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Will Tax Cut Passage Be Easy?

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Monday, December 4, 2017

Dow futures have rocketed up more than 200 points in this morning’s pre-market on news that the Senate has passed its version of a tax reform bill in the wee hours of Saturday morning. The corporate tax rate shedding 15 percentage points — 35% to 20% — is one of the main items the Senate version shares with the House bill, which now faces reconciliation to make its way to President Trump’s desk, which he would surely sign.

Same with the pass-through rate and the elimination of the estate tax. In fact, many of the main tenets of each bill fit together, which should help reconciliation (made necessary because the tax cuts were decided on purely party grounds: no Democrats voted for either bill, with only a few defectors from the GOP voting against). There are still some wrinkles that both sides will need to iron out, but because this is far from a bipartisan effort, common ground should be fairly easy to reach.

More difficult will be those who were against the tax bills before they even saw the contents of them. Now that we can all see what’s inside, be prepared to see economists, former Treasury Secretaries, etc. to voice their opposition. Republican representatives of “blue” states — those which tend to follow Democratic policies which generally include higher taxes at state and local levels — should be preparing themselves to hear from their voting constituencies, once these citizens recognize that their taxes are likely to go up, not down.

In order to help pay for the big tax cuts, elimination of tax write-offs such as state and local, medical costs and waived college tuition look to add tax burdens on millions of households. At the same time, wiping out the estate tax (dubbed the “death tax” by supporters of the current bills) and the Alternative Minimum Tax appear to be clear handouts to singularly high-wealth individuals. And the drastic corporate tax rate cut will already be a boon to shareholders of publicly traded corporations, another main piece of evidence that these tax reform packages are not aimed at working- and middle-class families, as regularly claimed by supporters, but those much farther up the economic food chain.

All this is to say that the hard work may be yet to come. House Representatives and some Senators also face re-election in the coming year; if their voting constituencies see the current tax proposals as being sell-outs to the Wall Street upper class — which Candidate Trump explicitly campaigned against, it is worth noting — they may feel the expressed need to make their displeasure known.

Return of the Vertical Merger

Pharmacy retailer CVS Health (CVS - Free Report) has come to terms to buy managed health care giant Aetna (AET - Free Report) for a cool $69 billion. This move looks to transform the way health care is managed, with agents of the deal calling the timing “perfect.” The idea is that costs for employer-supported healthcare will be more effectively managed by joining the retailer with the coverage. Recall a year ago, when a similarly sized merger between Aetna and competitor Humana (HUM - Free Report) — a horizontal merger, not a vertical one — did not pass antitrust regulation. This morning’s vertical arrangement may be seen more palatable by these same regulators.

That’s not to say all vertical merger agreements get a free pass: AT&T’s (T - Free Report) proposal to buy Time Warner faces litigation from none other that the U.S. Department of Justice. Government antitrust regulators for this $85+ billion deal claim the merger woulds harm competition and raise consumer prices. Yet thus far, we do not hear similar rhetoric from the Justice Department on the CVS-Aetna merger. We will keep our ears and eyes open, going forward.

Mark Vickery
Senior Editor

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