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