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Howard Schultz calls GOP tax plan ‘fool’s gold’


What's in the GOP proposed tax plan
What’s in the GOP proposed tax plan

Howard Schultz calls GOP tax plan ‘fool’s gold’


Many business leaders are cheering the corporate tax cuts proposed by President Trump and the GOP.

And then there’s Howard Schultz.

The Starbucks(SBUX) executive chairman slammed the House Republican tax proposal for being too heavily skewed toward tax cuts, instead of giving the outdated system much-needed reform.

“This is not tax reform. This is a tax cut. This is fool’s gold,” Schultz said on Thursday at the New York Times DealBook Conference in Manhattan.

Schultz, who stepped down as Starbucks CEO this year, said corporate America “does not need” the proposed corporate tax cut from 35% to 20%.

“The tax cut proposal is not going to create a more leveled playing field and a more compassionate society,” he said.

Of course, Schultz, a Democrat who backed Hillary Clinton in 2016, could merely be positioning himself for a long-rumored run for president.

Asked about a bid for the White House, Schultz said he’s “deeply concerned about the country,” but “not thinking today about running for president.”

The Starbucks exec isn’t the only one expressing skepticism about the tax plan. Barclays published a report Wednesday saying the GOP tax plan “is skewed in the direction of tax cuts over reform.” Barclays noted that “tax cuts tend to produce temporary effects, rather than permanent ones.”

The critical comments from Schultz come just hours after Gary Cohn, President Trump’s top economic adviser, talked up the tax plan’s support from big business.

“The most excited group out there are big CEOs,” Cohn told CNBC.

Pushing back against claims that the tax overhaul would only help business and the wealthy, Cohn predicted companies will return to the United States and workers will get a much-needed raise.

“We see the whole trickle-down through the economy, and that’s good for the economy,” he said.

The GOP tax plan has received strong support from the Business Roundtable, an influential group of CEOs that champions pro-business policy. On Tuesday, the organization released a national cable TV ad featuring an Illinois manufacturing company to press for tax reform.

But other powerful lobbying groups are trying to kill the GOP tax bill because it would close or limit deductions they covet. For instance, the real estate industry is warning that the housing market could be hurt by proposed limits on deductions for mortgage interest and state and local property taxes.

Yet Starbucks itself would seemingly benefit from tax cuts. The coffee giant’s effective tax rate last year was 33%, according to Howard Silverblatt at S&P Dow Jones Indices.

Asked what Starbucks would do with savings created by the proposed tax cuts, Schultz said at the DealBook conference that the company would not just add it to its profits.

“We will find other ways to create a contribution back to either the communities we serve, the many initiatives we have about veterans and obviously our people for benefits,” Schultz said.


Published at Thu, 09 Nov 2017 16:58:18 +0000

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Some big business groups hate the GOP tax plan


What's in the GOP proposed tax plan
What’s in the GOP proposed tax plan

 Some big business groups hate the GOP tax plan


President Trump argues the GOP tax overhaul will “create tremendous success for companies.” Yet some of America’s most powerful business alliances are already trying to kill the bill.

The instant opposition of well-organized and deep-pocketed lobbying groups threatens to delay or even derail passage of the legislation, which House Republicans unveiled on Thursday.

Three of the country’s largest and most influential business groups have already come out against the GOP bill.

“These three groups aren’t ‘lean no’ — they are full-blown, burn-it-to-the ground ‘no’,” Chris Krueger, managing director of the Cowen Washington Research Group, wrote in a report on Friday.

This hostility underscores why it’s so difficult to get tax reform done: entrenched interests will always fight tooth and nail to keep coveted tax breaks. Yet tax loopholes need to be closed to pay for the corporate and individual tax cuts promised.

The GOP bill would permanently cut the corporate tax rate to 20% from 35%, consolidate income tax brackets for individuals from seven to four and repeal or limits many deductions.

Analysts believe business opposition, combined with concern from Republicans in high-tax states, will make it tough for the GOP to pass meaningful reform by year-end — the party’s latest self-imposed deadline.

The initial reaction from “livid lobbyists” and others suggest it’s “farcical” that Congress will enact tax legislation before 2018, Isaac Boltansky, senior policy analyst at Compass Point Research & Trading, wrote in a report.

Here’s why some business groups are voicing serious concern about Trump’s effort to revamp the tax system:

Big problems for small business: Owners of mom-and-pop shops worry the tax bill doesn’t fix a system they feel already favors big business.

The National Federation of Independent Business, which represents 325,000 small businesses in the U.S., wasted little time saying it can’t support the tax legislation “in its current form.”

“This bill leaves too many small businesses behind,” Juanita Duggan, the groups’ president and CEO, said in a statement.

Most small businesses are set up as “pass-throughs,” meaning their profits are passed through to the owners, shareholders and partners, who pay tax on them through their personal returns. The GOP tax bill slashes the pass-through tax rate to 25%.

However, small business owners fear this won’t help the vast majority of them because most already pay taxes at a 25% rate or less.

“This proposal would primarily help wealthy individuals rather than small businesses,” according to John Arensmeyer, CEO of the Small Business Majority, another advocacy group.

Housing trouble: While Trump often brags about record highs on Wall Street, the tax plan he endorsed was greeted poorly by the homebuilding stocks.

Toll Brothers(TOL), KB Home(KBH) and other builders tumbled this week because the tax bill would limit key tax breaks that favor homebuyers.

Specifically, the legislation calls for capping the mortgage interest deduction at $500,000 instead of $1 million. It would also limit the deduction for state and local property taxes at $10,000.

The fear, at least in the housing industry, is that these tax breaks could sap demand for pricey homes, especially in expensive markets. Many of those markets, such as San Francisco and Manhattan, are in high-tax states. That’s a problem because the GOP tax plan would eliminate state income tax deductions altogether.

The National Association of Home Builders warned the GOP tax plan “slams the middle class” by hurting home values. The group complained that Republicans didn’t include its proposal to replace the mortgage deductions with a tax credit.

“This tax reform plan will put millions of home owners at risk,” said Granger MacDonald, chairman of the NAHB.

Realtors really mad: The GOP proposal to cap the mortgage interest deduction is also riling up the vast real estate industry.

Echoing the arguments made by the home builders, the National Association of Realtors complained that the plan “threatens home values and takes money straight from the pockets of homeowners.”

The concern for realtors is that a slowdown in housing could hurt their income or even employment prospects. It’s a major employer. There are about 2 million active real estate licensees in the U.S., according to the Association of Real Estate License Law Officials. The NAR alone represents 1.3 million realtors.

The White House has argued that Americans don’t buy homes for the tax breaks, they do it because they feel confident about the economy.

Nonetheless, the tax bill “fundamentally alters the tax benefits of homeownership,” according to Compass Point’s Boltansky.

Expect the “housing industrial complex fighting ferociously,” he said.

–CNNMoney’s Jeanne Sahadi contributed to this report.


Published at Fri, 03 Nov 2017 17:30:10 +0000

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House Republicans Release Tax Overhaul Bill


House Republicans Release Tax Overhaul Bill

By David Floyd | Updated November 3, 2017 — 3:54 PM EDT

On Thursday, Nov. 2, the House Ways and Means Committee unveiled the “Tax Cuts and Jobs Act,” a bill that would slash corporate tax rates, reduce the number of personal income brackets, limit or eliminate a number of popular tax breaks and – if it passes – mark the largest overhaul of the federal tax code since 1986.

The bill was initially slated for released on Nov. 1, but the committee’s chair Kevin Brady (R-Texas) held off, reportedly due to continuing disagreements over some of the bill’s key provisions.


Personal Taxes

• Collapse the current seven tax brackets into four, paying marginal rates of 12%, 25%, 35% and 39.6%. Here is how the proposed brackets compare to those under current law (2017):

Tax Cuts and Jobs Act proposed brackets vs current law
Single filers
More than Up to Proposed rate Current rate
$0 $9,325 12% ↑ 10%
$9,325 $37,950 12% ↓ 15%
$37,951 $45,000 12% ↓ 25%
$45,000 $91,900 25% – 25%
$91,900 $191,650 25% ↓ 28%
$191,650 $200,000 25% ↓ 33%
$200,000 $416,700 35% ↑ 33%
$416,700 $418,400 35% – 35%
$418,400 $500,000 35% ↓ 39.6%
$500,000 And up 39.6% – 39.6%
Married couples filing jointly
More than Up to Proposed rate Current rate
$0 $18,650 12% ↑ 10%
$18,650 $75,900 12% ↓ 15%
$75,900 $90,000 12% ↓ 25%
$90,000 $151,300 25% – 25%
$151,300 $233,350 25% ↓ 28%
$233,350 $260,000 25% ↓ 33%
$260,000 $416,700 35% ↑ 33%
$416,700 $470,700 35% – 35%
$470,700 $1,000,000 35% ↓ 39.6%
$1,000,000 And up 39.6% – 39.6%
Source: Investopedia analysis.

• Raise the standard deduction to $24,000 for married couples filing jointly in 2017 (from $12,700 under current law), to $12,000 for single filers (from $6,350), and to $18,000 for heads of household (from $9,350).

• Eliminate the $4,050 personal exemption and the additional standard deduction ($1,550 for single filers who are blind or over 65).

• Change the measure of inflation used for tax indexing. The Internal Revenue Service (IRS) currently uses the Consumer Price Index for all Urban Consumers (CPI-U), which the bill would replace with the chain-weighted CPI-U. The latter takes account of changes consumers make to their spending habits in response to price shifts, so it is considered more rigorous than standard CPI. It also tends to rise more slowly than standard CPI, so substituting it would likely accelerate bracket creep. The value of the standard deduction and other inflation-linked elements of the tax code would also erode over time.

• Scrap most itemized deductions, including those for medical expenses and student loan interest.

• Leave the mortgage interest deduction unchanged for existing homes. Married couples can currently deduct interest on mortgages worth up to $1,000,000; that cap would fall to $500,000. The charitable giving deduction would be left unchanged.

• Retain the deduction for state and local tax (SALT) property taxes up to $10,000, but scrap state and local income and sales tax deductions. The SALT deduction disproportionately benefits high earners and taxpayers in Democratic states, though a number of Republican members of Congress representing high-tax states have opposed attempts to eliminate it, as September’s Big Six framework proposed.

• Preserve the Earned Income Tax Credit.

• Leave annual 401(k) and Individual Retirement Account (IRA) contribution limits unchanged. Reports began circulating in October that traditional 401(k) contribution limits would fall to $2,400 from the current $18,000 ($24,000 for those aged 50 or older). IRA limits, currently $5,500 ($6,500 for 50 or older), may also have been considered for cuts.

