Deutsche Bank Tax Reform Lite The First 100 Days & the Narrow Road Ahead
May 2017
Tom Joyce Frank Kelly Hailey Orr Mariya Getsova CIB Capital Markets Strategist Head of US Government Affairs CIB Capital Markets Strategist CIB Capital Markets Strategist The Trump Trade
Markets Since the US Election Deregulation Tax Reform Infrastructure ACA Repeal S&P 500 Financials Russell 2000 US Cyclical Index S&P 500 Healthcare 1450 1900 425 Transition First 100 Days 880
1350
375 1700 830 1250 +12.6% +4.3% +15.3% +2.2% +12.1% +4.5% +2.6% +7.4% 325 1150 1500 780 08-Nov 20-Jan 29-Apr 20-Jan 08-Nov 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr Equity Bank Index S&P 500 DB Infrastructure Index S&P 500 Pharmaceuticals 320 2100 640 2400
260 2300 1800 590
2200 +5.8% +5.3% +20.8% +2.6% +12.8% +2.5% +1.6% +6.1% 200 2100 1500 540 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr IG Fin Credit Spreads NASDAQ Heavy Building Materials Medical Devices 140 6200 400 21500 130 5800 350 20000
120 5400 300 18500 (-9 bps) (-13 bps) +6.7% +9.2% +14.5% (-3.9%) +1.4% +13.4% 110 5000 250 17000 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr Deutsche Bank Source: Bloomberg. Data as of April 29, 2017. US Cyclical index refers to FTSE US Cyclicals. DB Infrastructure Index is custom basket of 27 infrastructure levered names. Medical Devices is Dow Jones US Medical Equipment Index. Heavy Building Materials is a custom DB index, 1 indexed to 2011. Past performance may not be indicative of future returns. Historical Perspective on US Tax Reform
Late US Government raised all of its revenue from tariffs and Congress introduces alternative minimum tax (AMT), and raises 19th C. excise taxes 1969 capital gains
1895 Supreme Court rules income tax unconstitutional 1981 President Reagan passes Economic Recovery Tax Act of 1981 with sharp reduction in rates and CapEx incentives (subsequently th US income tax becomes law via passage of the 16 paired back due to rising deficits) 1913 Amendment and the Revenue Act of 1913 (mortgage interest, state and local taxes all made deductible) 1983 President Reagan hiked gas and payroll taxes
1916 Farmers given immediate 100% expensing of equipment 1984 As deficits continue to rise, President Reagan closes a number of investments; Federal estate tax introduced loopholes for businesses
1917 Charitable contributions made deductible 1986 President Reagan passes comprehensive Tax Reform Act, lowering top individual rate from 50% to 28%, and corporate tax Taxes increased via 3 revenue acts, with top rate reaching WWI from 50% to 35% (while closing many loopholes) 77% in 1918 (subsequently reduced in 5 phases during 1920s to low of 24% in 1929) 1993 President Clinton makes modest increases to tax rates Congress passes Revenue Act of 1921, which for first time Taxpayer Relief Act of 1997 expands child tax credits, introduces 1921 1997 distinguishes tax treatment of capital gains from ordinary Roth IRAs and reduces long term cap gains from 28% to 20% income 2001 & In two Acts, President Bush reduces tax rates on individuals, AMT, 2003 dividends, capital gains, estate taxes, and retirement accounts 1926 Employers’ contribution to pension funds excluded from taxable income 2009 President Obama passes $831 billion crisis era stimulus package, which included over $275 billion of tax relief 1930s President Roosevelt introduces numerous tax increases to fund New Deal and WWII 2010 President Obama signs the Tax Relief Act, providing a temporary 2 WWII Top rate reaches 94% (on income over $200k); Congress year reprieve from numerous expiring sunset provisions in the introduces payroll withholding and quarterly tax payments Bush tax cuts
1950s IRS significantly reorganized to improve tax collection 2010 President Obama signs healthcare bill called the Affordable Care Act, which includes $1 trillion of new taxes over the subsequent President Kennedy signs tax bill to jumpstart economy with decade 1962 investment tax credits for business capex (repealed in 1969, then reinstated in 1971) 2014 House Ways & Means Chairman Dave Camp (R-MI) releases draft tax reform proposal Tax rates remained high through period of large government 1960-70s deficits (introduction of Medicare), low growth and high 2016 House Speaker Paul Ryan (R-WI) and Ways & Means Committee inflation Chairman Kevin Brady (R-TX) release “A Better Way” blueprint for tax reform and other change 1968 Corporate tax rates peak at 53% 2017 President Trump releases high-level blueprint for tax reform
Deutsche Bank Source: Internal Revenue Service. US Treasury. Jeffrey Birnbaum and Alan Murray: “Showdown at Gucci Gulch” (As of May 2017). 2 Tax Reform Lite
I. Introduction
II. Tax Reform Lite
III. The First 100 Days (January 20 – April 29)
Appendix:
A. Comparison of US Tax Reform Proposals B. Detailed Executive Orders List
This presentation has been prepared by the CIB Capital Markets Strategy team and does not necessarily represent the views of our Research department or Deutsche Bank's “House View."
Deutsche Bank Assumptions, estimates and opinions in this document constitute our judgment as of the date of the document and are subject to change without notice. 3 The First 100 Days & the Narrow Road Ahead
Tax Reform Lite The First 100 Days (Jan 20 – Apr 29)
1. Execution Decisions 16. Cabinet Confirmed
2. Paying for Lower Taxes 17. 9th Seat Filled
3. International Tax Complexity 18. The CEO President
4. The Battle for Deductions 19. 30 Executive Orders
5. Importance of Leadership 20. Legislative Roadblocks
6. Under-Resourced Tax Team 21. Tax Reform Behind Schedule
7. Congressional Bottlenecks 22. Trade Policy Actions
8. Debt & Deficits 23. Infrastructure Spend in Question
9. Tax Takes Time 24. Deregulation via Enforcement Changes
10. Difficult Sequencing 25. Economic Data Mixed
11. Failure to Repeal the ACA 26. Currencies
12. Revenue Neutrality 27. US Rates
13. Border-Adjusted Taxes 28. US Credit
14. Corporate Base Erosion 29. US Equities
15. Winners & Losers Effect 30. Historical Perspective: Markets
Deutsche Bank 4 Deutsche Bank
I. Introduction Tax Reform Lite
Plan A Plan B Plan C
Scope of Reform “Comprehensive” “Small Reform” “Extenders – Plus”
Tax Cuts Significant Modest Limited (Corp rate 20-25%) (Corp rate 25-30%) (Corp rate 28-30%)
Reform Features . Similar to Brady/Ryan . Small reform . Renew 2016 – 2017 tax (with or without BAT) . No BAT extenders . No 100% CapEx . Small Corp Tax cut (28 – expensing 30%) . Keep debt deductibility . Small ACA relief (i.e., . Modified territorial (with medical device tax) minimum overseas tax) . Other: Child care tax credit
The Path . Budget reconciliation . Budget reconciliation . Normal course legislation (GOP only) (GOP only) (GOP and Dems)
More Less Difficult Difficult
Less More Likely Likely
Deutsche Bank Source: Tax Foundation. Tax Policy Center. PMJ. CIB Capital Markets Strategy. As of May 2017. 6 Limited Disclosure on Trump 2017 Plan Estimated Cost of Individual Tax Reform Trump 2017 Tax Plan Expected 10 Yr Impact from Trump 2017 Tax Plan ($Trn) . Reduce to 3 tax brackets − 10%, 25%, 35% Repeal Most +$2.0 Trn . Double size of standard deduction (to $24k) Deductions . Eliminate deductions except mortgage, Repeal Net Investment (-$0.2 Trn) Income Surtax charitable gifts & retirement savings . Lower cap gains to 20% (eliminate 3.8% ACA (-$0.2 Trn) Repeal Estate Tax tax) (-$0.4 Trn) Repeal Individual AMT . Repeal estate tax
. Repeal AMT (-$1.5 Trn) Reduce Individual Rates . Child care tax credit (-$1.5 Trn) Double Standard Deduction Corporate Tax Reform Cut Pass-Through (-$1.5 Trn) . Lower rate to 15% (for corporates and pass- Tax Rate to 15% throughs) Cut Corporate (-$2.2 Trn) Tax Rate to 15% . Move to territorial tax system
