Sen. John McCain says he’ll vote for the GOP’s near-$1.5 trillion Tax Cuts and Jobs Act, clearing away perhaps the biggest obstacle to passage.
XSome details still need to be worked out, but Wall Street isn’t waiting to kick off a victory rally. In afternoon trading, the Dow Jones industrial average and S&P 500 index hit new highs, while the Nasdaq composite recovered a big chunk of Wednesday’s losses.
Goldman Sachs (GS) and JPMorgan Chase (JPM) were among the Dow’s biggest winners, rising on the near-certainty of a boost to after-tax profits and hopes that broader economic strength will lead to higher market interest rates. JPMorgan and other financials have taken over market leadership, at least for now.
The 10-year Treasury yield spiked to 2.43%, closing in on an eight-month high. The 2-year yield rose to its highest level since 2008.
McCain, who helped seal the defeat of ObamaCare-repeal efforts in the summer and fall and voted against George W. Bush’s tax cuts in 2001, said he’ll back the current bill, despite shortcomings: “I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families.”
With McCain on board, the chances of fiscal hawks blocking passage seem minimal. Yet two GOP senators, Bob Corker of Tennessee and Jeff Flake of Arizona, still want to attach a trigger to the bill to ensure that deficits won’t spike if rosy economic projections don’t come to fruition.
On Wednesday, reports emerged that Corker was working a trigger that would claw back a portion of corporate tax cuts, which would create uncertainty about the durability of proposed 20% corporate tax rate. But the discussion has apparently shifted to a trigger involving spending reductions, which looks like really good news for Wall Street. The only problem is that any kind of trigger might not comply with Senate reconciliation rules.
The question of the trigger isn’t the only outstanding issue. The family-first duo of GOP Sens. Marco Rubio and Mike Lee want to limit the corporate rate cut to 22% to pay for a more generous child tax credit.
The White House has said that a 20% corporate rate is nonnegotiable, so prospects for the Rubio-Lee limit aren’t clear.
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Two of the GOP holdouts, Sens. Ron Johnson of Wisconsin and Steve Daines of Montana, are demanding a better deal for pass-through businesses, including sole proprietorships and partnerships, whose profits are taxed via individual returns. They’ve identified a source of funds — $100 billion-plus that could be raised by ending the deductibility of state and local income taxes for corporations — to pay for their demands.
Meanwhile, Sen. Susan Collins wants the Senate to follow the House’s lead in preserving the deductibility of property taxes.
Add it all up, and there’s still a lot of demands that could push the tax bill beyond the $1.5 trillion budget limit. That’s why there’s some chance the Senate will follow the House lead in ratcheting up taxes on past earnings of multinationals like Apple (AAPL) and Google-parent Alphabet (GOOGL) that have been stashed overseas to avoid being taxed at the 35% U.S. corporate rate. The Senate plan would apply a 10% tax on cash and 5% on illiquid assets, raising $185 billion. The House’s 14% tax on cash and 7% on illiquid assets would raise $293 billion. Apple held $252 billion in cash overseas at the end of its fiscal fourth quarter.