• Repeal the alternative minimum tax, a device intended to curb tax avoidance among high earners.

• Roughly double the estate tax exemption and repeal the tax entirely after six years, along with the generation-skipping transfer (GST) tax.

• Introduce a “family credit,” which includes raising the child tax credit to $1,600 from $1,000 and providing each parent and non-child dependent with a temporary $300 credit. Only the first $1,000 of the child tax credit would be refundable initially, but this amount would rise to $1,600. The $300 credit would end after five years.

Business Taxes

• Permanently lower the top corporate tax rate to 20% from its current 35% and repeal the corporate AMT.

• Reduce the top pass-through rate to 25%, while introducing safeguards to keep high earners from passing off wage income as pass-through income. Owners of pass-through businesses – which include sole proprietorships, partnerships and S-corporations – currently pay taxes on their firms’ earnings through the personal tax code, so the top rate is 39.6%.

• Introduce rules to prevent abuse of the 25% pass-through rate. These would assume that 70% of a pass-through entity’s income is compensation subject to personal income tax rates, while 30% is business earnings subject to the pass-through rate. Businesses can prove otherwise, and certain industries – law, health, finance, performing arts – must “prove out” business income in order to qualify for the pass-through rate on any earnings.

• Allow businesses to immediately write off the costs of new equipment, rather than depreciating the value of these assets over time. This provision would end after five years.

• Limit the net interest expense deduction on future loans to 30% of Ebitda with a five-year carry-forward. Firms with at least $25 million in revenues would be exempt from the cap, as would real estate companies and some utilities.

• Limit the deduction of net operating losses (NOL) to 90% of taxable income in a given year, but allow NOLs to be carried forward indefinitely – the current limit is 20 years – while eliminating carrybacks, with exceptions for disasters.

• Scrap a number of business credits and deductions, including the section 199 (domestic production activities) deduction, the new market tax credit, the orphan drug credit and like-kind exchanges.

• Retain the low-income housing tax credit and the research and development credit.

• Alter the rules governing tax-exempt groups such as religious organizations, potentially allowing them to support or oppose political candidates and retain their tax-exempt status.

• Enact a deemed repatriation of overseas profits at a reduced rate of 12% for cash and equivalents and 5% for reinvested earnings. Goldman Sachs estimates that U.S. companies hold $3.1 trillion of overseas profits. As of Sept. 30 Apple Inc. (AAPL) holds $252.3 billion in tax-deferred foreign earnings, 94% of its total cash and marketable securities.

• Introduce a territorial tax system: repatriated dividends and earnings are not subject to U.S. tax, but 50% of foreign subsidiaries’ excess returns (greater than 107% of the short-term applicable federal rate) count towards U.S. shareholders’ gross income. A 20% excise tax would be applied to payments made to foreign subsidiaries. Proponents of these measures argue that – together with the lower corporate tax rate – they will increase American businesses’ competitiveness and discourage corporate inversions.

Whose Tax Cuts?

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Speaking at a rally in Indiana shortly after the Big Six framework’s release in September, President Trump repeatedly stressed that the “largest tax cut in our country’s history” would “protect low-income and middle-income households, not the wealthy and well-connected.” He added the plan is “not good for me, believe me.” That claim is hard to verify, however, because Trump is the first president or general election candidate not to release his tax returns since the 1970s. The reason he has given for this refusal is an IRS audit; the IRS responded that “nothing prevents individuals from sharing their own tax information.”

The Tax Policy Center (TPC) and Tax Foundation, two nonpartisan think tanks that lean to the left and right respectively, have not yet scored the bill, so its distributional effects are hard to assess. Previous Republican tax proposals would have cut the top personal income tax rate to 33% or 35%, eliminated the head of household filing status and cut the corporate tax rate to 15%. As a result, most analyses forecast enormous gains for the highest earners – not just in absolute dollar amounts, but as a percentage of income – and modest gains for working- and middle-class taxpayers. Some middle earners would have seen tax rises, particularly the single parents who would no longer have benefited from the head of household filing status.

The current plan would still cut the corporate tax rate, benefitting corporate shareholders (who tend to be higher earners); eliminate the alternative minimum tax, which requires high earners to calculate their liabilities twice and pay the higher amount; scrap the estate tax; and cut the rate married couples pay on income between $470,700 and $1 million. Unlike earlier plans, it leaves the carried interest loophole open. As a result, the bill may disproportionately benefit high earners, opening it up to charges of being “a giveaway to corporations and the wealthiest,” as Senate minority leader Chuck Schumer (D-N.Y.) said on Nov. 2.

On the other hand, some conservative commentators see a profound difference in approach between earlier Republican plans and the one released Nov. 2. The Wall Street Journal’s editorial board called it “a surrender to Democratic class warriors” (casting part of the blame on President Trump’s “flightiness and lack of principle”), arguing that the result will be “more income redistribution.”

A Middle Class Tax Hike?

While the standard deduction would increase under the bill, that increase would be mostly offset by the loss of the personal exemption. Currently a middle-income single filer does not pay tax on the first $10,400 they earn: the $6,350 standard deduction plus one $4,050 personal exemption. In other words, the standard deduction is roughly doubling only in the most technical sense; it is raising the amount that can be earned tax-free by a single filer with a moderate income by 15.4%. For people who are blind or older than 65, who would no longer receive the $1,550 additional standard deduction, the increase is just 0.4%.

For families with children, the loss of the personal exemption could result in a tax hike, though the increased child credit would offset the change at least in part.

The Estate Tax

The bill would roughly double the estate tax deduction to $10 million, indexed to inflation, and eliminate the tax entirely in six years. Speaking in Indiana in September, Trump attacked “the crushing, the horrible, the unfair estate tax,” describing apparently hypothetical scenarios in which families are forced to sell farms and small businesses to cover estate tax liabilities; the 40% tax only applies to estates worth at least $5.49 million. According to TPC, 5,460 estates are taxable under current law in 2017. Of those, just 80 are small businesses or farms, accounting for less than 0.2% of the total estate tax take.

The estate tax mostly targets the wealthy. The top 10% of the income distribution accounts for an estimated 67.2% of taxable estates in 2017 and 87.8% of the tax paid.

Opponents of the estate tax – some of whom call it the “death tax” – argue that it is a form of double taxation, since income tax has already been paid on the wealth making up the estate. Another line of argument is that the wealthiest individuals plan around the tax anyway: Gary Cohn reportedly told a group of Senate Democrats earlier in the year, “only morons pay the estate tax.”

Carried Interest

The bill would not eliminate the carried interest loophole, though Trump promised as far back as 2015 to close it, calling the hedge fund managers who benefit from it “pencil pushers” who “are getting away with murder.” Hedge fund managers typically charge a 20% fee on profits above a certain hurdle rate, most commonly 8%. Those fees are treated as capital gains rather than regular income, meaning that – as long as the securities sold have been held for at least a year – they are taxed at a top rate of 20% rather than at 39.6%. (An additional 3.8% tax on investment income, which is associated with Obamacare, also applies to high earners.)

Corporate Taxes

In his Indiana speech Trump said that cutting the top corporate tax rate from 35% to 20% would cause jobs to “start pouring into our country, as companies start competing for American labor and as wages start going up at levels that you haven’t seen in many years.” The “biggest winners will be the everyday American workers,” he added.

The next day, Sept. 28, the Wall Street Journal reported that the Treasury Department had deleted a paper saying the exact opposite from its site (the archived version is available here). Written by non-political Treasury staff during the Obama administration, the paper estimates that workers pay 18% of corporate tax through depressed wages, while shareholders pay 82%. Those findings have been corroborated by other research done by the government and think tanks, but they are inconvenient for the institution that produced them. Treasury Secretary Steven Mnuchin is selling the Big Six proposal in part through the assertion that “over 80% of business taxes is borne by the worker,” as he put it in Louisville in August.

A Treasury spokeswoman told the Journal, “The paper was a dated staff analysis from the previous administration. It does not represent our current thinking and analysis,” adding, “studies show that 70% of the tax burden falls on American workers.” The Treasury did not respond to Investopedia’s request to identify the studies in question. The department’s website continues to host other papers dating back to the 1970s.

Can Tax Reform Be Done?

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The Republican push to overhaul the tax code has proceeded at a slower rate than the Trump administration initially promised. Mnuchin said in February that a bill would be passed and signed before Congress’ August recess. In September he shifted that target to the end of the year.

Byrd Is the Word

A string of efforts to repeal and – ideally – replace the Affordable Care Act (ACA or “Obamacare”) set the GOP’s tax reform push back in a number of ways. The White House and congressional Republicans decided to pursue healthcare legislation first because, by cutting funding for premium and cost-sharing subsidies and programs such as Medicaid, they could create some room to introduce tax legislation that is not strictly revenue-neutral: the Senate’s Better Care Reconciliation Act, for example, would have shaved an estimated $321 billion from the federal deficit over a decade.

Fiscal prudence aside, Republicans felt a procedural need to balance the books, since they control only 52 of 100 seats in the Senate. Without the 60 seats needed to defeat a Democratic filibuster, they will have to use a fast-track process called reconciliation, which only requires 50 votes (plus Vice President Pence’s tie-breaker). Reconciliation must be authorized by a budget resolution; the Senate passed one on Oct. 19, and the House, in an unusual move, voted on the same resolution rather than drafting their own. The resolution passed the lower chamber on Oct. 26 by a narrow margin, 216 votes to 212. No Democrats supported the resolution, and 20 Republicans voted “no” to signal their opposition to plans (since abandoned) to eliminate the state and local tax deduction entirely.

Bills passed through reconciliation must also comply with the 1985 Byrd Rule, which limits the budget effects fast-tracked bills can have over a 10-year period. The budget resolution authorizes the Senate Finance Committee to draft a bill that would raise the deficit by $1.5 trillion over that period (the deadline to present a bill is Nov. 13). Citing the Joint Committee on Taxation, Brady said on Nov. 2 that the bill’s provisions would add $1.51 trillion to the deficit over 10 years.

Traditionally the party of fiscal responsibility – with exceptions – Republicans are taking pains to pay for their proposals. The budget resolution instructs the Senate Energy and Natural Resources Committee to achieve $1.0 trillion in savings; a likely route would be to allow oil and gas drilling in the Arctic National Wildlife Refuge, which is located in committee chair Sen. Lisa Murkowski’s (R-Alaska) home state. (Murkowski voted against multiple Obamacare repeal bills over the summer.) The party is also arguing that well-designed tax reform would more than pay for itself. Mnuchin told NBC’s “Meet the Press” at the beginning of October:

“On a static basis our plan will increase the deficit by a trillion and a half. Having said that, you have to look at the economic impact. There’s 500 billion that’s the difference between policy and baseline that takes it down to a trillion dollars, and there’s two trillion dollars of growth. So with our plan we actually pay down the deficit by a trillion dollars and we think that’s very fiscally responsible.”

