UBS House View Daily

Thought of the day

31.08 - Trump turns focus to tax reform

President Donald Trump put tax reform on center stage on 30 August, saying he wants to cut the corporate tax rate to 15% and simplify the tax code. Further detail was lacking, reflecting the political realityof failed healthcare reforms and a divided Republican Party. Passing substantive legislation will be challenging.

But while comprehensive tax reform may be out of reach, less ambitious reforms might be possible in the next 6–9 months:

  • Tax reform should be easier to pass than healthcare. Unlike healthcare, almost all Republicans agree on tax cuts in principle. Also, the different parts of healthcare were hard to deal with individually. In contrast, the Republicans can focus on limited corporate tax cuts.
  • A corporate tax cut shouldn't widen the deficit too much and alienate Republican hawks. Corporate tax raises USD 300bn a year – just 1.6% of GDP – compared with USD 1.5trn from personal taxes. Cutting the rate from 35% to 25% should be manageable.
  • The Republicans will want to do something to impress voters before campaigning for mid-term elections next year. Trump, too, needs policy success and would probably sign most forms of a deal.

So while far from certain, the UBS Office of Public Policy estimates the chances of a successful tax reform deal are 55%. We estimate a 10-percentage point cut in corporate tax could boost US stocks by 3–5%. A deal would benefit stocks with high domestic exposure, including small caps, financials and telecoms.

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