is the first post of a four-part series examining how President-elect Trump's initiatives could impact taxes, health care, sector regulation, government spending, and the country's fiscal situation.

Washington - For the first time in eight years, a new administration has assumed power in Washington. This blog series lays out the initiatives we expect Trump to pursue during his first year in office.

In Part 1, we set the stage by examining the extent to which Trump can expect support from the Republican-led Congress and the impediments that nonetheless may stand in the way. In future posts, we'll discuss how the new administration's programs are likely to affect the economy, industry sectors, tax planning, investments, and the markets.

With Republicans in control of both the House and Senate, Trump should have little trouble getting much of his agenda through Congress. Moreover, because President Barack Obama relied heavily on implementation by executive order, Trump can roll back many of Obama's actions even without Congressional approval. But we note two checks on Trump's plenary ability to implement his policies.

First, in the Senate, 60 votes are required to overcome a filibuster and pass most legislation. The Republicans have a majority in the Senate, but not 60 votes. Nonetheless, Congress has adopted a procedure called "reconciliation", which if followed permits the Senate to pass most spending and tax legislation with a simple majority. House Speaker Paul Ryan already has said he plans to use this procedure to pass much of Trump's fiscal agenda, such as tax reform.

There also is the possibility that Republicans could eliminate the filibuster rule. Although the rule requires 60 votes for Senate action, the rule itself can be changed with only 51 votes. A few years ago when they were in control, the Democrats, frustrated with their inability to get Obama's nominations through the Senate, eliminated the filibuster rule for federal appointments such as cabinet secretaries and for lower court judicial nominees (but not Supreme Court nominees).

Thus the Senate now can approve those nominations with only 51 votes. The Republicans could reduce the filibuster threshold similarly for the passage of laws. We consider the implementation of this "nuclear option" unlikely, however. Most senators are traditionalists who know their party will be in the minority someday. They are reluctant to eliminate all minority perquisites.

Second, the deficit hawks in the House, of which Speaker Ryan is one, are wary of actions that will add significantly to the federal deficit. Trump is proposing additions to defense spending, substantial new spending on infrastructure, and deep tax cuts. These proposals could exacerbate a deficit already swollen from the adverse effects of an aging population on Social Security and Medicare spending - programs Trump says he is unwilling to change.

House Republicans may push to reign in the scope of Trump's spending proposals to lessen the adverse budgetary effects. The House leadership also tends to support free global markets, and so might take issue with Trump's proposed trade restrictions.

Bottom line: A Republican-controlled Congress should help Trump get much of his agenda through Congress. However, procedural nuances and potential resistance from deficit hawks may create uncertainty on which policies ultimately pass and what they look like.

Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

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