Supply-side economics, an influential idea in the GOP, contends that tax cuts increase government revenue through the relationship described by the Laffer curve: lower taxes encourage higher rates of investment, spurring economic growth and ultimately increasing the government’s tax take. Republicans have also proposed scrapping a number of tax breaks and loopholes. The state and local tax deduction (skip to section) is the most controversial item under negotiation.

The Congressional Budget Office, however, “doesn’t always measure all the dynamic effects,” Diana Furchtgott-Roth, a Trump transition team member and Labor Department chief economist under George W. Bush, told Fox Business in March. Even if it did, Congress’ research arm would be unlikely to share Mnuchin’s optimism. The CBO released a study of the budgetary effects of a hypothetical 10% across-the-board tax cut in 2005. It estimated that a shift in the economic growth rate would make up for perhaps 28% of the resulting budget shortfall or, in the worst-case scenario, exacerbate it by 3%.

Maya MacGuineas, president of the fiscally hawkish Committee for a Responsible Federal Budget (CRFB), doubts that the GOP’s tax cuts can pay for themselves. In a statement emailed to reporters on Nov. 2, she said the bill “continues to rely on unrealistic economic growth assumptions to justify its cost.” She was less critical of the proposal than she was of the Big Six framework, which she called “fiscal fantasy”: “We are pleased to see the House put forward a number of serious pay-fors to help finance rate reductions,” she wrote. “But given the huge unpaid-for gap remaining, this plan does not constitute true comprehensive, revenue-neutral, and pro-growth reform.”

Trump has repeatedly asserted that gross domestic product (GDP) growth could exceed 3% per year following a tax overhaul; during the campaign he went as high as 6%, and speaking in Indiana following the release of the Republican framework he predicted that “everything takes off like a rocketship.”

What About the Democrats?

President Trump has openly flirted with Democrats when it comes to tax reform, reflecting his frustrations with Republicans in Congress after repeated Obamacare repeal failures, as well as a bipartisan desire to simplify the gargantuan tax code. The fact that his top tax negotiators, Mnuchin and National Economic Director Gary Cohn, are both former Democratic donors may also play some role in his attempts to woo the left.

In order to gain Democratic support, Trump has promised repeatedly not to cut taxes on the wealthy, but those promises may not square with the elimination of the estate tax and alternative minimum tax and the decrease in the pass-through rate.

Congressional Republicans have been less eager than Trump to reach across the aisle. McConnell said in August that his party intends to use reconciliation to pass tax reform, rebuffing an offer by 45 of 48 senators in the Democratic caucus to work with Republicans on the issue – albeit on Democrats’ terms, such as not lowering taxes on the rich.

Speaking on tax reform in Missouri at the end of August, Trump preemptively laid the blame for failure at Congress’ feet, saying, “I don’t want to be disappointed by Congress, do you understand me?” He referenced Republicans’ failed attempts to pass healthcare legislation and blamed congressional Democrats in particular, saying that Sen. Claire McCaskill (D-Mo.) should vote for tax overhaul or lose her seat.

Speaking North Dakota the following month, he invited another Democrat, Sen. Heidi Heitkamp (N.D.), to the stage; the gesture followed a deal struck the previous day between the president and Democratic senators, which raised the debt ceiling and provided relief for those affected by Hurricane Harvey. Heitkamp and McCaskill are among the 10 Democratic senators facing reelection in 2018 whose states went for Trump.

Internal Divisions

Before they can worry about the Democrats, however, Republicans must shore up support in their own party. As the healthcare battle showed, the priorities of the GOP’s moderate and Tea Party wings are difficult to reconcile, and proposals put forth by the leadership tend to alienate both camps – for diametrically opposed reasons. Given the thin Republican majority in the Senate, these tensions have so far prevented the passage of major legislation.

GOP factions clashed during the spring over border adjustment, a now-dead proposal that would have taxed imports and domestic sales but exempted exports. The fight pitted big importers, major Republican donors and the president, who all opposed the measure, against the House Republicans who proposed the measure and the prominent anti-tax crusader Grover Norquist, who supported it. The Big Six issued a statement in July saying they would drop border adjustment.

Since the release of the Big Six framework in September, a fight has been raging over the fate of the state and local tax deduction. According to a TPC analysis of IRS data, the ten jurisdictions where the highest share of returns claim the state and local tax deduction are Maryland, New Jersey, Connecticut, D.C., Virginia, Massachusetts, Oregon, Utah, Minnesota and California. Collectively they account for 35 Republican seats in the House – more than the GOP’s 23-seat majority.

New York Republican Chris Collins told the New York Times on Oct. 3 that Brady and House Majority Leader Kevin McCarthy (R-Ca.) had separately assured him, “it’s safe to say, we’re no longer going to be talking about a full repeal” of the state and local tax deduction. If Republicans ditch that idea, however, $3.6 trillion in savings will disappear over the first two decades after reform, according to TPC’s estimates. The Nov. 2 framework struck a compromise, allowing $10,000 in property tax deductions but scrapping other aspects of the state and local tax deduction.

A conflict is also brewing between Trump and Republicans in Congress. Sen. Bob Corker (R-Tenn.) is engaged in a full-blown feud with the White House, which he called an “adult day care center” in response to insults Trump tweeted in October. The spat has added acrimony to a policy disagreement: Corker said as the Big Six framework was released, “there is no way in hell I’m voting” for a bill that increases the deficit, as the bill released Nov. 2 likely would. Without Corker, the White House is left with one vote to lose. That vote could be Jeff Flake’s (R-Ariz.), who announced that he would not run for reelection on Oct. 24, while delivering a blistering rebuke of Trump on the Senate floor. He called the president’s behavior “reckless, outrageous and undignified,” as well as “dangerous to democracy,” earning him a barrage of revenge tweets from the White House. Speaking to CNBC, Sen. Rob Portman (R-Ohio) said both Flake and Corker would ultimately vote for the bill.

Trump has not displayed the political finesse that suggests he can work with a slim margin. Two tweets in particular indicate he does not understand the process ahead of him. The day after the Big Six proposal was released, he referred to the “great reviews” the “Tax Cut and Reform Bill” was receiving. There would not be a bill – at least one the public could see – for over a month.

Trump had perhaps alluded to that process two weeks earlier, but using odd language: “The approval process for the biggest Tax Cut & Tax Reform package in the history of our country will soon begin. Move fast Congress!” Members of Congress are unlikely to embrace the idea that they are engaged in an “approval process” for the executive branch.

The Voters

Polling on the bill released Nov. 2 is not available yet, but an NBC-Wall Street Journal poll published Nov. 1, only 25% of repsondents called Trump’s tax plan a “good idea” (though 54% of Republicans did so). Harry Enten, senior political writer at FiveThirtyEight, told Investopedia by email on Nov. 3 that voters “don’t just want the rich getting richer. And the problem is that they feel this tax bill is doing exactly that. That’s the issue, and it’s showing up in poll after poll.” Asked whether perceptions would change as the details of the latest bill percolated through the media, he said, “I tend to doubt that public opinion will move that much.”

Special Interests

In attempting to rework the tax code, Trump and Congress are picking their way through a minefield of vested interests. As the Economist put it, “Where once the passage of bills was smoothed by including federal money for pet projects in congressmen’s districts, tax breaks are now the preferred lubricant.”

This trend has created a difficult situation for would-be reformers of either party: while the overall benefits of an overhaul would be enormous, they would be diffuse, with each household and firm saving some money and some time. For a few interest groups, on the other hand, particular carve-outs and loopholes are essential, meaning they are willing to expend significant time and money lobbying against reform. The last sweeping tax reform to pass Congress was called the Lobbyists’ Relief Act of 1986 in K Street circles; the New York Times reported in late September that companies and trade associations have submitted 450 filings to lobby on tax issues so far this year, far outstripping the total for 2016. In short, Trump’s promises to “drain the swamp” and to overhaul the tax code may not be compatible. (See also, Goldman Reduces Buyback Forecast After Trump Tax Reform Delay.)

One group is dependent not on any particular aspect of the complex tax system, but on the complexity itself: as NPR and ProPublica have reported, TurboTax maker Intuit Inc. (INTU) and H&R Block Inc. (HRB) lobby against bills that would allow the government to estimate taxes, saving much of the hassle on which the firms’ business depends. In addition to bills aimed at simplifying the filing system, tax-preparation firms may also oppose bills aimed at simplifying the tax code itself.

The Pledge

As of the previous (113th) Congress, only 16 Republicans in the House and six in the Senate have failed to sign Norquist’s pledge not to raise taxes. If Norquist decides that an aspect of a Republican proposal violates the pledge – or Republicans decide to invoke it to avoid a showdown with special interests – the bill could be dead on arrival.

That some American households would see their tax bills rise is not exactly a remote possibility, given the range of proposed changes: the bottom personal tax rate would rise, which may not be fully offset for all households by a higher standard deduction – particularly given the loss of the personal exemption.

The Bulls Weigh In

Despite the obstacles facing the tax reform efforts – fiscal constraints, a slim Republican majority, intra-party rifts, the “swamp” and a potentially inconvenient pledge – the market is bullish. A Bank of America Merrill Lynch team led by chief investment strategist Michael Hartnett wrote in a note on Oct. 5 that equities are “starting to anticipate tax reform,” which accounts for a string of all-time highs. On the other hand, the team notes, a correction “requires higher rates,” which the Fed would only deliver if stubbornly low inflation were to perk up – or Congress delivered tax reform.

What’s Wrong With the Status Quo?

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People on both sides of the political spectrum agree that the tax code should be simpler. Since 1986, the last time a major tax overhaul became law, the body of federal tax law – broadly defined – has swollen from 26,000 to 70,000 pages, according to the House GOP’s reform proposal. American households and firms spent $409 billion and 8.9 billion hours completing their taxes in 2016, the Tax Foundation estimates. Nearly three quarters of respondents told Pew in 2015 that they were bothered “some” or “a lot” by the complexity of the tax system.

An even greater proportion was troubled by the feeling that some corporations and some wealthy people pay too little: 82% said so about corporations, 79% about the wealthy. According to TPC, 72,000 households with incomes over $200,000 paid no income tax in 2011. ITEP estimates that 100 consistently profitable Fortune 500 companies went at least one year between 2008 and 2015 without paying any federal income tax. ​There is a widespread perception that loopholes and inefficiencies in the tax system – the carried interest loophole and corporate inversions, to name a couple – are to blame.


