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"Credit Negative For U.S. Government": Moody's Threatens Downgrade If Trump Tax Plan Is Passed

Zero Hedge Wednesday, 4 October 2017 ()
Credit Negative For U.S. Government:  Moody's Threatens Downgrade If Trump Tax Plan Is PassedAs various institutions continue to publish very detailed estimates of how Trump's tax plan will impact the federal budget, which is somewhat amazing since income brackets haven't even been assigned yet, Moody's published a note today threatening to finally strip the U.S. of its AAA credit rating if the tax plan is ultimately passed as currently contemplated.



President Donald Trump’s tax proposal would probably weigh on the U.S. government’s credit outlook, on concerns that it would cause the federal deficit to swell, according to Moody’s Investors Service.


*“The Trump tax framework is likely credit negative for the U.S. government,”* Moody’s said in a statement. *“Tax cuts would not be offset by equivalent cuts to spending, which would put upward pressure on the federal budget deficit and debt,”* while “the tax reform’s effect on economic growth and, in turn, federal government revenue would also affect U.S. credit strength.”


By contrast, banks, insurers and asset managers would benefit from a lower tax rate, Moody’s said.



As we pointed out last Friday, the Tax Policy Center found that Trump's plan would cost $2.4 trillion over the first decade, assuming no spending cuts, and result in federal deficits soaring by several hundred billion dollars each year. 

· The proposal would *reduce federal revenues by $2.4 trillion over the first ten years and $3.2 in the second decade. *This means that absent a matched deduction in spending, US deficit and debt will increase by a similar amount. This is a problem as a Senate GOP budget resolution unveiled on Friday only allows for adding $1.5 trillion to the debt, *implying a revenue shortfall of just under $1 trillion.*

· The business income tax provisions—including those affecting corporations and pass-through businesses—would reduce revenues by $2.6 trillion over the first ten years. Elimination of estate and gift taxes would lose another $240 billion. The individual income tax provisions (excluding those related to business income) would increase revenues by about $470 billion over the same period.

So, just to summarize Moody's position on this issue, a ~$1.5 trillion budget deficit in 2009 was no problem at all but a ~$1 trillion budget deficit today would suddenly merit a downgrade.

Of course, the Trump administration has argued that increased GDP growth will offset lower tax receipts and actually result in lower deficits rather than higher. 

To that end, Deutsche Bank's economists took a shot a estimating what kind of GDP boost could be expected from the Trump tax plan and found that a 0.4% - 0.5% boost might be reasonable...



Given the size and scope of the tax plan presented, it is worthwhile to investigate the potential macroeconomic implications of the bill. We use the Fed’s model of the US economy (FRB/US) to do just that.


The full tax plan provides a meaningful lift to growth in the coming years (Figure 7). *Year-over-year growth in Q4 2018 and Q4 2019 is about 0.4pp and 0.5pp higher than the no ?scal stimulus baseline. * Higher growth leads to a tighter labor market. *The unemployment rate falls to 4% by end-2018 and 3.85% by end-2019 under the full plan, 0.2pp and 0.35pp below the baseline with no tax cuts (Figure 8).* The more modest, and in our view more realistic, tax plan intuitively produces more modest results for growth and the unemployment rate. Growth is higher by about 0.2pp and 0.3pp, and the unemployment rate is 0.1pp and 0.2pp lower, by end-2018 and end-2019, respectively.



...that said, they also found that any increase in growth expectations would just be offset by quicker interest rate hikes from the Fed.



Despite assuming a gradual response by the Fed, the implied fed funds rate is significantly higher in response to the tax cuts, as the Fed at least partially o?sets the further decline in the unemployment rate below NAIRU (Figure 9). By end-2018, the fed funds rate would be 13bp higher in response to the full tax plan and 5bp higher under the more modest tax plan scenario. *The gap between the no-stimulus scenario and tax cut scenarios is considerably wider further out. By end-2019, the fed funds rate would be 40bp higher in response to the full tax plan and 20bp higher under the more modest tax plan scenario. *These differences rise to 60bp and 30bp by end-2020 – more than two hikes more under the full tax cut scenario and more than one additional hike under the modest stimulus compared with the baseline.



Of course, the most comical part of all of this is that, after years of exponential debt growth, Moody's has finally decided that Trump's tax cuts will be the final straw that forces them to strip the U.S. of its pristine debt rating...
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Source: WSJLive - < > Embed

News video: Trump's Tax Plan: What You Need to Know

Trump's Tax Plan: What You Need to Know 01:36

President Trump touted his tax plan as a 'middle class miracle' and as a way to spur economic growth. Here's what you need to know about the Republican plan to overhaul taxes. Photo: Associated Press

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