|US president Donald Trump talking tax in Indianapolis on Wednesday|
Talking to senior executives of large and small banks across the US is to be reminded just how big a deal for them the tax reforms proposed by the Trump administration at the end of September are.
The American Bankers Association was, of course, quick to applaud the administration for its commitment to lowering taxes and to agree with its contention that lower rates will pay for themselves by growing the economy, creating jobs and so expanding the tax base and revenues.
This enthusiasm goes far beyond gratitude for the boost to banks’ own profits if a political deal can be hammered out to get a reduction in the corporate tax rate from 35% to 20% through both houses.
US corporate financiers have talked for years about the inhibiting impact of an overly complex tax code and the urgent requirement for a comprehensive overhaul that fears over the short-term boost in federal borrowing have delayed for so long.
The reform outlined in late September would be the biggest in 30 years.
US bankers already report that the US consumer is in much stronger shape than August’s weak personal consumption data suggest. But they say that business confidence rests on more of a knife edge. Corporations now need to see the country’s supposedly pro-business president actually achieve something important – and tax reform is the big one.
It may not pass quickly. It could take between eight and 12 months. But if it does in a form close to that first sketched out last month, robust growth could indeed deliver a shot in the arm for banks to all manner of financial activity, including M&A, IPOs, as well as loan demand, irrespective of near-term concerns about deficits.
Debate over federal government debt capacity may yet return, likely around budget tussles over the rate of return on long-term infrastructure investment.
US bank equity prices shot up after last year’s election on expectations that the Trump reflation trade would see higher infrastructure spending, debt-funded growth and a steeper yield curve rewarding maturity transformation. In the year since, the president’s divisive style, occasionally wild bluster and political failures, most notably over healthcare reform, have stalled this rally.
Bankers are therefore pleased that the administration, notably Treasury secretary Steven Mnuchin, appear to have managed for once to prepare diligently and talk little ahead of the launch of tax reform, giving them confidence that political and non-business constituents have been properly consulted, the plan is well thought through and that it might therefore stand a chance of success.
After one early mention of a possible 15% corporate tax rate, even Trump has contained himself.
For good or ill, the share prices of US banks are caught up with Trump. At the end of September, they were rallying ahead of the market once more. It could be a choppy ride though, especially if the administration fumbles tax reform.
Hopes for higher domestic investment spending and M&A rest largely on repatriation of cash attracted back by lower taxes. If the 15-percentage point cut doesn’t materialize, growth rates look better in emerging markets and capital returns more attractive, then, far from bringing their capital back home, large and even medium-size US companies might deploy more in investment and job creation overseas.