Published at Fri, 03 Nov 2017 19:54:00 +0000

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Is now really the time for massive tax cuts?


Details of GOP tax plan released
Details of GOP tax plan released

Is now really the time for massive tax cuts?


America’s economy and jobs market look quite healthy right now. But President Trump is demanding very expensive surgery anyway.

New numbers released Friday show that the U.S. has grown at 3% for back-to-back quarters for the first time in three years. Unemployment is sitting at just 4.2%, the lowest in 16 years. And consumer sentiment rose in October to levels unseen since early 2004.

Despite the obvious strength in the economy, Trump recently promised on Twitter the “biggest TAX CUT” ever, adding “we need it!”

Trump says he wants to push through both tax reform, which would modernize the outdated tax code, and to provide tax cuts to individuals and businesses.

Given how healthy the economy is, some economists are mystified over Trump’s urgent push for tax cuts that are likely to be paid for by adding to America’s mountain of debt.

“No other president in modern economic history has tried to do this,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “It just seems completely unnecessary. With unemployment at 4.2%, why on earth would we try to stimulate the economy?”

Normally, presidents ask Congress for deficit-financed tax cuts when the economy is weak. That’s what President Obama did in 2009 during the Great Recession, and President George W. Bush did the same after the 2001 downturn.

“This is kind of an odd time to get fiscal stimulus. It’s not like we’re in a recession, or coming out of one,” said Gus Faucher, chief economist at PNC.

Here’s the problem: There will be another recession, eventually. And spending heavily to slash the corporate tax rate to 20% from 35% today could leave Congress with fewer options to tackle the next downturn. The current economic expansion is already the second-longest ever.

The Tax Policy Center estimates that Trump’s tax overhaul would slash federal revenue by $2.4 trillion over 10 years, and by $3.2 trillion over the second decade. And the national debt is already 77% of GDP, and slated to keep growing.

“The risk is we don’t have the money for a rainy day. It’s borderline irresponsible,” said Rupkey.

It’s true that the U.S. economy is not perfect. Businesses remain reluctant to spend, and Americans aren’t getting the raises they deserve. Wage growth has been sluggish, although that improved in September.

It’s also true that tax reform is an admirable goal, no matter how fast the economy is growing. Tax reform, which is aimed at making the sprawling and outdated system more efficient, is different and much less costly than tax cuts.

“Tax reform that is paid for is much better for the economy than a plan that adds to the debt,” Maya MacGuineas, president of the nonpartisan Committee for Responsible Federal Budget, wrote recently.

Some experts believe that efforts to reform the tax code will fail once details of the bill are finally unveiled on November 1, leaving the GOP to push simple tax cuts instead.

“We continue to expect deficit-increasing tax cuts, not…deficit-neutral tax reform,” Barclays economist Michael Gapen wrote in a recent report.

Given that the U.S. economy is “at full employment,” Gapen believes that tax cuts will provide a “temporary boost” to GDP of just 0.5 percentage points. That would leave 2018 growth near 2.8%.

The White House was asked on Friday by reporters about the need for tax cuts given solid GDP growth.

Kevin Hassett, chair of Trump’s Council of Economic Advisers, argued that the U.S. economy has accelerated because businesses are excited about tax and regulatory reform.

Hassett also predicted that lowering the corporate tax rate and allowing businesses to immediately write off investments could increase GDP by 3% to 5%, as well as boost wages.

Without tax cuts and tax relief, the U.S. will be stuck with “depressed wage growth,” the White House said in a statement on Friday.

Rupkey concedes that tax reform could boost wages, but he’s skeptical that wage growth will accelerate by a meaningful amount.

Some economists fear that stimulus at this point in the economic cycle could be too much of a good thing.

“The worry is that by adding fuel to what’s already, believe it or not, a pretty fiery economy in the U.S., you risk driving inflation and overheating growth,” said Guy LeBas, chief fixed income strategist at Janney Capital.

Such an outcome could spur the Federal Reserve to raise interest rates so rapidly that it derails the stock market and burdens businesses and consumers with higher borrowing costs.

“Deficit-financed tax cuts are the wrong way to go at this point,” said Faucher.

–CNNMoney’s Jeanne Sahadi contributed to this report


Published at Fri, 27 Oct 2017 18:41:42 +0000

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Puerto Rico sees an opportunity to reimagine the island


Small power company lands $300M Puerto Rico contract
Small power company lands $300M Puerto Rico contract

Then the storm devastated the island’s transportation and communication networks. President Trump says “broken infrastructure” was to blame for any delayed response by the federal government. Seven in 10 Puerto Ricans still have no power.

Despite the suffering, one of Puerto Rico’s leaders sees the hurricane’s destruction as a chance for a clean slate.

“We have this historic opportunity: Instead of going with incremental changes, we can go and push the envelope to really transform the infrastructure,” Economic Secretary Manuel Laboy told CNNMoney on Thursday in New York. “That is the silver lining opportunity that we have.”

The first sign of that type of sweeping rebuild came Wednesday, when Tesla CEO Elon Musk announced that a children’s hospital in San Juan, the capital, is being powered by Tesla solar panels and power packs.

Musk wrote in an Instagram post that the project is the “first of many solar + battery Tesla projects going live in Puerto Rico.”

Laboy, the economic secretary, said Tesla has “five to 10” projects in the works in Puerto Rico, including schools and community centers. Tesla(TSLA) declined to provide specifics.

AT&T(T, Tech30) and a project owned by Google’s parent company, Alphabet, teamed up to provide cell phone coverage to parts of the island cut off from communication. Project Loon won approval from the U.S. government to fly up to 30 giant balloons over Puerto Rico, beaming down LTE service.

Puerto Rico is even pitching itself as a site for Amazon’s second headquarters. Laboy declined to provide specifics but said he sent Amazon(AMZN, Tech30) a lucrative package of incentives to consider.

He sees the island’s recovery as a selling point with Amazon, in addition to Puerto Rico’s educated and bilingual workforce.

“The opportunity to transform the infrastructure … for me, that is a very powerful message,” Laboy said.

Of course, Puerto Rico has to get the lights back on before it can carry out big plans. And that hasn’t been easy, nor without controversy.

The utility company, PREPA, found itself under fire after it gave a $300 million contract to an infrastructure repair company, Whitefish Energy. The company only has two official employees, though it’s hired hundreds of subcontractors to help restore the power grid.

Investigations are under way into the the contract’s procurement. Critics say the contract is bloated and didn’t go through proper bidding.

Beyond the physical damage, Puerto Rico must overcome vast other challenges to rebuild an innovative infrastructure system.

Unemployment is high, and some the island’s young, educated class has been leaving for the mainland United States for years. Some fear the hurricane’s destruction could expedite the exodus. The island’s government also filed for bankruptcy last spring.

But Laboy says those challenges shouldn’t prevent Puerto Rico from thinking big.

“We need to be bold and we need to transform the system,” he added. “That is going to be the key for the recovery, and the sustainable economic growth that we are aspiring to have in Puerto Rico.”


Published at Fri, 27 Oct 2017 15:17:54 +0000

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Mnuchin to Congress: Cut taxes or market will dive

“There’s no question in my mind if we don’t get it done you’re going to see a reversal of a significant amount of these gains,” Mnuchin told Politico on Wednesday.

Mnuchin’s warning — a highly unusual one for a sitting treasury secretary — suggests he fears a drop of at least thousands of Dow points. The average has spiked almost 5,000 points since last fall’s election, a rally that President Trump often celebrates as evidence of his success.

Trump’s treasury secretary told Politico that the stock market has “baked into it reasonably high expectations of us getting tax cuts and tax reform done.” He predicted the market will go “up higher” if Congress succeeds on taxes.

It’s true that Trump’s economic agenda, including promises for “massive” tax cuts and deep deregulation, sent the stock market soaring in the weeks and months after the election.

But the market’s entire post-election rally is not based solelyon the anticipation of tax cuts or tax reform. Stocks have been supported by strong corporate profits, improved economic growth and extremely low interest rates.

If all markets cared about were tax cuts, then stocks should have plunged this spring and summer when Trump’s political stumbles threatened his agenda. Instead, investors dialed back their bets on tax cuts by selling “high tax” stocks that should benefit from tax reform. And the broader market kept going higher.

Lately, hopes of tax reform have returned, lifting potential tax cut winners like high-tax payers and small-cap stocks.

dow trump election stocks 1017

Sam Stovall, chief investment strategist at CFRA Research, said tax cut hopes have “boosted investor confidence,” but they didn’t alter the fundamentals that markets trade on: earnings estimates. Those projections haven’t budged because details on the tax deal aren’t available yet, Stovall said.

Only 32% of investors polled by E*Trade believe “President Trump and the current administration” is a leading factor behind the extended bull market in stocks. The survey respondents said that the top three drivers for stocks are: improving U.S. economy (61%), strong earnings (45%) and strong performance in certain sectors (40%).

Those positives are why Stovall isn’t worried about Congress setting off a market crash.

“Should tax cuts not materialize, a pullback or mild correction may ensue, but I don’t think it would trigger a new bear,” Stovall said.

Mnuchin’s comments raised eyebrows because normally the U.S. treasury secretary is counted on to instill financial and economic confidence, not sow doubt.

“That is fundamentally irresponsible. He has no understanding of the role of treasury secretary,” said Robert Shapiro, who served as a Commerce Department economic official under President Clinton and later advised Hillary Clinton.

“Part of the job of the treasury secretary is to maintain the stability of U.S. markets. Every other treasury secretary has recognized this. Apparently, it’s eluded Mr. Mnuchin,” said Shapiro, who is a senior fellow at Georgetown’s McDonough School of Business.

One parallel in recent history of a treasury secretary linking the health of the market to a single piece of legislation is Hank Paulson’s support for the TARP bailout in 2008. The former treasury secretary famously begged Speaker of the House Nancy Pelosi not to blow up the Wall Street rescue. The Dow plunged 777 points after the House of Representatives initially rejected the bailout.

Of course, that was a totally different time as the U.S. was grappling with the scariest financial crisis since the Great Depression. Now, big banks are healthy, unemployment is very low and markets are on the upswing — raising the question of how much the economy really needs tax cuts right now.

Besides, just because the notoriously-fickle market expects something, doesn’t mean it’s the best policy for the moment.

“To pinpoint or lever policy initiatives to the direction the stock market will take seems a little short-term oriented,” said Mark Luchini, chief market strategist at Janney Capital.

Ironically, Luchini said it’s possible the economic expansion is extended if there is no tax deal because it would keep the Federal Reserve from fearing the economy is overheating.