. One-time deemed repatriation (rate not Estimated Cost: $5.5 Trillion specified) (over 10 Years)
Deutsche Bank Source: White House Committee for a Responsible Federal Budget. As of May 2017 Expected range for repealing deductions (except mortgage, charitable giving, retirement) is $0.5 trillion to $4.5 trillion. This information is a forecast and due to a variety of 7 uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered may differ from those presented Tax Reform a Critical Variable for 2017 Markets
2017 US Tax Reform Scenarios
# of Additional Peak 10Yr UST 2017 Fed Hikes #1: “Comprehensive” US Tax Reform 2 – 3 ~3% Area . Analogous to Brady / Ryan & Trump 2017 blueprint . Large tax cuts / significant reform #2: “Small” US Tax Reform
. Smaller corporate and individual tax cuts . Less reform and change
#3: “No” US Tax Reform
. Minor tax cuts 1 – 2 ~2% Area . No substantive tax code reform
Recently Revised DB 10 Yr UST Forecasts Apr 29 Q2 Q3 Q4 Spot 2017 2017 2017
2.28% 2.25% 2.50% 2.75%
Deutsche Bank Source: DB Global Markets Research (Konstam, “US Fixed Income Weekly: What are we waiting for?” and “Bear Market On Hold.”). Data as of April 29, 2017. 8 This information is a forecast and due to a variety of uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered may differ from those presented. The First 100 Days, in Numbers
Politics & Policy Markets
S&P performance in the first 100 days 1 Supreme Court justice nominated and +5.3% confirmed
Appreciation of S&P 500 financial stocks in the 30 Executive orders issued in the first 100 days +2.2% first 100 days
0 Number of major pieces of legislation passed Appreciation of S&P 500 healthcare stocks in into law +7.4% the first 100 days
The number of Obama-era regulations and laws Decrease in 10Yr UST in the first 100 days 13 that President Trump has rolled back by virtue (-18 bps) of the Congressional Review Act – the most of any US President Depreciation of the USD index in the first 100 (-2.1%) days 13+ In-person meetings with foreign Heads of State Tightening in USD IG Credit in the first 100 CEOs President Trump has met with since (-3 bps) days 140+ Inauguration day Tightening in USD HY Credit in the first 100 Top corporate tax rate proposed in Trump’s (-18 bps) days 15% 2017 Tax Plan DB’s 2017 US GDP forecast (revised up from Top individual tax rate proposed in Trump’s 35% 2.6% 2.4% during the first 100 days) 2017 Tax Plan
President Trump’s approval rating at the end of DB’s peak 2017 10Yr rate forecast (revised 43% 2.75% the first 100 days down from 3.6% in the first 100 days)
Congressional approval rating at the end of the CBO projected US Government Debt / GDP 19% 89% first 100 days ratio for 2027, up from 77% in 2016
Deutsche Bank CIB Capital Markets Data as of April 29, 2017. 9 DB Forecast Changes Over First 100 Days
Economic Growth 2017 2018 US GDP: On Jan 20 (Day 1) 2.4% 3.6% On Apr 29 (Day 100) 2.6% 3.6% Market Forecasts Q2 2017 Q3 2017 Q4 2017 10Yr UST: On Jan 20 (Day 1) 3.60% 3.60% 3.10% On Apr 29 (Day 100) 2.25% 2.50% 2.75% EUR / USD: On Jan 20 (Day 1) 1.00 0.98 0.95 On Apr 29 (Day 100) 1.08 1.03 0.95 USD / JPY: On Jan 20 (Day 1) 120 123 125 On Apr 29 (Day 100) 129 126 119 GBP / USD: On Jan 20 (Day 1) 1.12 1.09 1.06 On Apr 29 (Day 100) 1.30 1.24 1.20
Deutsche Bank Source: DB Global Markets Research. Data as of April 29, 2017. This information is a forecast and due to a variety of uncertainties and assumptions 10 made in our analysis, actual events or results or the actual performance of the markets covered may differ from those presented. Deutsche Bank
II. Tax Reform Lite 1. Execution Decisions
More Less Tax Feature Likely Possible Likely Rationale “Comprehensive” reform . Very hard to do; revenue constraints; vested interests; fractured GOP; narrow majority
“Smaller” reform . Easier to do; GOP controls White House and Congress
Individual reform only . Possible fall back plan
Scope Corp reform only . Possible fall back plan
Corp & individual reform . Strong GOP preference to do both (thousands of small businesses file through “individual” code)
FY 2018 Budget . GOP resistance to deficit increases Reconciliation
FY 2017 Budget . Possible but would entail much smaller tax cuts (appears unlikely) Reconciliation Path Working with Democrats . Possible fallback plan (unlikely, higher risk path and entails smaller tax (Not revenue neutral) cuts)
Pass into law by Aug 2017 . Almost impossible at this point (if at all)
Pass into law by Dec 2017 . Will be very difficult to do given late start and ACA process delays (if at all)
Pass into law in Q1 2018 . Beyond Q2 2018 unlikely because of US mid-term elections Timeline (if at all)
Deutsche Bank Source: Tax Foundation. Tax Policy Center. Deloitte. GOP Tax Plan (“A Better Way”). Note: Budget window for reconciliation can be extended beyond 10 year window. As of May 2017 12 2. Paying for Lower Taxes
More Less Tax Feature Likely Possible Likely Rationale Lower to 28 – 30% . Easier to achieve revenue neutral; fewer deductions to eliminate
Lower to 25 – 27% . Requires eliminating nearly all deductions and adding contentious “pay forwards”
Lower to 20 – 24% . Very difficult to do without border adjusted pay forward
Lower to 15 – 19% . Nearly impossible to do given GOP deficit resistance and limited pay forwards
Lower Pass Through Rates . Lowering this rate is high priority, though unlikely to reach Trump 15% (i.e., 25 – 30%) proposal
Implement Carbon Tax . White House has indicated opposition Corporate Tax Rates Tax Corporate
Tax carried interest as . Trump campaign promise (Mnuchin has repeated) ordinary income
Lower Individual Rates . Likely, but detail and cost will matter
Eliminate Estate Tax . Long-held GOP priority, but expensive
Lower Cap Gains & . Difficult because 3.8% ACA surcharge critical to ACA funding Dividends
Introduce a Value Added . Long-held GOP resistance to VAT; too large a structural change to do in Tax (VAT) narrow time frame Individual Rates Individual
Deutsche Bank Source: Tax Foundation. Tax Policy Center. Deloitte. GOP Tax Plan (“A Better Way”). (As of May 2017) 13 3. International Tax Complexity
More Less Tax Feature Likely Possible Likely Rationale Worldwide tax system . Strong GOP resistance (with no deferral)
Worldwide tax system . Current system (with deferral) . Strong consensus on need to change
Modified territorial tax . Addresses corporate base erosion concerns system (keep low overseas System rate, i.e. 15%)
Full territorial tax system . High GOP priority but too much base erosion if corporate rate not very low
Optional repatriation . Bad CBO scoring; bad precedent; didn’t work previously window
Mandatory “deemed . Resolves tax liability on $2.6 Trn of overseas earnings; pay forward for repatriation” reform
Minimum tax on future . Likely path for future overseas earnings (i.e., at lower ~15% rate) overseas earnings Overseas Earnings Overseas (no deferral)
Modified border adjusted . Not likely, but could resurface late in process as a “pay forward” tax (phase-in, exemptions)
Modified border adjusted . Not likely, but Trump and Mnuchin have hinted at possibility; structure tax (reciprocal tax) unclear
Full border adjusted tax . Limited Senate support; USD concerns; industry impact too high
Border Adjustments Border
Deutsche Bank Source: Tax Foundation. Tax Policy Center. Deloitte. GOP Tax Plan (“A Better Way”). As of May 2017 14 4. The Battle for Deductions
More Less Tax Feature Likely Possible Likely Rationale 100% upfront CapEx . Strong GOP support but expensive expensing
Eliminating net . Long-held GOP objective but difficult given size of US debt markets interest deductibility
Limit net interest . Possible compromise measure deductibility . Recent UK proposal limiting deduction to 30% of EBITDA
