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Wall Street Is Overlooking Three Things That Could Derail Tax Reform

The counting of chickens yet to be hatched is the business of Wall Street.

Hatched chickens, after all, are “past performance.” It’s the little ovals full of promises for future earnings that capture all the attention.

House Speaker Paul Ryan sent the egg counters clucking when he told a CNN town hall on Monday night that tax reform would be easier to pass than failed healthcare reform because Republicans agree on the issue. All three major stock indexes rose on Wednesday, with the Standard & Poor’s 500 index posting its best gains in nearly four months.

Give some credit to Senate Majority Leader Mitch McConnell too. The Senator said on Monday that there was “zero chance” that the United States will fail to raise the debt ceiling in September.

Of course, McConnell has not spoken to President Donald Trump in weeks. The last time the two Republican leaders spoke, McConnell was hurling obscenities at the president after Trump blamed him for healthcare failure. It’s probably not too alarmist to say that this situation creates at least some non-zero chance for lawmakers to fail to raise the debt ceiling.

Some investors may also cast the cold eye of memory on Ryan’s tax remarks. After all, prior to the failure of healthcare reform, Republicans were all in agreement that Obamacare was a very bad thing that needed to be repealed and replaced. The broken shells of Republican healthcare reform hints that there may be less than meets the eye to the Republican consensus on tax reform as well.

And then there are the foxes of immigration and the border wall that are quietly stalking September. In the coming weeks, Capitol Hill will attempt to pass legislation on a government budget, the debt ceiling, and tax reform. That would be an ambitious agenda, fraught with hazard, for any Congress. Add to that Republican disarray to the border wall and the fate of rules granting temporary amnesty to illegal aliens who arrive as children.

At the Arizona rally on Tuesday night, Trump said he would allow the government to shut down if the budget did not include funding for a border wall. Senator Chuck Schumer quickly vowed that no such funding would be forthcoming, eliminating the chance that Democrats would vote for a Trump budget out of a enthusiasm for infrastructure spending or funding for Obamacare subsidies.

McClatchey’s this week reported that certain very influential White House staffers–including Chief of Staff John Kelly, First Daughter Ivanka Trump and First Son-In-Law Jared Kushner–are pushing the President to strike a deal extending Obama administration protection for so-called Dreamers in exchange for border wall funding. That would be a lopsided deal because legislation protecting Dreamers would amount to a permanent amnesty while funding for the Wall would last for one year at most. Future Congresses could refuse to fund the Wall and the Trump administration would have to offer other immigration reversals to strike a bargain. Think more temporary workers, expansion of legal immigration limits, and even broader amnesty.

That dynamic is likely to alienate Republican lawmakers like Tom Cotton and David Perdue who would like to see immigration reduced. With Democrats dead-set against funding the Wall, the Republicans cannot afford to lose any votes to pass a budget. So any attempt to attach Dreamer amnesty to the budget would likely mean a government shutdown.

A Capitol Hill embroiled in a budget fight over wall funding is not going to be a hospitable place for tax reform or raising the debt ceiling. This could easily become an all-or-nothing situation, where tax reform, the budget, and the debt ceiling rise or fall together.

At the risk of spoiling the era of good feelings that has over-taken Wall Street, it is worth imagining what might happen to equity prices if investors woke up one morning to find that the U.S. government was shut-down while hopes of tax-cuts were dashed and the U.S. Treasury was running short of cash to make interest payments on U.S Treasuries.

At the very least, investors bidding up stocks in the closing days of summer stand a good chance of winding up with egg on their faces come October.

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