Published at Wed, 18 Oct 2017 16:03:42 +0000

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How to close the race-based chasm in U.S. retirement wealth

CHICAGO (Reuters) – The gap in U.S. retirement wealth between white and minority families has widened to the point where it really is not a gap anymore. It is a canyon.

In 2016, white families had six times more money saved for retirement on average than black or Latino families, according to new data from the Federal Reserve’s Survey of Consumer Finances. As recently as 2007, the gap was fourfold for black families and fivefold for Latino households, according to a new analysis of the Fed data by the Urban Institute. (

Research shows that low-income families can – and do – save. Instead, the widening chasm results from a range of economic factors and upside-down tax policy. Lifetime income inequality certainly is one driver, but the problem is much broader than that, said Signe-Mary McKernan, co-director of the institute’s opportunity and ownership initiative.

“The cards are stacked against lower-income Americans,” she said. “We’re a country built on the premise of economic opportunity but entire groups are not getting the same chances to move up.”

For starters, minority workers are far less likely than whites to hold jobs that offer tax-advantaged retirement saving programs like 401(k) plans. That means these workers are not enjoying the benefits of plan features such as employer matches or automated contributions. Even workers who are offered these accounts do not benefit as much, since the tax incentives associated with 401(k) and Individual Retirement Accounts are structured as deductions, and flow predominantly to taxpayers in higher brackets.

Lower rates of home ownership among minority households also contribute to the retirement gap, the researchers found. Last year, 68 percent of white households were homeowners, compared with 46 percent of Latino households and 42 percent of black households, the Urban Institute reports. That means fewer minority households can tap in to home equity to meet retirement needs.

”When you think about home ownership, part of the story is appreciation of home values, but families of color have faced structural barriers in achieving this goal,” said Kilolo Kijakazi, an Urban Institute fellow also working on the wealth gap research.

Well-qualified home buyers of color face substantial barriers such as being shown fewer homes, the institute’s research shows. And price appreciation for homes in neighborhoods of color is lower than in white neighborhoods with comparable income levels. Lower home ownership rates and less home equity mean fewer families of color can tap in to home equity to meet retirement needs.

Federal tax policy is upside-down here, too, with current tax subsidies flowing to the most affluent households, who are more likely to itemize their filings and tend to be in higher tax brackets. The capital gains exclusion on housing also benefits higher-income taxpayers, who tend to own more expensive homes.


Targeted federal policies could go far to close the gap – starting with the tax code. On home ownership, for example, we could establish a first-time homebuyer tax credit and a refundable credit on property taxes. This could be funded by limiting the mortgage interest deduction for the most affluent households. For example, the Bowles-Simpson fiscal commission back in 2010 proposed capping the deductibility of mortgage interest at $500,000.

Improving the federal Saver’s Credit also could be a big help. The credit provides a second layer of tax incentives for lower-income households beyond the benefit of tax deferral that everyone receives for contributing to a 401(k) or IRA. Taxpayers with yearly incomes of less than $31,000 (single filers) and $62,000 (joint filers) this year can claim a credit of up to $1,000 for contributions to a qualified retirement plan or individual retirement account (IRA) – but only if they have a tax liability.

Near 10 percent of tax filers could claim the credit, but only about 5 percent do so, according to the National Institute on Retirement Security. Restructuring the credit into a match would have the biggest impact. That could be done by making the credit refundable – in other words, available no matter what your tax liability (

Federal policy under the Trump administration is heading in exactly the opposite direction, especially where retirement saving and tax policy are concerned. The administration is phasing out the U.S. Department of the Treasury’s myRA program, a low-cost, simple entry-level retirement saving plan targeting workers who are not offered a plan by employers. And Congress has pulled back two Obama-era rules aimed at helping states launch their own low-cost saving programs.

Meanwhile, the administration’s tax plan would further fuel the inequality trends, not reverse them. Tax cuts would flow mainly to businesses and high-income households. If in place next year, 50 percent of the cuts would flow to households with the top 1 percent of income ($730,000 or more), according to the Tax Policy Center, while middle-income households (earning $50,000-$90,000) would receive about 8 percent. Low-income households would receive even less. And the plan is silent on the issue of mortgage interest deductions and credits for first-time homebuyers.

Instead, we need smart policies that help low-income households get ahead. Let’s start narrowing the retirement chasm – now.

Editing by Matthew Lewis


Published at Thu, 12 Oct 2017 15:00:15 +0000

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New York-area hedge fund manager charged with Ponzi fraud


New York-area hedge fund manager charged with Ponzi fraud

NEW YORK (Reuters) – A suburban New York hedge fund manager accused of losing or spending all but about $27,000 of the $21.8 million he told investors he had was criminally charged on Thursday with running a Ponzi scheme.

Prosecutors said Michael Scronic, who once worked at Morgan Stanley (MS.N) and has degrees from Stanford University and the University of Chicago, stole more than $19 million from 45 investors he had lured to his Scronic Macro Fund by lying about his track record.

Scronic, 46, of Pound Ridge, New York, allegedly lost money in 28 of 29 calendar quarters since April 2010, even as he reported largely positive returns on bogus account statements.

Prosecutors said he also spent $2.9 million on himself over 5-1/2 years, including $180,000 annually on credit cards, fees for beach and country club memberships, and mortgage payments for a vacation home near Stratton Mountain in Vermont.

Scronic was criminally charged with one count each of securities fraud and wire fraud.

He was released on $500,000 bond after a brief appearance in the federal court in White Plains, New York, and is forbidden from trading other people’s money or raising new funds.

The U.S. Securities and Exchange Commission filed related civil charges.

Robert Anello, a lawyer for Scronic, declined to comment.

The defendant had worked for Morgan Stanley from 1998 to 2005, including on an equities trading desk, court papers show. Morgan Stanley was not accused of wrongdoing.

Authorities said Scronic used some new money to repay earlier investors, but as cash became tight this summer refused to honor some investors’ redemption requests.

According to court papers, Scronic had emailed one of those investors in November 2015 that “what’s cool about my fund is that i‘m only in publicly traded options and cash so any redemptions are met within 2 business days so if you do need to withdraw for your business needs it will be quick and painless.”

Authorities said it proved otherwise.

They said Scronic blamed a vacation, a relative’s medical condition, email issues, and a new quarterly redemption policy for refusing the investor’s Aug. 8 redemption request.

As of Monday, that investor was still waiting for his money, court papers showed.

Reporting by Jonathan Stempel in New York; Editing by Tom Brown, Lisa Shumaker and David Gregorio


Published at Thu, 05 Oct 2017 21:45:59 +0000

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Quest: Are Theresa May’s days in charge numbered?


Brexit trouble for Theresa May
Brexit trouble for Theresa May

Quest: Are Theresa May’s days in charge numbered?


Quest’s Profitable Moment

I wonder if we will look back on this week as the turning point when it became obvious Theresa May’s prime ministership is over. Her keynote speech to the Tory conference was by every conclusion a mishap-filled disaster.

Firstly, a prankster managed to get on the stage and handed her a P45 — the form used in the U.K. for dismissal. Then May got a coughing fit and had to be handed a throat lozenge by the chancellor. Finally, some of the letters on the screen behind her fell off while she was finishing up.

At the moment, the only reason to keep Theresa May is the alternatives are grim, if not worse. The foreign secretary, Boris Johnson, is a brilliant man suffused by his own ambition. Everyone else is either dull, dangerous or deluded. So, Mrs. May continues.

It would be a grave mistake for the European Union to engage in schadenfreude, rubbing their hands in glee at this confusion. Some clearly hope the British confusion will enable the EU to “get one over” on the U.K., punishing them for leaving and sending a warning to other upstarts. That would be disaster. A failed negotiation may hurt the Brits more than the rest, but in the long run everyone will suffer.

Theresa May’s days as prime minister are numbered. What comes after may be worse. The Brexit negotiations are stuck in phase one and time is running out. Politics as normal must not be the way forward on either side if we are to avert disaster of the worst kind.


Quick takes

Warren Buffett gets into truck stop biz on the same day he trolls Trump, GOP

More Uber drama: Former CEO gets slapped down. Japan’s SoftBank invests

Wells Fargo slammed by Elizabeth Warren, accused of lying to Congress

Shock over Equifax/IRS deal at hearing that Monopoly Man photobombed

Echoes of the dotcom bubble as China’s tech stocks party like it’s 1999

What’s next

Jobs, jobs, jobs:The U.S. Labor Department is set to release September jobs numbers on Friday. The unemployment rate is expected to reflect layoffs linked to Hurricanes Harvey and Irma, which hit hard in Texas and Florida.

Big banks share earnings:It’s a big week for investors who keep an eye on big banks. JPMorgan and Citigroup report earnings on October 12. PNC, Bank of America and Wells Fargo will follow suit the next day.


Published at Fri, 06 Oct 2017 04:10:24 +0000

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Column: Pre-tax retirement contributions at risk in tax reform


Column: Pre-tax retirement contributions at risk in tax reform

NEW YORK (Reuters) – If you like the income tax reduction you get for your 401(k) contribution then make sure to max out now, because you may not get the chance in the future.

Tax reform proposals of past years from both political parties have targeted the break people get for 401(k)s because it is a gigantic source of untaxed money – perhaps more than $580 billion over five years, according to a 2016 Joint Committee on Taxation estimate.

The Tax Policy Center suggests that Congress needs to find $2.4 trillion over 10 years to avoid increasing the deficit with the current tax reform proposal. So the temptation to end the 401(k) tax break could be intense. Currently, 401(k) contributions come from pre-tax earnings, and the government waits until you take the money out in retirement to tax it and the returns it has earned.

If Congress gets rid of this system, saving for retirement would be more like saving in a Roth IRA or Roth 401(k). With a Roth, you do not get any tax benefit when you contribute, but the money grows tax-free in the accounts. These accounts are also not subject to required minimum distributions, which retirees must take from 401(k)s beginning at age 70 1/2.

Roth rules can be a great benefit because people can count on every cent after retirement without worrying about Uncle Sam taxing it. Retirees also are not forced to spend their nest egg, so they can pass it along to heirs with fewer restrictions if they have money left over.

It is not clear, however, how the fine print would shake out, because there is no specific proposal on the table yet from Congress. Nevertheless, retirement saving advocates are bracing for a potential fight over preserving the 401(k) system’s tax breaks as negotiations over tax reform progress. They know Congress will start looking for sources of billions of dollars so it can cut taxes without adding to the nation’s budget deficits, notes Brigen Winters, an attorney with Groom Law Group and lobbyist for 401(k) advocates such as the Plan Sponsor Council of America.

Jack VanDerhei, research director for the Employee Benefit Research Institute, is already studying the potential impact, so he is ready at any time.