Optionality: Lose net . Feature of Trump 2016 campaign plan
CapEx & Debt & CapEx interest deductibility if . Appeal to less CapEx intensive and levered sectors choose 100% CapEx expensing
Retain R&D . Strong GOP support deduction
Retain charitable . Sacrosanct deduction giving deduction
Retain mortgage . Sacrosanct deduction interest deduction
Retain state & local . Significant pay forward, but will be very difficult to eliminate deduction Other Deductions Other Child care tax credit . Ivanka Trump proposed feature
Deutsche Bank Source: Tax Foundation. Tax Policy Center. Deloitte. GOP Tax Plan (“A Better Way”). as of May 2017 15 4. The Battle for Deductions
Estimated Cost to Individuals Losing State & Local Tax Deduction Before accounting for proposed lower rates and repeal of AMT Democratic* Swing state* Republican* Connecticut $4,286 West Virginia $1,694 New York $4,250 Hawaii $1,692 New Jersey $3,522 Iowa $1,686 California $3,218 Oklahoma $1,682 Massachussetts $3,174 Kentucky $1,672 Maryland $2,564 North Dakota $1,629 Illinois $2,548 South Carolina $1,619 Rhode Island $2,333 Arkansas $1,605 Virginia $2,333 Indiana $1,579 Minnesota $2,261 Montana $1,561 Pennsylvania $2,182 Idaho $1,526 Wisconsin $2,105 Arizona $1,518 Kansas $2,040 Utah $1,485 Vermont $1,983 Florida $1,453 Oregon $1,975 Texas $1,453 Ohio $1,950 New Mexico $1,408 Nebraska $1,901 Louisiana $1,388 North Carolina $1,895 Washington $1,238 Delaware $1,848 Mississippi $1,223 Missouri $1,844 Alabama $1,211 Maine $1,839 Nevada $1,084 Colorado $1,834 South Dakota $1,017 Michigan $1,814 Alaska $992 Georgia $1,805 Wyoming $943 New Hampshire $1,734 Tennessee $938
Summary: State and local deductions represent 42% of total individual deductions, a huge revenue raiser (over $100 bn per annum, $1.3 trillion over 10 years) that will face formidable opposition. In the high state tax jurisdictions of NY, NJ and CA alone, House Republicans number 28, well above the current 21 person Republican majority. Notably, it was the battle to save state and local tax deductions that almost killed the Reagan Tax Reform Act of 1986.
Deutsche Bank Source: Tax Policy Center (tax burden). Cook Political Report (2008-2012 Partisan Voter Index). Wall Street Journal. Based on the state’s political control, not 2016 Presidential election. (as of May 2017) 16 5. Importance of Leadership
President’s Approval Ratings US Congress Approval Ratings
50% 50%
Dec 14 45% 40% 45% (Peak) April 29: 43%
30% Mar 10 23% 40% (Peak) April 29: 20% 19%
First 35% 100 Days 10%
30% 0% Jul-2016 Oct-2016 Jan-2017 Apr-2017 Jan-2017 Feb-2017 Mar-2017 Apr-2017
Summary: When President Reagan passed the Tax Reform Act of 1986, he had recently won the Presidential election by 15 million votes, winning 49 of 50 states. President Trump’s low approval ratings, in contrast, translate into less political capital. While his base remains strong, his polling suggests at least some erosion in the middle. Polling data also suggests that the rushed rollout of ACA repeal has negatively impacted support for Congress and its leadership.
Deutsche Bank Source: Bloomberg. Real Clear Politics. Data as of April 29, 2017 17 6. Under-Resourced Tax Team
Key Members of President Trump’s Tax Team
Wall Street & Politics Tax & Economic Experts Gary Cohn, Director of National Economic Council Shahira Knight, National Economic Council Tax Policy Previously: President & COO of Goldman Sachs Advisor Previously: Fidelity Investments Steven Mnuchin, Secretary of the Treasury Previously: Goldman Sachs Partner, Hollywood Financier
James Donovan, Deputy Secretary of the Treasury David Kautter, Assistant Secretary for Tax Policy Previously: Goldman Sachs Investment Banker Previously: Kogod Tax Center (previously E&Y) Jared Kushner, Senior Advisor to the President Previously: Real Estate Investor & Developer
Wilbur Ross, Secretary of Commerce Kevin Hassett, Chair of the Council of Economic Previously: Investment Banker Advisors (Nominee) Previously: AEI scholar and economist (and former advisor to Andrew Maloney, Deputy Undersecretary for Legislative McCain and Romney Presidential campaigns) Affairs Previously: VP of Government Affairs for Hess Corp.
Mick Mulvaney, Director of the OMB Previously: US House of Representatives (R-SC)
Summary: While the White House has the benefit of nearly 100 permanent tax staff in the US Treasury Department, it is nonetheless true that their team is under-resourced for the task at hand. The one page rollout of their tax plan on April 26th was a case in point. While neither House Ways & Means nor Senate Finance have released detailed bills, both have done significant work on tax with the benefit of larger teams, and multiple years of prior work.
Deutsche Bank Source: Public Media. Trump Transition Team. (As of May 2017) 18 7. Congressional Bottlenecks
Composition of the 115th Congress US Senate US House of Representatives
Dems: 48* GOP: 52 Dems: 193 GOP: 237 Freedom Caucus: ~ 40 Tuesday Group: ~ 70
25 up for re-election in 2018 (10 from Red States)
Vacant 5 Republican Majority: +2 Republican Majority: +21
Summary: President Obama entered office in 2008 with a filibuster proof 60-person majority in the Senate, and a unified Democratic Party. Today, President Trump has neither, with only a 2 person majority in the Senate (not filibuster proof), and a fractured GOP. Today’s Republican Congress is also less cohesive and less inclined to follow its leaders than in years past, with many Freedom Caucus members, for example, in safe seats.
Deutsche Bank Source: PWC “Decision time for tax reform – 2017 Policy Outlook”. Peck, Madigan, Jones. * Includes Independents who caucus with the Democrats. (As of May 2017) 19 8. Debt & Deficits
US Government Debt / GDP US National Debt Debt Held by the Public as a Percentage of GDP Total Public Debt ($ Trn) 2027F: $29Trn 100% $30 2027F: 89% 90% $25 80% 2016: 77% 2017: $20Trn 70% $20
60%
50% $15
40%
$10 30%
20% 1986: 38% $5 10%
0% $0 1966 1976 1986 1996 2006 2016 2026 1966 1976 1986 1996 2006 2016 2026 Summary: When comprehensive tax reform was last passed in 1986, US Debt/GDP was closer to 38%, versus 77% today. Estimates suggest the Trump tax plan could add $5-7 trillion to US debt. The IMF believes US Debt/GDP could rise as much as 11 points in 5 years due to tax cuts. As tax reform unfolds, look for strong GOP resistance to: (i) a deficit producing 2018 budget process; and (ii) any deficit-financed tax reform.
Deutsche Bank Source: St. Louis Fed. Congressional Budget Office. Data past 2016 is a Congressional Budget Office projection. Figures not seasonally adjusted. (As of May 2017) 20 9. Tax Takes Time
Reagan 1986 Tax Reform Trump 2017 Tax Reform (Approximately 12 Months) (Optimistic Scenario)
Q3 – Q4 1985 Q2 – Q3 2017 . House drafts and passes tax reform bill . House drafts and passes tax reform bill
Q1 – Q2 1986 Q3 – Q4 2017 . Senate drafts and passes tax reform bill . Senate drafts and passes tax reform bill
Q3 1986 Q4 2017 – Q1 2018 . July – Aug: House & Senate Conference to . House & Senate Conference to reconcile tax bills reconcile tax bills . US Congress passes tax reform bill . Sept: US Congress passes tax reform bill
Q4 1986 Q1 2018 . Oct: President Reagan signs into law . President Trump signs into law (if above steps successful)
Summary: While the “home stretch” of President Reagan’s landmark tax reform took approximately 12 months, critical ground work was laid down in prior years: Senator Bill Bradley’s (D-NY) early drafts in 1981-82; Treasury Secretary Don Regan’s extensive work in 1984; Chief of Staff (and later Treasury Secretary) Jim Baker’s skillful political navigation in 1985-86; and the successful bipartisan working relationship of House Ways & Means Chairman Dan Rostenkowski (D-IL) and Bob Packwood (R-OR).
