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Republicans Struggle To Make Tax Numbers Add Up; Stocks Fall | Stock News & Stock Market Analysis

Republicans are apparently facing a reality check as they struggle to squeeze a nearly $6 trillion wish-list of tax cuts into a $1.5 trillion budget hole.

After GOP House leaders delayed by a day the rollout of tax legislation that had been set for Wednesday, Republicans slapped down rumors of further possible delays. Still, the S&P 500, which surged to record highs early in the session, gave up much of those gains by early afternoon while the Nasdaq composite turned lower.

While there a number of factors for the market’s moves, including Apple (AAPL) and iPhone-related stocks retreating, there’s no doubt that tax reform hopes have been a big contributor to the stock rally since President Trump’s election.

It’s not hard to figure out what the big holdup is: Republicans are promising so much to businesses that they’re having trouble making their tax cuts sufficiently attractive for individuals without busting the budget. If anything, President Trump is making their job harder by insisting on an immediate cut in the corporate rate to 20%, rather than a gradual phase-in, and pushing back against any changes in tax treatment of 401(k) accounts. Trump is likely to lose the latter battle and may lose the former.

The GOP tax framework called for a $2.6 trillion net cut in business taxes, according to a Tax Policy Center analysis. That includes an immediate 20% corporate tax rate and a 25% rate for small businesses and partnerships whose business income is taxed via the individual tax code. While Republicans have some offsets they haven’t yet spelled out, including a partial limit on interest deductibility for corporations and a minimum tax on overseas earnings, they need to at least cut the cost in half to allow room for individual tax cuts.

Those interest deductibility limit could hit companies like Verizon (VZ), which has $100 billion in debt. Meanwhile, a minimum tax threatens to raise taxes on overseas earnings for companies like Pfizer (PFE), Alphabet (GOOGL) and Apple that face single-digit effective overseas tax rates.

Even still, there would be scant room for individual tax cuts unless the GOP can magically find hundreds of billions of dollars in tax savings by limiting the size of pretax 401(k) contributions. While cutting the $18,000 limit in half would raise more than $100 billion, that’s unlikely to be enough. Meanwhile, Republicans from high-tax states including New York, New Jersey and California seem to be waging a successful battle to preserve at least part of the state and local tax deduction, which will cost the federal government $1.3 trillion over a decade.

The individual tax numbers aren’t adding up, which is why the GOP is now willing to keep a 39.6% top income rate. The estate tax is another pressure point, but so far House leaders are sticking by their plan to kill it.

The bigger picture is that Republicans have few votes to spare, with three defections enough to kill it in the Senate. Even if there is no further delay in releasing the GOP plan, it’s not safe to assume that Republicans will eventually prevail and get big tax cuts passed.

The first test will be the reaction of GOP lawmakers. The second big test will come when independent budget analysts determine who benefits from the tax cuts. One of the big shortcomings of the GOP tax framework is that the middle class didn’t come out that well, with a less-generous inflation adjustment gradually shrinking or reversing their tax cuts.

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