The big fear among experts like Winters and VanDerhei is that if people cannot contribute pre-tax money to their 401(k), they will cut back on saving and the nation’s looming retirement savings crisis will worsen. Americans already are saving so little that 52 percent of Americans are on track to struggle in retirement, according to the Center for Retirement Research at Boston College.

The way it works now takes some sting out of saving. For every $1,000 a person in the 25 percent tax bracket socks away, they pay $250 less in taxes, notes the H&R Block Tax Institute. If that money cannot go in pre-tax anymore, they would need to pay tax on all of their income and their take-home pay would diminish.

People do not like to see their take-home pay slip at all, says Aron Szapiro, director of Morningstar Public Policy Research. He calculated that a 30-year-old earning $50,000 and now saving 10 percent of pay, would cut savings to 7.5 percent to maintain the same level of take-home income while working. By retirement, the reduced savings level would lower total contributions to the nest egg to $230,400 from $307,200.  And that person would have only about $28,400 for living expenses compared with $30,800, Szapiro found.

Szapiro notes that young workers could ultimately benefit from the Roth treatment if their pay takes a big jump during their careers and they end up with a lot more income when they are retired than when they were young.

But he thinks most people miss an important point: The tax breaks people receive on 401(k) savings in the current system give them the financial leeway to save more early in life.

“If you take that away, people are going to say: why should I bother to contribute?’” says Szapiro. “It will be hard to get people to act, and that would be very bad for people in retirement.”

Editing by Steve Orlofsky


Published at Wed, 04 Oct 2017 21:20:30 +0000

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Tax Reform Should Bode Well for Charles Schwab


Tax Reform Should Bode Well for Charles Schwab

By Donna Fuscaldo | September 28, 2017 — 1:09 PM EDT

Charles Schwab Corp. (SCHW), the discount brokerage firm, has been bouncing along near its 52-week high so far this week, but that doesn’t mean it won’t go higher, particularly if President Donald Trump gets tax reform pushed through.

That’s according to Seeking Alpha, which laid out a bevy of reasons why investors may want to buy shares of Charles Schwab, one of the leaders in the online brokerage world. Even at $44.01, close to its 52-week high of $44.35, shares could start to gain more, particularly in the first quarter of next year.

Charles Schwab (SCHW) Upsides and Downsides

Take tax reform for starters. While all eyes have been on technology stocks that have a lot of cash overseas and are hoping for a reduced tax rate to bring it back to the U.S., Charles Schwab is the opposite, with little business outside the U.S. That means that if tax reform does get passed and the corporate tax rate is reduced, Schwab stands to benefit the most. On top of that, because it doesn’t have big exposure overseas, it won’t suffer as much as rivals from a weakening U.S. dollar. If the U.S. dollar stays weak next year it could increase interest in stocks like Schwab.

Use Investopedia’s broker reviews to find a broker to match your investing goals.

But it’s not just tax reform that could draw more interest to the San Francisco-based discount broker. On the sector front, with ongoing consolidation, Schwab could become an attractive takeover target for a big financial firm that is betting the financial markets will be huge during the next 10 years. While Schwab has been a player in the consolidation, it could become a target, which should send the stock higher.

Back in 2011, the company spent $1 billion to acquire OptionsXpress as way to get in on the options trading market. Rival E*Trade has also been on a buying spree in recent years, spending $725 million last July for OptionsHouse. If Charles Schwab doesn’t get bought out, its not a bad thing either for the stock. That’s because consolidation in a sector may not bode well for consumers, but it does mean less competition, which in turn could result in higher commissions for the likes of Schwab. That would be a welcome reversal from the years of declines.


Published at Thu, 28 Sep 2017 17:09:00 +0000

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Record inequality: The top 1% controls 38.6% of America’s wealth


Melinda Gates: Tax the rich to pay for services
Melinda Gates: Tax the rich to pay for services

America’s inequality problem is getting worse.

The richest 1% of families controlled a record-high 38.6% of the country’s wealth in 2016, according to a Federal Reserve report published on Wednesday.

That’s nearly twice as much as the bottom 90%, which has seen its slice of the pie continue to shrink.

The bottom 90% of families now hold just 22.8% of the wealth, down from about one-third in 1989 when the Fed started tracking this measure.

The numbers paint a stark picture of the inequality problems gripping the country and the ability of politicians, like President Donald Trump and Sen. Bernie Sanders, to attract voters by arguing that the system is “rigged” in favor of the rich.

Even the Fed acknowledged in the report that the distribution of wealth has “grown increasingly unequal in recent years.”

inequality wealth rich

Not only that, but the richest Americans are taking home an even bigger part of the nation’s overall earnings.

The top 1% of families brought in a record-high 23.8% of the overall income in 2016, the Fed said. That’s up from 20.3% in 2013 and about twice as high as the low point in 1992.

The bottom 90% of families now make less than half of the country’s income. That figure slipped to 49.7% last year, down from more than 60% in 1992.

The good news is that the middle class just enjoyed its biggest two-year raise in decades. Median household income ticked up by 3.2% last year following a 5.2% jump in 2015, according to the Census Bureau.

However, it’s not just a stagnant wages problem. The booming stock market may also be contributing to America’s inequality issues.

On the one hand, the Fed said that the value of stock portfolios rose “dramatically” over the past three years to an average of $344,500.

But millions of Americas can’t feel the stock market boom because they’re not invested or don’t have much money in the market.

Overall, 51.9% of families owned stocks in 2016, up from 48.8% in 2013. Stock ownership is much less popular among less affluent people though.

Barely one-third of families in the bottom 50% of earners own stocks, either directly or indirectly. The average stock portfolio among this group is worth about $52,000. That’s up significantly from 2010, but down from $55,300 in 2013.

By contrast, the Fed said 93.6% of the top income group owned stocks in 2016. Their average holdings stood at $1.4 million last year, up from $999,400 in 2013.

–CNNMoney’s Tami Luhby contributed to this report.


Published at Wed, 27 Sep 2017 20:05:00 +0000

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Political Tremors In Germany And Spain


Political Tremors In Germany And Spain


The datacenter hosting my VPS’ decided to hand me and a bunch of its client a crate of lemons when moving all its servers to a new location without previously advising its sub vendors. Well at least that is what mine is claiming and if you search for quickpacket on twitter you do indeed find a bunch of angry complaints on how the migration was handled. Now for me that means most of my VPS’ have been down since Sundays, leaving me hanging high and dry. Fortunately the Zero’s VPS is hosted somewhere else, so at least all you Zero subs will not be deprived of the signals today.

Now you probably know the old saying: if life hands you a bunch of lemons, make lemonade! While I unfortunately won’t be able to properly post my usual charts and campaign updates I believe the political crisis currently unfolding here here in Spain as well as in Germany may be worth summarizing as there appear to circulate a lot of myths and misinformation on both ends. And as a born German come American now living in Spain I do feel that I am somewhat qualified to offer my perspective on what is going on and where I believe things are heading here in Europe.



So let’s start with Germany, a subject pretty dear to my heart as I was born there and spent about 12 years of my life living in various parts of the country. Apologies for the picture but that is literally the friendliest snapshot of Chancellor Angela Merkel I was able to find. She’s not exactly a people person and the sweeping changes to Germany she spearheaded over her past three administrations do to some extent reflect the fact that she grew up under the East German regime in which she was a low level player in her early youth. She’s an extremely smart woman who holds a degree in quantum chemistry and was awarded prizes for her proficiency in Russian and Mathematics.

After the unification of Germany in 1989 the Democratic Awakening party Merkel had previously joined merged with West Germany’s CDU. Then Chancellor Helmut Kohl took her under his wings as sort of a protégé and the rest is history as the saying goes. After 12 years in power she is now embarking on her fourth term as German chancellor, but due to various controversial policies during her reign, mass immigration and a shift in energy policy being the most salient, a new nationalist party called the Alternative Für Deutschland (AfD) managed to more than double its percentage from under 5% to slightly over 12% during yesterday’s federal elections. Plus several of her allies and previous coalition partner SPD are now starting to distance themselves from Mrs. Merkel, not surprisingly so as their own election results yesterday took a major hit as well.

It is difficult to project forward from here as, just with the Federal Reserve, one should never under estimate the political skill of Angela Merkel. She has repeatedly run circles around her opponents and I am pretty confident that she will once again find a way to form a coalition and determine the course of Germany over the next four years to come. However that said, the easy days are over for Mrs. Merkel as she now will face not only the conservative AfD but also a strengthened FDP as well as both an embattled CDU and CSU (the Bavarian version of the CDU) which are now realizing that they are facing a fight for political relevancy.

Now I do have a pretty unique perspective on the situation as I left Germany in 1991, just after the reunification. The way I still remember Germany is what some people today may call antiquated and backward as much of the political shift toward the left happened after I was long gone. I suspect that previous chancellors like Helmut Kohl or Willy Brandt would be considered political extremists in this day and age but if one peruses the election program of the CDU or SPD from about 25  years ago then you’ll find that there’s a lot of overlap between them and what the AfD stands for today. You may disagree on that front but there simply is no way that Germany will be taken over by Neonazi right wing extremists. The German people have learned from history and they would never ever let this happen again.

I actually think that this may turn out to be a blessing in disguise, not so much for Mrs. Merkel and her CDU, but for Germany, as it once again gives the political center a chance to reassert itself. The last thing the liberals want to do is to continue ignoring or outright ostracizing a large percentage of its own population for political opinions that were considered mainstream just two or three decades ago. Because that is exactly what has happened over the past few years and once the center disappears completely what you may get is polarization on both fronts, which puts you on the fast track to civil war. And Germany in chaos always means Europe in chaos. I hope the Germans will continue to remember their lesson and use the coming four years as an opportunity to engage in mutual dialog and to prevent the rise of political extremism on both sides, the right and the left.



When it comes to Spain I am somewhat stunned by the overwhelming international support that Catalonia seems to be receiving in its struggle for independence. I wonder if California or Texas attempting to secede from the United States would receive a similar response. Be this as it may, this has been a train wreck in the making for a good part of the past decade now and the independista movement is just now receiving global recognition. Which always surprised me a little as a break off from Spain may send shockwaves through the entire European Union.

As I am a guest here I will not post my personal opinion on the subject as I believe this is something that Spain and Cataluña will have to sort out amongst each other. You will probably come across a lot of opinion pieces on the subject with both sides presenting very compelling arguments. All I would like to offer however is this: Although I do believe that secession would be terrible for both Spain and Cataluña as well as the rest of Europe, I also believe that all people have the right to self determination and to decide their own future. If a large part of a region wants to establish independence then it should be allowed to at least pursue that course.