Deutsche Bank Source: Showdown at Gucci Gulch by Jeffrey Birnbaum and Alan Murray. Tax Analytics. as of May 2017. 21 10. Difficult Sequencing
The Current GOP Strategy: 2 Reconciliations Reconciliation #1 Reconciliation #2
ACA Repeal Comprehensive Tax Reform (FY 2017 Budget) (FY 2018 Budget)
Key Questions . Will GOP pass ACA repeal, and what will be timing and revenue implications for tax? . Will tax reform be done as part of FY 2017 or FY 2018 budget? . If FY 2018 budget, will GOP be able to agree on spending and deficit levels? . Will budget reconciliation, in the end, be used for tax reform at all?
Summary: Having not passed a budget last year, Congress entered 2017 with an opportunity to take two bites at the apple via budget reconciliation (which only requires a simple 51 person majority). The Republican strategy for tax reform thus became anchored around very difficult sequencing between ACA and tax. Early stumbles on ACA appear to have provided important lessons in soliciting more “input” and consensus-building on tax, as evidenced by forthcoming hearings in the House and President Trump’s “listening sessions” in May.
Deutsche Bank Source: CIB Capital Markets Strategy. (As of May 2017) 22 11. Failure to Repeal the ACA
ObamaCare Scoring Largest ObamaCare Taxes
CBO / JCT Scoring Largest Taxes CBO / JCT Score Medicare taxes (3.8%) Most $318 Bn Market (payroll, cap gains and dividends) Relevant
. 10 Year ACA Spending: $1.4 Trn Cadillac Tax on Premium Plans (40%) $111 Bn
Employer Mandate Penalty $106 Bn
. 10 Year ACA Taxes: $1.1 Trn Tax on Health Insurers $102 Bn
Individual Mandate Penalty $55 Bn
Tax on Drug Manufacturers $34 Bn Tax Policy Center Tax on Medical Device Manufacturers $29 Bn Scoring of ACA Tax Repeal Flexible Spending Account Cap $24 Bn
. First 10 Years (2016 – 2025): (-$803 Bn) Codify IRS Economic Substance Doctrine $5.3 Bn Tax on HSAs $4.5 Bn
. Second 10 Years (2027 – 2036): (-$1,403 Bn) Tax on OTC Medications $4.0 Bn Subtotal $793 Bn Other Taxes & Revenue Effects $260 Bn Total Gross Tax Revenues $1,053 Bn
Summary: Failure to repeal the ACA makes tax reform more politically necessary, but also more difficult to achieve. That’s because repealing most or all of the ACA’s $1 trillion of taxes over the next decade effectively sets the Government revenue baseline lower, thereby making revenue neutrality easier to achieve. The contentious status of other large pay forwards – BAT, debt interest, and state / local deductions – makes the ACA revenue critically important to tax.
Deutsche Bank Source: Based on Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) analysis of HR 3762 from December 2015. Largest ObamaCare tax list based on revised JCT scoring in 2012. 23 12. Revenue Neutrality
Brady / Ryan Plan Impact on Tax Receipts (2016 – 2026)
Largest Revenue Reducers Largest Revenue Producers Static Scenario Only Static Scenario Only ($, Bn) ($, Bn) Full CapEx Repeal Personal & (-$2.2 Trn) Expensing +$1.7 Trn Dependent Exemptions (-$2.0 Trn) Reduce Individual Rates Repeal State & +$1.3 Trn Local Exemptions (-$1.8 Trn) Reduce Corporate Rate Disallow Interest Deductions +$1.2 Trn (-$1.4 Trn) Increase Individual Standard Deduction Corporate BAT +$1.2 Trn
(-$803 Bn) Repeal ACA Taxes Repeal Itemized +$1.0 Trn Deductions* (-$609 Bn) 50% Inclusion of Capital Income Limit NOLs / Small Business Credits +$701 Bn (-$515 Bn) Reduce Pass-Through Rate Deemed Repatriation +$185 Bn (-$160 Bn) Territorial System
Summary: We do not currently see a credible bi-partisan alternative to budget reconciliation for tax reform and so revenue neutrality remains critically important. To this end, revenue producers (pay forwards) were notably absent from Trump’s April 26 tax rollout. While Congress adopted rules requiring the inclusion of “dynamic scoring” in budget analyses that will help tax, we should not assume that fiscal conservatives will necessarily accept all such assumptions.
Deutsche Bank Source: Tax Foundation. Tax Policy Center. *Estimates for repealing most itemized deductions are approximately $2.3 trillion, of that State and Local are approximately $1.3 trillion. (as of May 2017) 24 13. Border-Adjusted Taxes
Breakdown of US Imports US States Most Sensitive to BAT ($, Bn) Imports as a % of State GDP Auto & parts $349 Bn Michigan Machinery & equipment $306
Louisiana Computer & Electronics $238
Consumer durables $209 Tennessee
Energy $198 New Jersey
Apparel / textile $169 Kentucky
Food / bev / tobacco $128 South Carolina
Metal $109 Illinois Pharmaceuticals $108 Texas Cell phones $99 Georgia Chemicals $75
California Transportation equipment $69 0% 10% 20% 30% Summary: As a rule of thumb, each one point decline in the corporate tax rate (from 35%) costs the US Government about $110 billion over 10 years. Trump’s 15% rate alone would therefore cost over $2 trillion. Without border adjusted taxes and other contentious revenue producers, it will be very difficult to get the corporate rate below 26%. With only a two person majority in the Senate, passage of even a modified BAT appears unlikely.
Deutsche Bank Source: Credit Sights (“US Strategy: Import Tax Pain Ahead?”). Import data as of 2015. Americans for Prosperity. Freedom Partners (“The Impact of the Border Adjustment Tax on the States”) as of May 2017. 25 13. Border-Adjusted Taxes
Largest Export Trading Partners by State Canada Mexico China Brazil UK Other
WA
MT ND ME OR MN VT NH MA ID RecommendationsSD and detectedWI threats NY WY MI RI
IA PA CT NV NE NJ (France) (Switzerland) OH UT IL IN DE CA CO WV VA KS MO KY MD
TN NC AZ OK AR NM SC
MS AL GA
LA TX AK FL
HI (Australia)
Summary: Border adjusted taxes have varying impact on industries, US states, and countries outside of the United States. The strong opinions for and against will make their way to the GOP’s narrow majority in the Senate, and the larger but still vulnerable majority in the House. While the Freedom Caucus has yet to form an official position on Brady/Ryan, many of its members have indicated an opposition to border adjusted taxes.
Deutsche Bank Source: BMO Economics. US Department of Commerce. WSJ. Based on 2016 Census data. 26 14. Corporate Base Erosion
US Government Receipts US Corp Tax Rates by Industry ($, Trn) Median effective rates for S&P 500 companies, by sector $5.0 Other 5-Year Avg. Excise Taxes $4.5 $4.3 Trn Social Insurance and Retirement Receipts Energy 34.1% Corporate Income Tax $4.0 Individual Income Tax Consumer Discretionary 33.8% $3.5 Utilities 33.5% $3.0 Consumer Staples 32.7% $2.5 Telecom Services 32.2% $2.0 Industrials 31.7% $1.5 Financials 29.5% $1.0 Materials 28.2% $0.5 Health Care 27.1% $0.0 1977 2020E Information Technology 23.7%
Summary: Corporate share of Federal tax revenue has dropped by 2/3 over the last 60 years, from 32% in 1952 to approximately 10% today. The largest US tax break today is for deferred foreign profits. As such, the question of worldwide vs. territorial, and the issue of deferral, will be critical pieces of the great 2017 tax debate. In the absence of a sharp tax rate reduction, corporate base erosion concerns may necessitate closer consideration of a modified territorial system, with a minimum tax rate on future overseas earnings.
