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Trump’s Tax Plan - A Dollar strength policy ?

Trump’s proposed tax plans (on offshore earnings, and much lower corporate tax) are part of a very pragmatic set of likely compromises with Congress. A revised healthcare act is included. Delaying the border wall with Mexico will avert a government shutdown. The net result is expected to be a firmer US dollar, in line with our views in Global Investment Outlook 2017.

US President Donald Trump’s tax plan is said to seek 10% levy on offshore earnings. Such an initiative should get passed by Congress, and would be a further incentive for US corporates to generate more revenue ‘back home’. This would be a net-dollar positive, as it would keep more jobs in America by imposing punitive taxes on re-exports from American corporations operating in Mexico. Under the offshore tax plan, higher tax receipts for the Federal Government would ultimately make more funds available to the ‘Make America Great’ campaign.

The offshore tax plan proposal is an alternative to Trump’s controversial border tax on all imports into the US. This would have imposed heavy taxes on imported goods into the United States, in many cases from emerging nations. Some US corporations had been lobbying the Trump Administration, suggesting that the all-important consumer sector would be impaired longer term by such a move and the higher domestic prices resulting. The Trump response has been to rethink this, with a view to re-presenting all this later in the year, in similar fashion to Trump’s American Healthcare Act that was shelved at the eleventh hour last month.

While many Republicans have been unwilling to increase the US deficit, the Chairman of the Senate Finance Committee has been more supportive. He stated last night that he is ready to support Trump on the tax levy on offshore earnings, as well as on a more acceptable redrafted healthcare proposal. Senator Orrin Hatch, the Republican finance committee Chairman, has been known to sway the sometimes fickle Republican-led Congress’s senior members. His comments could be a deciding factor on Trump’s tax presentation expected later tonight. In that presentation he is expected to announce a proposed reduction in corporation tax to 15%, from the current 35%. This would be balanced by a reduction of spending at the Federal Government level by 1% annually for the four years he is in office. This would be in addition to the 10% levy on corporate earnings offshore.

While all this has been going on, Trump has conceded regarding Congress funding the immediate construction of the proposed wall along the US-Mexico border. He seems willing to wait until September on this issue, with the pay-off being that it helps avoid a government shutdown. The last time this nearly happened was under the Obama Administration two years ago. The deal to fund the US government is reaching its climax. A deal is hoped for by the end of this week that would finalize the US government’s spending plans for 2017 and be bi-partisan. The current stop-gap measures expire at midnight on Friday, the 28th April.

If the above tax proposals go through, along with the 2017 funding programs, we would expect this to be dollar-positive, overall. Most markets have been more focused on geopolitics of late, but despite some mixed statistics in the short-term the economic fundamentals in the US remain intact. The markets will get back to this, and once again appreciate that Janet Yellen and her Federal Reserve colleagues are still set to ‘normalize’ the Fed funds rate as soon as possible, in all likelihood still resulting in at least another two rate hikes this year, with more in prospect next year. These moves should underpin dollar strength versus other currencies.

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