It’s a bit like owning a dog and keeping it on a leash at all times. The more you try to exert control, the more eager it will be to run off at the first opportunity. The more space and love you give it the more it wants to stick around. Clearly a lot of political mistakes have been made and instead of demonizing Cataluña Madrid should take a good look at itself and ask why the Catalans are so eager to separate themselves from Spain in the first place. On the other side the Catalans of course need to carefully evaluate the pros and cons of secession, especially on a long term basis. A decision made as a result of regional pride and frustration about unfavorable policies coming out of Madrid may in the long term lead to unintended consequences.

But the die is cast now and increasing exchanges between pro-independence groups and Spanish loyalists will only accomplish exactly what I have warned about in my chapter on Germany – increasing polarization on both sides. Whether this in the end devolves into another regional civil war remains to be seen but I do believe that the potential for violent conflict exists as the Catalans are very proud and politically engaged people, and are not expected to simply stand by idly if they feel treated unfairly.

It’s important to remember that the Catalans always have considered themselves to be Catalans first and then perhaps Spaniards. Unlike down here in Valencia where Valenciano is used actively alongside with Spanish the Catalans insist on speaking mainly Catalan and will often refuse to engage you in Spanish. This shows a lot about their passion and the importance they put on their own regional language, culture, and of course their political future.

In closing, I wouldn’t worry too much about Germany at the current time and instead look at Spain for future signs of trouble. While Merkel will continue to dominate the international headlines it is Spain that is sitting on a proverbial powder keg that could go off at a moment’s notice.


Published at Mon, 25 Sep 2017 13:35:15 +0000

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Hack of Wall Street regulator rattles investors, lawmakers

Hack of Wall Street regulator rattles investors, lawmakers

WASHINGTON (Reuters) – Wall Street’s top regulator came under fire on Thursday over its cyber security and disclosure practices after admitting hackers had breached its database of corporate announcements in 2016 and may have used it for insider trading.

The breach involved the U.S. Securities and Exchange Commission’s EDGAR filing system, which houses market-moving information with millions of filings ranging from quarterly earnings to statements on acquisitions.

The SEC said on Wednesday evening it discovered in August that cyber criminals might have used a hack detected in 2016 to make illicit trades.

On Wednesday afternoon, SEC Chairman Jay Clayton gave members of Congress a “courtesy call” about the hack before it was announced publicly, said Representative Bill Huizenga, chairman of the U.S. House subcommittee that oversees the SEC, in a phone call.

“It’s hugely problematic and we’ve got to be serious about how we protect that information as a regulator,” Huizenga said.

The SEC disclosure came two weeks after credit-reporting company Equifax Inc (EFX.N) said a breach had exposed sensitive personal of data up to 143 million U.S. customers. This followed last year’s cyber attack on SWIFT, the global bank messaging system.

It is particularly embarrassing for the SEC and its new boss Clayton, who has made tackling cyber crime one of the top enforcement issues.

“The chairman obviously recognizes the irony of the SEC potentially serving as the unwitting tipper in an insider trading scheme,” said John Reed Stark, president of a cyber consulting firm and a former SEC staff member.

The SEC has said it was investigating the source of the hack but did not say exactly when it happened or what sort of non-public data was retrieved. The agency said the attackers had exploited a weakness in a part of the EDGAR system and it had “promptly” fixed it.

Most reports filed with the SEC “generally don’t contain super-sensitive information,” and any insider trading would have taken place soon after company filings were made but before they were released to the public, said Gary LaBranche, president of National Investor Relations Institute.

“People are shocked and disappointed,” LaBranche said. Members of the institute, who work with 1,600 publicly traded companies, will be examining their trading reports for any unusual activity that could be tied to disclosures, he said.

U.S. President Donald Trump’s administration has prioritized protection of federal agency networks after breaches during the Obama administration, including at the Office of Personnel Management, Internal Revenue Service and State Department.

Trump in May signed an executive order requiring agencies to use a specific framework to assess and manage cyber risk, and prepare a report within 90 days about how they implement it.

The SEC did not respond when asked about that review or whether it triggered the disclosure. But Clayton said in his Wednesday statement that he began reviewing the agency’s cyber risk in May.

SEC Commissioners did not learn of the breach until recently. In a statement, Republican SEC Commissioner Mike Piwowar, who for part of 2017 also served as acting chairman, said he was “recently informed for the first time that an intrusion occurred in 2016.”

Erica Elliott Richardson, a spokeswoman for the Commodity Futures Trading Commission (CFTC),the top U.S. derivatives regulator, said in an emailed statement the agency constantly reviewed and updated its cybersecurity protections to guard against the growing threat of a breach.

“Our agency has successfully thwarted hundreds of attempted breaches,” she added.

The Canadian Securities Administrators, an umbrella group representing Canada’s provincial securities regulators, said on Thursday it would conduct an additional security review.

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Wall Street doesn’t want this Trump official to quit


Cohn outlines Trump tax cuts
Cohn outlines Trump tax cuts

Wall Street doesn’t want this Trump official to quit


Wall Street didn’t flinch at the sudden exits of White House officials like Steve Bannon, Reince Priebus and Sean Spicer. Things may not stay as calm if Gary Cohn follows them out the door.

Cohn is President Trump’s top economic adviser, and considered to be one of the most important remaining players in the administration. Cohn has acted as a moderating force on Trump’s populist instincts on delicate issues like trade. Cohn is also quarterbacking the push to cut taxes along with Treasury Secretary Steve Mnuchin.

Cohn is such a vital member of Team Trump that rumors over his resignation due to the president’s handling of the violence in Charlottesville spooked the market last week, briefly causing stocks to drop on Thursday morning. A White House official sought to reassure Wall Street, telling reporters that “nothing has changed,” and that reports of Cohn’s stepping down as director of the National Economic Council are “100% false.”

Investors are hoping that the former Goldman Sachs(GS) president will remain a source of stability and reason in the often-chaotic White House.

“The loss of Cohn would be another point of destabilization on tax reform, which is what the market wants desperately,” said Mark Luschini, chief strategist at Janney Capital, which manage more than $50 billion in assets.

“Cohn is viewed as a pretty steady, level-headed guy,” he said.

Normally, Wall Street might not care about the day-to-day personnel moves inside the White House. But Cohn’s pro-business views have comforted investors unsettled by Trump’s populist campaign platform, especially his promises to rip up NAFTA and label China a currency manipulator.

“If Cohn were to leave, Trump’s economic policies could take a turn to the more populist side, a turn that markets would not appreciate,” Nomura chief U.S. economist Lewis Alexander warned in a report on Monday.

Such a shift could alarm Wall Street as the White House gears up for key battles in September over the budget, tax reform and renegotiating NAFTA. Investors are also on guard for a potential government shutdown or a stand-off over the debt ceiling, which needs to be raised to avoid a disastrous default.

“Gary Cohn is very establishment. He’s basically Mr. Goldman Sachs. He’s not fringe,” said Ed Yardeni, president of investment advisory Yardeni Research.

Of course, Cohn’s career moves aren’t the only thing the market cares about. Ultimately, the direction of the U.S. economy and corporate profits are what will influence stock prices in the long run.

It’s also worth noting that Cohn may leave the White House soon to take an even more important job. Trump told The Wall Street Journal last month that he’s considering Cohn to replace Federal Reserve chair Janet Yellen when her term expires in February.

In some ways, Cohn’s standing in the White House seems to have been bolstered by the firing of Bannon, Trump’s chief strategist. The two officials frequently butted heads, with Bannon representing the populist or nationalist views that make markets nervous.

“Steve Bannon’s departure is undoubtedly a noteworthy victory for the globalists inside the administration” like Cohn, Isaac Boltansky, director of policy research at Compass Point Research & Trading, wrote in a report on Monday.

But Boltansky urged investors not to celebrate yet. He pointed out the tumultuous nature of the White House and warned that Bannon’s return to Breitbart gives him a powerful platform to influence future policy debates.

“The reality TV nature of the West Wing wars suggest that there could be a reversal of fortunes on the other side of the commercial break,” Boltansky wrote.

Published at Mon, 21 Aug 2017 19:45:36 +0000

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U.S. takes tough lines as NAFTA negotiations begin


U.S. takes tough lines as NAFTA negotiations begin

WASHINGTON (Reuters) – The United States on Wednesday laid down a tough line for modernizing the North American Free Trade Agreement, demanding major changes to the pact that would reduce U.S. trade deficits with Mexico and Canada and increase U.S. content for autos.

Speaking at the start of the talks in Washington, U.S. President Donald Trump’s top trade adviser, Robert Lighthizer, said Trump was not interested in “a mere tweaking” of the 23-year-old pact, which he blames for hundreds of thousands of job losses to Mexico.

“We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement,” Lighthizer, the U.S. Trade Representative, said in an opening statement.

Canadian and Mexican officials defended NAFTA and said its benefits and structure should be preserved while it is modernized.

Lighthizer said he would demand increased regional and U.S. content in autos produced in the region, the largest source of a $64-billion U.S. goods trade deficit with Mexico last year. He also said the United States would insist on strong provisions governing labor and currency practices.

“We need to ensure that the huge trade deficits do not continue and we have balance and reciprocity. This should be periodically reviewed,” said Lighthizer. “The rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content.”

The demand is at odds with auto producers and suppliers in the region, who are concerned that increasing local content requirements will raise their costs and make their factories less competitive with those in Asia and Europe.

Canadian Foreign Minister Chrystia Freeland, who suggested this week her country could walk away if the U.S. insisted on scrapping a NAFTA mechanism to resolve trade disputes, also took a swipe at the U.S. fixation on cutting its trade deficits.

“Canada does not view trade surpluses or deficits as a primary measure of whether a trading relationship works,” she said in her opening statement. “Nonetheless, it’s worth noting that our trade with the U.S. is balanced and mutually beneficial.”

Mexican Economy Minister Ildefonso Guajardo said NAFTA stood as model of North American integration and the talks should aim to strengthen the continent’s trade ties.

“The issue is not tearing apart what has worked, but rather, how we make our agreement better,” he said. “For a deal to be successful, it has to work for all parties involved. Otherwise, it is not a deal.”

Mexico is keen to maintain preferential access for its goods and services to the United States and Canada, where nearly 85 percent of its exports are shipped. Its NAFTA priorities also include greater integration of the continent’s labor markets and energy sectors.

Canadian Minister of Foreign Affairs Chrystia Freeland speaks at a news conference prior to the inaugural round of North American Free Trade Agreement renegotiations in Washington, U.S., August 16, 2017.Aaron P. Bernstein

Canadian and Mexican delegations were not surprised by the Lighthizer’s tough talk.