Deutsche Bank Source: Tax Policy Center. Credit Sights. Bloomberg. Company filings. Pew Research. (As of May 2017) 27 15. Winners & Losers Effect
Selected Examples of Potentially Differently Impacted Constituents
Exporters & Importers Lower & Higher Income Taxpayers
Small Business & Large Cap MNCs Homeowners & Non-Homeowners
Domestic & International Businesses Healthcare Insurers, Providers & Users
Higher Effective High R&D Intensive Industries & Less Tax Rate Industries & Lower
More CapEx Higher Levered Industries & Less Intensive Businesses & Less
High State Tax Jurisdictions & Low Credit & Non-Credit Investors
Summary: Tax reform inherently produces winners and losers. Between Jan and April 2017, roughly 260 companies have hired registered lobbyists for tax, more than double the same number last year. In our opinion, both the Brady-Ryan blueprint and the Trump 2017 plan are aspirational documents which are not politically viable (in their current form). Tax reform, if passed into law, will most likely be smaller and less ambitious than the currently proposed plans.
Deutsche Bank Source: CIB Capital Markets Strategy. (As of May 2017). 28 Deutsche Bank
III. The First 100 Days (January 20 – April 29, 2017) 16. Cabinet Confirmed
Confirmed and Nominated Cabinet Positions
Mike Pence Rex Tillerson Steve Mnuchin James Mattis Jeff Sessions Ryan Zinke Sonny Perdue Wilbur Ross Vice President Secretary of State Secretary of the Secretary of Defense Attorney General Secretary of the Secretary of Secretary of Treasury Interior Agriculture Commerce
Alexander Acosta Thomas Price Ben Carson Elaine Chao Rick Perry Betsy DeVos David Shulkin John Kelly Secretary of Labor Secretary of Health Secretary of Housing Secretary of Secretary of Energy Secretary of Secretary of Secretary of & Human Services & Urban Development Transportation Education Veterans Affairs Homeland Security
Robert Lighthizer Linda McMahon Reince Priebus US Trade Daniel Coats Nikki Haley Mick Mulvaney Mike Pompeo Scott Pruitt Head of the Small White House Representative Director of National Representative of Director of the OMB Director of the CIA EPA Chief Business Chief of Staff (designate) Intelligence the US to the UN Administration
Summary: Although President Trump’s Cabinet is in place, hundreds of positions in the layers below must still be filled. Of the 553 positions in the Executive Branch that require Senate confirmation, nearly 30 have been nominated and approximately 25 confirmed in the First 100 Days. That does not include thousands of other appointments still required, not subject to confirmation.
Deutsche Bank Source: The White House. Includes cabinet and cabinet-level positions. (As of May 2017) 30 17. 9th Seat Filled
The US Supreme Court The Left The Center The Right
Ruth Bader Sonia Sotomayor, 62 Anthony John Roberts, Jr., 62 Clarence Thomas, 68 Ginsburg, 84 Appointed in 2009 Kennedy, 80 (Chief Justice) Appointed in 1991 Appointed in 1993 Appointed in 1988 Appointed in 2005
First 100 Days
January 31: Nominated
Neil Gorsuch, 49 Samuel Alito, Jr., 67 Elena Kagan, 56 Stephen Breyer, 78 Appointed in 2017 Appointed in 2006 Appointed in 2010 Appointed in 1994 April 7: Confirmed
Summary: The confirmation of Supreme Court Justice Neil Gorsuch on Friday, April 7, is considered by many to be the signature achievement of President Trump’s first 100 days. To accomplish this, the US Senate took the historic step of abandoning the filibuster rule for Supreme Court picks. Less known is that that same day, 61 US Senators (both Republican and Democrat) signed and sent a letter to Majority Leader Mitch McConnell (R-KY) and Minority Leader Chuck Schumer (D-NY) asking them to preserve the filibuster rule for legislation.
Deutsche Bank Source: Supreme Court of the United States as of May 2017. 31 18. The CEO President In-Person Meetings with Over 140 CEOs in First 100 Days In-Person CEO Meetings Selected CEO Events Feb-2 President's Strategic and Policy Forum 35 Finance Sector CEOs (16 Top Business Advisors) 18 Transportation CEOs Feb-9 Meeting with Airline CEOs
16 Manufacturing CEOs Feb-15 Meeting with Retail CEOs
16 Consumer CEOs Feb-23 Meeting with Manufacturing CEOs
15 Business Services CEOs Feb-27 Meeting with Insurance CEOs
14 Technology/Media/Telecom CEOs Mar-9 Meeting with Female Bank CEOs
8 Real Estate CEOs Mar-23 Meeting with Transportation CEOs
6 Commodities CEOs Mar-31 National Association of Manufacturing CEOs 5 Healthcare CEOs Apr-4 CEO Town Hall across Industries 4 Defense CEOs Apr-11 President's Strategic and Policy Forum Actual #s may be higher (16 Top Business Advisors)
Summary: By our count, with incomplete public records, President Trump has met over 140 CEOs in person in his first 100 days in office. Importantly, President Trump has a very high comfort level with this high impact audience, and they in turn, have likely had a noticeable impact on the President’s pivot to more moderate positions on a broad range of topics including immigration, trade, tax, China and the Federal Reserve.
Deutsche Bank Source: The White House. Based on publicly available information. Actual # of meetings likely higher. In person meetings only (phone calls not included) as of May 2017. 32 19. 30 Executive Orders
# of Executive Orders in the First 100 Days Issued in the first 100 days of assuming office
Donald Trump (2017) 30 Jimmy Carter (1977) 16 See appendix for detailed list of Trump Executive Orders
Gerald Ford (1974) 26 Richard Nixon (1969) 15
John F. Kennedy (1961) 23 Lyndon Johnson (1963) 14
Dwight Eisenhower (1953) 20 Bill Clinton (1993) 13
Barack Obama (2009) 19 George H.W. Bush (1989) 11
Ronald Reagan (1981) 18 George W. Bush (2001) 11
Summary: In his first 100 days, President Trump signed 30 Executive Orders, the most of any President since WWII. While several entail only ceremonial or symbolic action, a number of them include substantive initiatives related to immigration, deregulation, the environment, and the US economy.
Deutsche Bank Source: Data as of April 28, 2017. FiveThirtyEight. National Archives. Truman excluded as he took office from FDR during WWII. Executive orders issued in first 100 days as President (i.e., LBJ’s first 100 days as President took place while finishing 33 out the term of JFK). 20. Legislative Roadblocks
Legislation Not Yet Status
. Significant challenges balancing House Freedom Caucus and GOP moderates ObamaCare Repeal & Replace . Senate unlikely to pass a House bill with significant cuts to Medicaid
. House: Has revealed blueprint only; detailed draft bill expected in late May - June Comprehensive Tax Reform . White House: Limited blueprint on Apr 26 . Senate: Has not yet released blueprint
. Very unlikely given absence of filibuster proof majority in the Senate (60 votes) Dodd-Frank Repeal / Revisions . Senate unlikely to eliminate filibuster rule for legislation as done for Supreme Court Gorsuch nomination
. White House plan expected in May-June timeframe . GOP appetite for deficit financed infrastructure very $1 Trillion Infrastructure Stimulus limited . Very unlikely to be anywhere close to $1 trillion in size
Summary: While the Gorsuch nomination may be the President’s signature accomplishment, the absence of legislative success has been his most notable shortfall. When it comes to legislation, momentum is critically important. Against this backdrop, many advisors and pundits think the President should pivot to a quick (and more limited) success on tax, rather than the more “comprehensive” path that he and the Congress continue to embrace.
