In early January, President Trump restated his campaign pledge that he would cut taxes “massively.” Trump’s pledge to reduce taxes has been seen as a major factor in the increase in U.S. equity prices. From Trump’s election until early February 2017, the benchmark S&P 500 index allied about 8 per cent.

However, the return on the S&P 500 index has actually been negative from the beginning of March through mid-April, although there’s still an overall positive gain of around 4.5 per cent calculated from the beginning of 2017 through April 18, 2017.

The recent behaviour of the U.S. stock market suggests that investors are increasingly skeptical about personal and corporate tax rates being cut massively anytime soon—or perhaps being cut at all during by the current administration. The main reason is that Tea Party conservatives in Congress want any tax reductions to be revenue-neutral. That is, tax reductions should not increase the federal government’s deficit.

Democrats in Congress who ordinarily don’t much worry about increasing government deficits will also insist on revenue neutrality, if only because it would make it more difficult legislatively for the Trump administration to enact straightforward marginal tax rate reductions, which the Democrats view as giveaways to the rich.

The revenue neutrality tail that is wagging the tax reduction dog has resulted in a contorted and confused legislative agenda for the administration. Specifically, Trump’s advisors argued for tackling health-care reform before taking on tax reform because House Speaker Paul Ryan’s plan for replacing the Affordable Care Act (Obamacare) with the American Health Care Act promised to reduce government expenditures by almost US$1 trillion over 10 years. This saving would create some scope for any losses in tax revenue associated with the Congressional Budget Office’s official scoring of Trump’s proposed tax reductions.

The CBO arguably traditionally understates the economic benefits of tax reductions, which actually make CBO estimates of the impacts of tax reforms unduly pessimistic. In any case, the American Health Care Act was still-born and never introduced for a vote in Congress. Nor is it likely that any semblance of Ryan’s proposed bill with its associated estimated cost-savings will be passed into law in the future.

More recently, unofficial reports have circulated that attempts will be made by the administration to “pay for” corporate and personal income tax reductions by introducing new taxes, such as a border adjustable tax, which would tax U.S. imports but exempt exports from corporate taxes. Another rumoured initiative is what President Trump has called a "reciprocal tax," which, while extremely vague in detail, seems to involve levying import taxes at various rates on specific goods from individual countries. Neither of these rumoured new taxes seems popular with Congress, and the betting is that neither would be passed into legislation. They might also both be illegal under WTO rules.

So if meaningful reductions in U.S. corporate and personal tax rates are off the table for at least the foreseeable future, what does that mean for the Canadian economy?

In the short-run, it would reduce pressure on Canadian politicians to lower marginal tax rates on relatively high income-earners in Canada, particularly since there will be less incentive for highly educated and skilled Canadians to migrate to the U.S., which would be the case given even lower individual tax rates in the U.S. than in Canada.

In the longer-run, Trump’s failure to fulfill his pledge to substantially lower income tax rates threatens to perpetuate the long and ongoing slow rate of real economic growth in the U.S. Given the importance of U.S. economic growth to Canadian exports, the corollary is that Canada‘s even slower real economic growth rate will persist.

But perhaps the most significant long-run consequence of the political roadblocks placed in the way of marginal tax rate reductions (presumably combined with simplifications of corporate and individual tax codes in the U.S.) is that it will delay, if not prevent entirely, a long-overdue post-Reagan renewal of supply-side fiscal policies, which arguably is the single best policy initiative to restore productivity growth and economic prosperity in North America.

Canadian politicians are currently hardly disposed to embrace supply-side fiscal policies, but this resistance might weaken over time if there’s compelling evidence from south-of-the-border that such policies work to encourage productivity growth. Unfortunately for Canadians, a new U.S. policy experiment in supply-side tax reform is receding into the horizon.