‘The haggling will only intensify’ — Wall Street’s wary of the Republican tax plan

Morgan Stanley: in an all or nothing scenario, legislative failure is the base case

Morgan Stanley reiterated its base case that the Republican tax plan will spur modest stimulus and “plenty of execution risk,” while noting that it’s “still at the drawing board.” Here are some select comments from the firm:

• On corporate tax cuts: “Corporate tax rate could still go higher … Many pay-for provisions in the bill are likely to be challenged by members and lobbyists. Hence, proponents of an immediate corporate rate cut may still be disappointed … A rate closer to 25% (our base case) could also be a necessary maneuver to compel votes.”

• On pass-throughs: “The influential National Federation of Independent Business (NFIB) has already come out against the bill because they believe the pass-through provision does not help most small businesses. This may continue to be a subject of debate.”

• On repatriation: “As expected, the bill proposes a one-time favorable repatriation rate … However, a 12% mandatory tax on cash-backed foreign retained earnings is higher than expectations and prior Republican proposals.”

• On mortgage interest deduction: “On the surface, the plan preserves the mortgage interest deduction. However, the devil, as always, is in the details. While the current mortgage interest deduction is preserved for existing mortgages, for homes purchased going forward, the mortgage interest deduction will be capped at $500k, reduced from its current cap of $1 million.”

• “A key risk to our view is that producing a limited deficit-expansion bill becomes politically untenable as contentious pay-fors deny leadership the votes to pass one or either chamber of Congress. In this case, Republicans could attempt the ‘Hail Mary’ option, pursue an ‘all cuts’ bill that substantially increases the deficit and implied stimulus.”

• On possible failure and market impact: “In this ‘all or none’ scenario, we think legislative failure would likely become the base case, as there may be enough deficit hawks and rules purists in the Senate to deny passage. But it would also signal an increased probability of meaningful stimulus. This dynamic could encourage rates volatility.”