Deutsche Bank Source: CIB Capital Markets Strategy as of May 2017. 34 21. Tax Reform Behind Schedule
Current Brady / Ryan Trump 2016 Plan Trump 2017 Plan
Top Corporate Rate 35% 20% 15% 15%
Top Pass-Through 39.6% 25% 15% 15% Rate
Top Individual Rate 39.6% 33% 33% 35%
Tax System Worldwide (deferral) Territorial Worldwide (no deferral) Territorial
Mandatory “Deemed No Yes (8.75%)* Yes (10%) Yes Repatriation” (rate not disclosed)
Border Adjustment No Yes No Not disclosed
Capital Investment Depreciation schedule 100% upfront expensing Optional 100% Not disclosed expensing
Net Interest Yes No Optional (No if elect Not disclosed Deductibility 100% CapEx expense)
Deutsche Bank Source: CIB Capital Markets Strategy. Shearman & Sterling. Davis Polk. Deloitte. A Better Way. WSJ. Tax Policy Center. Tax Foundation. CBO. * 3.50% for non-cash. as of May 2017. 35 22. Trade Policy Actions Key Members of Trump Trade Team Selected Key Trade Policy Actions Jan Exited TPP Negotiations Wilbur Ross, Secretary of Commerce Previously: Investment banker Mar Executive order for 90-day study of US trade Gilbert Kaplan, Under Secretary of Commerce for deficits International Trade Previously: Trade attorney, King & Spalding Mar Draft circulated to congress on potential NAFTA renegotiation points (renegotiation not formally announced) Robert Lighthizer, US Trade Representative Previously: Lawyer; former trade representative Mar Executive order establishing enhanced collection and enforcement of antidumping and countervailing duties Payne Griffin, Deputy Chief of Staff, Office of the USTR Apr Executive order to buy American and hire American Previously: Congressional staffer
Apr 100 day agreement with President Xi to review US / Vishal Amin, Intellectual Property China trade relationship Previously: Senior Counsel, House Judiciary Committee Apr 20% tariffs on Canadian lumber
Peter Navarro, Head of the National Trade Council Apr White House signals existence of NAFTA Previously: Professor, author withdrawal notice (then backtracks)
Summary: Since assuming office, the President has been driven by an “America First” policy, as evidenced by his appointments, public comments and actions. Perhaps nowhere has this been more true than in trade. The President’s political philosophy may be defined more by “transactional nationalism” than by a core commitment to an underlying ideological doctrine. Such an approach lends itself to more flexibility in changing one’s position in order to achieve success.
Deutsche Bank Source: Public Media. Trump Transition Team. White House. World Trade Online. Politico. Note: Lighthizer is awaiting final Senate confirmation as of May 2017. 36 23. Infrastructure Spend in Question Funding Source: Funding Source: Deficit Financed Tax Credits & Private Sector Net Gov’t Debt Held by the Public as a % of GDP The Ross-Navarro PPIP
. Target Size: $1 Trillion (over 10 years) 100% 2027F: 89% 90% . Required Equity: $167 Billion 80% 2016: 77%
70% Total Gross US Gov’t 60% Debt: $20 Trillion . Avg. Project Leverage: 5x
50%
40% . Avg. Financing Rates: 4.5 – 5%
30%
20% . Assumed Equity Returns: 9 – 10% 1986: 38% 10% . Government Tax Credits: Equal to 82% of equity 0% ($137 Billion cost to US Government) 1966 1976 1986 1996 2006 2016 2026
Summary: The President is unlikely to surmount the formidable obstacles to his commitment to $1 trillion of infrastructure spending. While fiscal conservative Republicans are strongly opposed to deficit financed infrastructure, Democrats are not as favorable on the “tax credit” path of the Ross-Navarro plan. In addition, the market for PPIPs is unlikely to bear the type of infrastructure spending needed, in the size that Trump has promised.
Deutsche Bank Source: Bloomberg. WSJ. Congressional Budget Office. BMI Research. Wilbur Ross. Peter Navarro (UC-Irvine Professor). Trump advisory team as of May 2017. 37 24. Deregulation via Enforcement Changes
Leadership Status at Regulators
. Steve Mnuchin confirmed as US Treasury . Nominated current Acting CFTC Chairman, J. Secretary (Head of FSOC – Financial Christopher Giancarlo, to maintain Chair Stability Oversight Council) position . Currently 3 of 5 Commission seats are vacant US Treasury . No more than 3 Commissioners may be from CFTC the same Party . Likely to nominate Federal Reserve Vice Chair of Supervision (position created by Dodd-Frank but never formally filled) . Nominated Jay Clayton, partner at Sullivan & . 3 Board of Governor seats currently vacant Cromwell, to fill recently vacated Chair role . Potentially 5 Board of Governor appointees . Currently 3 of 5 Commission seats are vacant Federal Reserve over the next two years . No more than 3 Commissioners may be from the same Party . Current Chairman, Martin Gruenberg’s, term SEC as Chair to expire in late 2017 . Richard Cordray, director of CFPB, holds position through July 2018 FDIC . Currently Office of the President can only remove CFPB director with cause . Thomas Curry, current Comptroller of the − Ongoing legal battle challenging Currency’s, term expired in April constitutionality of this rule . Opportunity to nominate new Comptroller of Consumer − Upholding lower courts decision would allow Financial the Currency removal and replacement by Trump team . Position is removable by the President Protection Office of Bureau the Comptroller of the Currency
Summary: While President Trump almost certainly does not have the votes to repeal Dodd-Frank, he will have an almost unprecedented opportunity to reshape US regulatory leadership in his own mold. At the Federal Reserve alone, the President may have an opportunity to select 5 of the 7 Board of Governors over the next 12-24 months.
Deutsche Bank Source: Davis Polk. Sullivan & Cromwell. SEC as of May 2017. 38 25. Economic Data Mixed
Confidence High Actual Data Mixed Consumer Confidence US GDP (Q/Q) Retail Sales (m/m)
100 97 6% 1.0% 4% 90 0.4% 2% 80 -0.2% 0% Q1: 0.7% (-0.2%)
70 -2% -0.8% 2012 2013 2014 2015 2016 2017 2016 2017 2016 2017 Small Business Optimism Auto Sales Industrial Production (m/m)
105 1.0% 20 16.5mm 105
0.5% 0.55% 15 95 0.0%
85 10 -0.5% 2012 2013 2014 2015 2016 2017 2016 2017 2016 2017
Summary: Thus far, there has been a gap between the confidence in President Trump’s pro-growth agenda, and the actual economic data itself. While US consumer confidence stands at 17 year highs, the actual economic data in Q1 has been mixed. As evidenced by a lower than expected 0.7% Q1 US GDP growth number, the US economy has once again stumbled out of the starting gate in 2017, just as it has done in each of the last 5 years.
Deutsche Bank Source: Bloomberg. Data as of April 29, 2017. Industrial Production and Retail Sales are 3-month moving averages. End point is most recent data available. Consumer confidence is University of Michigan Consumer Sentiment Index. Small 39 Business Optimism is the NFIB Small Business Optimism Index. 26. Currencies
Global Currencies in the First 100 Days
USD Index JPY GBP EUR 100 1.32 1.30 1.12 105 Transition First 100 Days 1.30 1.10 1.09 105 1.28 111 1.26 1.08 1.24 100 110 1.06 1.22 1.20 1.04 115 1.18 +3.4% (-2.1%) (-0.3%) +4.9% 1.02 (-3.3%) +2.2% 1.16 (-8.4%) +3.0% 95 120 1.14 1.00 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
CAD MXN CNY RUB 16 6.7 55 56.93 1.25 17 18 18.82 6.8 1.30 60 1.37 19 6.89 20 6.9 65 1.35 21 (-0.2%) (-2.5%) 22 +6.6% +5.2% (-16.5%) +16.7% (-1.2%) (-0.3%) 1.40 23 7.0 70 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
Summary: The US Dollar index has been a better indicator than most markets of the difficulty in executing President Trump’s pro- growth agenda. Separately, the Mexican Peso has been one of the strongest performing countries in the world this year, while the Yen has benefitted from a flight to quality amidst rising geopolitical risk.
Deutsche Bank Source: Bloomberg. Data as of April 29, 2017. All currencies shows vs. USD. MXN, CNY, RUB axis shown as inverse, % change calculated in local currency terms. Past performance may not be indicative of 40 future results. 27. US Rates
US Rates in the First 100 Days
3M Libor 2 Year UST 5 Year UST 2.5% Transition First 100 Days 1.4% 1.20% 1.17% 1.26%
1.2% 1.81% 2.0%
1.0% 1.00% 1.5% 0.8% +16 bps +13 bps +37 bps +4 bps +64 bps (-15 bps)
0.80% 0.6% 1.0% 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
10 Year UST 30 Year UST 2s – 10s 1.4% 2.7% 3.3%
2.5% 2.28% 3.1% 2.95% 102 bps 2.3% 1.2%
2.1% 2.9%
1.9% 1.0% +62 bps (-18 bps) 2.7% +43 bps (-9 bps) +25 bps (-22 bps) 1.7%
1.5% 2.5% 0.8% 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
Summary: If the bear market in bonds is dead, the bull market may never have noticed. Rates have questioned since mid December the uncertainty around the President’s ability to deliver sizeable fiscal stimulus by way of deregulation, infrastructure and tax reform. As DB’s Dominic Konstam notes, failure of the Administration to pass meaningful tax reform and/or fiscal stimulus accentuates tail risks that yields could decline back into the pre-election range.
