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The FxPro Analyst Team

Trump’s Tax Reform Plan Could Lead To Rising Deficit

US Treasury Secretary Mnuchin announced Trump’s tax reform plan in a press conference yesterday; the biggest tax reform plan since 1986.

Trump has proposed slashing corporate tax from the current rate of 35% to 15%; from one of the highest in the world to one of the lowest. In terms of personal income tax, the current 7 tax bands (minimum 10%, maximum 39.6%) is to be simplified to 3 bands instead (10%,25%,35%). Trump has also called for a repeal of the 3.8% tax on investment income and death tax.

The aim for the plan is to improve corporate competitiveness, encourage US companies to repatriate overseas funds held offshore, create more jobs, and spur economic growth to a 3% target.

The dollar index and US stock markets nudged up ahead of the press conference lifted by market expectations on Trump’s tax reform plan. However, it was followed by a retracement after the press conference. Dow Jones and the S & P 500 indexes failed to breach the psychological level at 21000 and 2400 respectively.

Although corporate tax cut will spur economic growth it will also slash more than $600 billion in revenue a year resulting in a rising deficit due to reduced tax revenue.

Trump had planned to finance tax cuts by a reduction in healthcare costs after repealing Obamacare. However, as the new healthcare bill had failed to pass on March 24, the US government’s prospective financial stress will likely become heavier. Trump now expects the costs would lead to a 3% annual economic growth.

Trump has also promised a $1 trillion infrastructure plan, with an increase in spending on military defense, which will further add to the government deficit during his presidency.

The tax reform bill will still need Congress’s approval to pass. Considering the prospective rising deficit, it is likely that conservative Republicans might not support the tax reform bill. If Trump is unable to get enough support again it will likely lead to substantial market disappointment likely to initiate a USD and Equity sell off.

The European Central Bank (ECB) will announce its interest rate decision at 12:45 BST today. It will be followed by the ECB’s press conference at 13:30 BST. Markets expect that the ECB will keep rates on hold and keep the current QE programme unchanged. However, we need to keep an eye on whether the ECB will give hints about prospective gradual QE reduction. US durable goods and core durable goods for March are released at 13:30 BST.

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