Deutsche Bank Source: Bloomberg. Data as of April 29, 2017. Past performance may not be indictive of future results. 41 28. US Credit
US Credit in the First 100 Days USD Investment Grade USD High Yield
US IG Index US HY Index 140 Transition First 100 Days 600 121 bps 500 390 bps 400 (-13 bps) (-3 bps) (-108 bps) (-18 bps) 110 300 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
US IG Corporates (excl. Financials) US HY BB Index 150 400 260 bps 300 123 bps 200 (-15 bps) (-1 bps) 100 (-78 bps) (-8 bps) 100 0 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
US IG Financials US HY CCC Index 140 1500 840 bps 118 bps 1000
(-8 bps) (-7 bps) 500 (-262 bps) (-63 bps) 100 0 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
Summary: US Dollar credit spreads have tightened considerably in 2017 due to a favorable mix of fundamentals, technicals and policy potential. To the extent that comprehensive tax reform was implemented, the impact on US credit would be formidable, both positively and negatively, and with variance by ratings category. In particular, the elimination of debt deductibility and repatriation flows would have meaningful impact on future issuance and market pricing.
Deutsche Bank Source: Bloomberg. Data as of April 29, 2017. Past performance may not be indicative of future results. 42 29. US Equities
US Equities in the First 100 Days
Russell 2000 S&P 500 Dow Jones Nasdaq S&P Energy First 100 Days 2500 21500 6000 600 1450 Transition
+12.6% +4.1% +5.8% +5.3% +7.6% +6.1% +6.7% +9.2% +6.7% (-8.4%) 1150 2000 17500 5000 480 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
S&P Telecom S&P Financials S&P Real Estate S&P Industrials S&P Materials 190 450 205 600 340
195
185 +15.3% +2.2% +8.8% +4.0% +10.2% (-7.1%) +1.2% +2.8% +7.4% +4.7% 150 300 175 480 290 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr
S&P Cons Staples S&P Utilities S&P Consumer Disc S&P Healthcare S&P IT 580 270 700 900 910
850 250 800 (-0.9%) +5.7% +6.5% +7.6% (-1.1%) +6.3% +2.6% +7.7% +4.0% +11.6% 480 230 600 750 750 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr 08-Nov 20-Jan 29-Apr Summary: Small cap stocks (Russell 2000) and financials are among those companies poised to benefit the most from tax reform. Lower tax rates would also have a meaningful impact on the earnings growth recovery that has defined much of 2017’s equity markets. It should also be noted that in the 8 close US Presidential elections over the last century, equities have generally under- performed pre-election, and out-performed post-election. This time has not been different.
Deutsche Bank Source: Bloomberg. Data as of April 29, 2017. Past performance may not be indicative of future results. 43 30. Historical Perspective: Markets
US Equities Post Election & First 100 Days (Post WWII)
President First Term Election to Inauguration First 100 Days Cumulative Change (Election Day to Day 100)
John F. Kennedy 8.5% 9.5% 18.8%
George H. W. Bush 4.3% 7.9% 12.5%
Donald Trump 5.8% 5.5% 11.6%
Bill Clinton 3.6% 0.9% 4.5%
Lyndon B. Johnson 1.7% 2.7% 4.4%
Ronald Reagan 4.2% (-1.0%) 3.2%
Dwight D. Eisenhower 5.7% (-5.1%) 0.3%
Richard Nixon (-1.0%) 0.7% (-0.3%)
Jimmy Carter 0.7% (-5.4%) (-4.8%)
Harry S. Truman (-7.5%) (-4.9%) (-12.0%)
George W. Bush (-6.2%) (-6.7%) (-12.5%)
Barack Obama (-15.5%) 2.8% (-13.1%)
Deutsche Bank Source: Bloomberg. Values shown are for first 100 days after elected term (does not account for market moves in the event of Vice President taking over mid-term) as of May 2017. 44 Epilogue
“We should not let the perfect be the enemy of the good.” - 17th Century Italian Proverb popularized by the French philosopher Voltaire in the late 18th Century
“You can’t pass a bill [ACA repeal] that impacts 1/6th of the US economy in 18 days.” - Joe Scarborough, US political commentator and former Republican member of the US Congress
“Getting [tax reform] done well and getting it done right is more important than getting it done soon. We are committed to getting it done this calendar year.” - Gary Cohn, Chief Economic Advisor to President Donald Trump
“If you think healthcare was a mess with a handful of members pushing their own ideas, wait until tax reform when 435 members jump into the fray with their ideas about how to reform the tax code.” - House Republican staffer
“There was really a lack of appreciation of how hard it was going to be to do healthcare reform. We are seeing something similar at play with tax reform as well.” - Michael Strain, American Enterprise Institute
“God put the Republican Party on Earth to cut taxes.” - Robert Novak, acclaimed US conservative political commentator (1931 – 2009)
Deutsche Bank 45 Deutsche Bank
Appendix A: Comparison of US Tax Reform Proposals Rate Reductions
Phase-In Period Likely Comprehensive US Tax Reform Current Brady / Ryan Trump 2016 Plan Trump 2017 Plan Top Corporate 35% 20% 15% 15% Rate Top Pass-Through 39.6% 25% 15% 15% Rate Individual Rates • 7 brackets • 3 brackets • 3 brackets • 3 brackets • Top rate: 39.6% • 12%, 25%, 33% • 12%, 25%, 33% • 10%, 25%, 35% • Additional 0.9% Medicare • Repeal 0.9% Medicare tax • Repeal 0.9% Medicare tax tax Corporate & Yes Repeal Repeal Repeal Individual AMT Capital Gains & • Short term: income rate • Tax at ordinary income • Retain current-law rates • Retain current-law rates Dividends • Long term: 20% rates with 50% exclusion (max 20% rate) (max 20%) • Additional 3.8% net (effective top rate is 16.5%) • Repeal 3.8% additional • Repeal 3.8% additional investment income tax for • Repeal 3.8% additional Medicare tax Medicare tax high earners Medicare tax • Non-qualified dividends taxed as ordinary income Interest Income Taxed as ordinary income Tax at ordinary income rates N/A Not Disclosed with 50% exclusion (effective top rate is 16.5%) ObamaCare • 0.9% Medicare Hospital Repeal Repeal Repeal 3.8% Net Investment Insurance Income Tax • 3.8% Net Investment Income Tax Estate Tax • Top rate 40% Repeal Repeal but certain Repeal • Exemption of $5.45 mm per appreciated assets subject to spouse for 2016 capital gains tax if > $10 mm
Deutsche Bank Source: CIB Capital Markets Strategy. Shearman & Sterling. Davis Polk. Deloitte. A Better Way. WSJ. Tax Policy Center. Tax Foundation. CBO as of May 2017. 47 Broaden the Base
Comprehensive US Tax Reform Current Brady / Ryan Trump 2016 Plan Trump 2017 Plan Individual Significant # of itemized Most exemptions eliminated Itemized deductions capped at • Double standard deduction Deductions deductions permitted except mortgage interest and $100k/$200k for single/joint filers • Eliminate most individual charitable breaks (except mortgage, charitable gifts, retirement savings) • Child care tax credit Corporate Permits dozens of deductions Eliminates most deductions Eliminates most deductions Eliminate special interest tax Deductions and credits except R&D except R&D breaks Net Interest Yes • Effectively eliminated Non-deductible if elect to Not Disclosed Deductibility • Only to offset interest income expense capital investment (unlimited carry forward of expense) • Special rules TBD for financial services Border No Destination-based cash flow tax No Not Disclosed Adjustability on jurisdiction of consumption, not production (exports exempt)
Energy Tax Credits For fossil fuels, alternative N/A Repeal most except R&D Eliminate special interest tax energy, and energy efficiency breaks Healthcare Employer-provided health • Limit exclusion for employer- N/A Not Disclosed Benefits benefits excluded from income provided health benefits and payroll tax • New refundable credit for individuals without workplace coverage
Carried Interest Long-term capital gains rate N/A Taxed at ordinary rates Not Disclosed State / Local Itemized deduction of state / Repeal Itemized deductions capped at Repeal Deduction local taxes or general sales tax $100,000 and $200,000 for single and joint filers, respectively
Deutsche Bank Source: CIB Capital Markets Strategy. Shearman & Sterling. Davis Polk. Deloitte. A Better Way. WSJ. Tax Policy Center. Tax Foundation. CBO as of May 2017. 48 Promoting US Growth
Comprehensive US Tax Reform Current Brady / Ryan Trump 2016 Plan Trump 2017 Plan
Capital Depreciation schedule Immediate and full expensing Optional immediate and full Not Disclosed Investment (except for land purchase) expensing (revocable within 3 years) Amortization of 15yr amortization schedule Full expensing in year one N/A Not Disclosed Intangibles
Cash Flow Tax N/A Destination-based cash flow N/A Not Disclosed Approach tax with adjustment (exports exempt)
Tax System Worldwide (with deferral) Territorial (with 100% Worldwide Territorial participation exemption for (no deferral) foreign dividends) Inversions 20% foreign ownership Discouraged via more Discouraged via more Not Disclosed threshold competitive tax code competitive tax code
Research Credit Up to 20% credit for Retain Retain Not Disclosed expenses over base amount
NOLs Carry back (2 yrs) & • No carry back N/A Not Disclosed Forward (20 yrs) • Indefinite carry forward, adjusted for inflation • Only applicable to offset 90% of taxable income
ObamaCare Over a dozen new taxes ($1 Repeal Repeal Remove 3.8% Net Investment trillion over 10 years) Income Tax
Deutsche Bank Source: CIB Capital Markets Strategy. Shearman & Sterling. Davis Polk. Deloitte. A Better Way. WSJ. Tax Policy Center. Tax Foundation. CBO as of May 2017. 49 International Tax
Comprehensive US Tax Reform Current Brady / Ryan Trump 2016 Plan Trump 2017 Plan
Tax System Worldwide Territorial (with 100% Worldwide Territorial (with deferral) participation exemption for (no deferral) foreign dividends)
Deferred Taxed at full corporate • One-time mandatory • One-time mandatory • One-time mandatory Overseas rate with allowance for deemed repatriation deemed repatriation deemed repatriation Earnings foreign tax credits upon • Cash: 8.75% • 10% • Rate not specified repatriation • Non-cash: 3.5% • Payable over 10 years • Payable over 8 years
Future Foreign Taxed at applicable 100% dividend exemption Tax profits as earned 100% dividend exemption Income corporate rate when on foreign earnings (0% (ends deferral, maintains on foreign earnings (0% repatriated tax) foreign tax credits) tax)
Border No Destination-based cash No Not Disclosed Adjustability flow tax on jurisdiction of consumption, not production (exports exempt)
Inversions 20% foreign ownership Discouraged via more Discouraged via more Not Disclosed threshold competitive tax code competitive tax code
Deutsche Bank Source: CIB Capital Markets Strategy. Shearman & Sterling. Davis Polk. Deloitte. A Better Way. WSJ. Tax Policy Center. Tax Foundation. CBO. as of May 2017 50 Deutsche Bank
Appendix B: Detailed Executive Order List President Trump’s Executive Orders 30 Executive Orders in the First 100 Days
1. Jan 20 Minimizing the Economic Burden of the Patient Protection and 16. Mar 6 Protecting The Nation From Foreign Terrorist Entry Into The Affordable Care Act Pending Repeal United States
2. Jan 24 Expediting Environmental Reviews and Approvals For High 17. Mar 13 Comprehensive Plan for Reorganizing the Executive Branch Priority Infrastructure Projects
3. Jan 25 Border Security and Immigration Enforcement Improvements 18. Mar 27 Revocation of Federal Contracting Executive Orders
4. Jan 25 Enhancing Public Safety in the Interior of the United States 19. Mar 28 Promoting Energy Independence and Economic Growth 20. Mar 29 Establishing the President’s Commission on Combating Drug 5. Jan 27 Protecting the Nation from Foreign Terrorist Entry into the Addiction and the Opioid Crisis United States 21. Mar 31 Regarding the Omnibus Report on Significant Trade Deficits 6. Jan 28 Ethics Commitments by Executive Branch Appointees
7. Jan 30 Reducing Regulation and Controlling Regulatory Costs 22. Mar 31 Providing an Order of Succession Within the Department of Justice 8. Feb 3 Core Principles for Regulating the United States Financial 23. Mar 31 Establishing Enhanced Collection and Enforcement of System Antidumping and Countervailing Duties and Violations of 9. Feb 9 Task Force on Crime Reduction and Public Safety Trade and Customs Laws 24. Apr 18 Buy American and Hire American 10. Feb 9 Preventing Violence Against Federal, State, Tribal, and Local Law Enforcement Officers 25. Apr 21 Identifying and Reducing Tax Regulatory Burdens 11. Feb 9 Enforcing Federal Law with Respect to Transnational Criminal 26. Apr 25 Promoting Agriculture and Rural Prosperity in America Organizations and Preventing International Trafficking 27. Apr 26 Review of Designations Under the Antiquities Act 12. Feb 9 Providing an Order of Succession Within the Department of Justice 28. Apr 26 Enforcing Statutory Prohibitions on Federal Control of Education 13. Feb 24 Enforcing the Regulatory Reform Agenda 29. Apr 27 Improving Accountability and Whistleblower Protection at the 14. Feb 28 Restoring the Rule of Law, Federalism, and Economic Growth Department of Veterans Affairs by Reviewing the "Waters of the United States" Rule 15. Feb 28 The White House Initiative to Promote Excellence and 30. Apr 28 Implementing an America-First Offshore Energy Strategy Innovation at Historically Black Colleges and Universities
Deutsche Bank Source: The White House. (as of May 2017) 52 Disclaimer
We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipients seek their own independent advice in relation to any investment, financial, legal, tax, accounting, or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. Furthermore, past performance is not necessarily indicative of future results. This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buy any security, nor to enter into any agreement or contract with Deutsche Bank AG or any affiliates. Any offering or potential transaction that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation and in such case the information contained herein will be superseded in its entirety by such documentation in final form. This presentation has been prepared by members of our investment banking department and does not necessarily represent the views of our Research department or Deutsche Bank's "house view." This presentation speaks only as of the date it is given, and the views expressed are subject to change based upon a number of factors, including market conditions.
Because this communication is a summary only it may not contain all material terms, and therefore this communication in and of itself should not form the basis for any investment decision. Financial instruments that may be discussed herein may not be suitable for all investors, and potential investors must make an independent assessment of the appropriateness of any transaction in light of their own objectives and circumstances, including the possible risks and benefits of entering into such a transaction. By accepting receipt of this communication the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any financial instrument discussed herein. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial, and any investor in that financial instrument effectively assumes currency risk. Prices and availability of any financial instruments described in this communication are subject to change without notice.
Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSE, FINRA and SIPC, and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates. This communication and the information contained herein is confidential and may not be reproduced or distributed in whole or in part without our prior written consent.
For investors in Bermuda This is not an offering of securities or interests in any product. Such securities may be offer or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda, which regulates the sale of securities in Bermuda. Additionally, non-Bermudian persons (including companies), may not carry on or engage in any trade or business in Bermuda unless such persons are permitted to do so under applicable Bermuda legislation. Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries.
For more information contact Tom Joyce (212-250-8754) I- 050684-1 (5/17)
This presentation has been prepared by the CIB Capital Markets Strategy team and does not necessarily represent the views of our Research department or Deutsche Bank's “House View." Reader’s Notes
Deutsche Bank 54 Reader’s Notes
Deutsche Bank 55 Reader’s Notes
Deutsche Bank 56