Raymond Bachand, the lead trade negotiator for the Canadian province of Quebec, said he was not worried by Lighthizer’s remarks that the U.S. would not accept minor changes to the agreement.

“Mr Lighthizer’s speech was very focused on U.S. domestic policy. President Trump promised to renegotiate NAFTA,” Bachand said. “There’s a lot of strategizing going on today because it’s clear that U.S. business circles have one objective – do no harm,” he told reporters.

The first round of meetings, which are expected to last until Sunday, will focus on consolidating the proposals from all three countries, a U.S. trade official said ahead of the talks, which are being held at a Washington hotel.

Slideshow (5 Images)

As the NAFTA talks began, Trump faced increasing political heat over his comments that both right-and left-wing extremists were responsible for violence at a white supremacist rally in Virginia on Saturday.

The biggest uncertainty in the NAFTA talks is whether a deal can pass Trump’s “America First” test. Trump has constantly blamed NAFTA for shuttering U.S. factories and sending U.S. jobs to low-wage Mexico. The test will be whether NAFTA negotiators can prove to him that a new agreement alters that course.

Business communities from all three countries have called on the sides to “do no harm” amid concerns that a new agreement will unravel a complex North American network of manufacturing suppliers built around NAFTA.

U.S.-Canada-Mexico trade has quadrupled since NAFTA took effect in 1994, surpassing $1 trillion in 2015.

Robert Holleyman, a former deputy U.S. trade representative during the Obama administration, said the “toughest nut to crack” will be whether changes meet Trump’s goal of reducing the trade deficit.

“We know where he wants to make changes to NAFTA. Whether those changes lead up to something that actually reduces the trade deficit with Mexico is wholly unclear,” Holleyman said.

NAFTA renegotiation will be a major test of Trump’s ability to meet his campaign promises to restore U.S. manufacturing jobs. Although he has inherited a strong economy that has added 1.29 million jobs this year, his promises of an ambitious legislative agenda have been derailed by the failure of a healthcare bill and the lack of a detailed plan for tax reform.

Also weighing heavily over the talks is the upcoming 2018 Mexico presidential election. Mexico has urged all sides to complete the negotiations before the campaign ramps up in February to avoid it becoming a political punching bag.

Additional reporting by Lesley Wroughton, David Lawder and Ginger Gibson; Editing by Leslie Adler and Nick Zieminski


Published at Wed, 16 Aug 2017 17:10:58 +0000

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Day 1 of NAFTA talks: ‘This agreement has failed’


U.S., Canada and Mexico begin NAFTA negotiations
U.S., Canada and Mexico begin NAFTA negotiations

 Day 1 of NAFTA talks: ‘This agreement has failed’


President Trump’s trade team didn’t mince words on the first day of trade talks with Canada and Mexico.

Leaders from the U.S., Canada and Mexico on Wednesday officially began renegotiating NAFTA, the three-nation trade pact, in Washington.

Mexican and Canadian leaders started a press conference on a positive note, touting the advantages of NAFTA and saying the new agreement must work for all three nations.

Then, U.S. Trade Representative Robert Lighthizer spoke. He noted that NAFTA has benefited many Americans, such as farmers, and said the U.S., Canada and Mexico have a strong friendship.

But he soon tore into NAFTA, Trump-style.

“For countless Americans, this agreement has failed,” Lighthizer said. “We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved because of invectives, intended or not, in the current agreement.”

Lighthizer said at least 700,000 American jobs have been lost due to NAFTA. He added “many people believe the number is much, much bigger than that.”

The stakes of renegotiation are high. Millions of jobs and thousands of companies rely on NAFTA. American consumers benefit immensely from free trade while factory workers say they’ve gotten the short end of the deal, with their jobs outsourced to Mexico.

The threat facing the pact is real, too. Trump says if the U.S. can’t get a better deal, he’ll withdraw from NAFTA. He’s also threatened to slap tariffs on Mexico, and he’s already slapped some on Canada. They have in turn cautioned that they’ll retaliate against any U.S. tariffs.

Mexican and Canadian leaders framed their desires around “modernizing” NAFTA to reflect more of today’s global economy, including guidelines for e-commerce, which isn’t included in the 23-year-old deal.

“The issue is not tearing apart what works, but rather making our agreement work better,” Mexico’s economy secretary Ildefonso Guajardo said on Wednesday.

“We want to protect NAFTA’s record of job creation and economic growth,” Canada’s foreign minister Chrystia Freeland said. Freeland also delivered remarks in Spanish, which appeared to be a gesture of goodwill toward Mexico.

Negotiations will begin with what isn’t in NAFTA already — digital trade, protection of intellectual property and energy trade, among other topics.

Leaders admitted that’s the easy part. “After modernizing, the tough work begins,” Lighthizer said.

Future rounds of negotiations will take place in Mexico and Canada over coming months.

Thorny issues surround several topics, including where and how car companies manufacture vehicles. Trump’s team sees this as an area where they can reshape NAFTA to create more factory jobs.

Right now, 62% of the parts of a car sold in North America have to come from the region. U.S. officials will likely aim to raise that level, though it’s unclear how much.

But experts caution if companies have to produce more parts in the U.S., it will likely cause American consumers to pay higher prices on cars, clothing and other goods.

“It sounds difficult to achieve both things, something has to give,” says Marcelo Carvalho, head of emerging markets research at BNP Paribas.

Another challenge facing the negotiators: Time. Mexico has a presidential election next year and the front runner, Andres Manuel Lopez Obrador, is a major critic of Trump. Current Mexican officials warn that NAFTA talks need to end before Mexico’s election season starts next spring because it will be very hard to ratify a deal in that political environment.

And Lighthizer noted that Trump isn’t interested in “tweaking” NAFTA. They want a “major improvement.”

Experts say the administration will be challenged to get a truly new deal done before the spring.

“I’m skeptical that you can fundamentally rewrite the agreement in six to eight months,” says Matthew Rooney, economic growth director at the Bush Institute in Texas.

As talks get underway, one lingering question hangs over the three nations.

“If they can’t get an agreement, does President Trump get rid of it entirely?” said Lori Wallach, global trade watch director at Public Citizen, a non-profit. “It depends on the will of the parties.”

Published at Wed, 16 Aug 2017 16:18:14 +0000

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Eerie quiet on Wall Street is finally broken


Haley: Sanctions are a gut punch to N. Korea
Haley: Sanctions are a gut punch to N. Korea

Eerie quiet on Wall Street is finally broken


Markets have been quiet for far too long. That finally changed a bit on Wednesday.

President Trump’s vow of “fire and fury” in response to North Korea, and its threat to strike the U.S. territory of Guam, was a reminder of how unprepared Wall Street is for a shock.

Stocks have been coasting to new highs day after day. The Dow was on track for a 10th straight record close before Trump’s “fire and fury” comments late Tuesday caused stocks to retreat.

Investors aren’t freaking out about North Korea, but there was a noticeable shift in sentiment nonetheless.

“I’m concerned. I can’t predict a shooting war before it happens, but escalating rhetoric of this type is dangerous,” David Kotok, chief investment officer at Cumberland Advisors, told CNNMoney.

The Dow fell as many as 88 points on Wednesday, before ending down just 37 points. The S&P 500 suffered its worst open since mid-June, but closed almost flat.

Of course, North Korea wasn’t the only catalyst for the caution on Wall Street. Disney(DIS) shares slumped after it announced plans to pull its movies from Netflix. That news also sent Netflix(NFLX, Tech30) stock lower. There were also disappointing earnings reports from Fossil(FOSL) and Priceline(PCLN, Tech30).

But that corporate news doesn’t account for the two-month high in the price of gold, which serves as a safe haven during times of worry. The closely-watched VIX volatility gauge remains low, but it’s popped 21% since Monday’s close. CNNMoney’s Fear & Greed index of market sentiment flipped to “neutral” after previously sitting comfortably in “greed” mode.

“The world is getting more dangerous. You don’t wait for the tornado. Seeing the cloud is enough to start moving,” Kotok said.

Kotok said he’s “glad” his asset management firm has been building cash reserves. He’s also been buying shares of the VanEck Vectors Gold Miners ETF(GDX) as well as shares of defense contractors — both of which rallied on Wednesday.

This summer’s rally on Wall Street has left the market almost priced for perfection. The Dow is up nearly 12% this year, while the Nasdaq has soared 18%.

chart trump dow stock markets

The relentless rise has been marked by unusual calm. Consider that the S&P 500 hasn’t suffered a downturn of 5% or more in 408 days, the longest streak since May 1996. Two weeks ago, the VIX(VIX) touched an all-time intraday low.

North Korea worries sent Asian markets sinking overnight. Japan’s Nikkei slumped 1.3%, while South Korea’s KOSPI closed down 1.1%. The iShares MSCI South Korea Capped ETF(EWY) fell 2%. European markets also dipped modestly.

Investors are worried that the war of wordscould turn into a miscalculation that spirals out of control.

“The concern is about how this could devolve into a fairly messy state of affairs that would cause markets to sell first and ask questions later,” said March Luschini, chief market strategist at Janney Capital Markets.

Kotok said Trump’s aggressive threats are a stark departure from Teddy Roosevelt’s famous approach of “walk softly and carry a big stick.”

“Now we have ‘yell loudly and we don’t know about the stick.’ It’s something that just adds to the uncertainty,” said Kotok.

But Luschini warned investors not to overreact to the rising tensions with North Korea.

It’s “premature to de-risk your portfolio” by dumping stocks, Luschini said, because this threat could fade away.

If there’s ultimately no impact on the global economy and corporate profits, it shouldn’t disrupt the stock market either.

Indeed, this is hardly the first time that North Korea has threatened stability in the region. And previous incidents had just a fleeting impact on global markets.

For decades, investors who were brave enough to “buy on the dips” caused by North Korea concerns ended up making money, according to Erin Browne, head of asset allocation at UBS Asset Management.

But the flipside to that, Browne said, is that a “general sense of complacency” has crept into global markets about the North Korea risk.

Published at Wed, 09 Aug 2017 20:31:01 +0000

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Where’s my raise? Wage growth still sluggish


U.S. unemployment rate falls to 16-year low
U.S. unemployment rate falls to 16-year low

Where’s my raise? Wage growth still sluggish


More Americans are finding jobs, and the unemployment rate is at a 16-year low. That is undeniably good news.

But there is one number in the jobs report that remains frustratingly subpar: wage growth.

The government said Friday that average hourly earnings for workers rose 2.5% over the past 12 months, to $26.36 an hour. That is good, but not fantastic.

Many economists, including members of the Federal Reserve, feel that wage growth of 3% to 3.5% a year is healthier. That allows consumers to better keep up with inflation.

Wages were growing about 3% a year just before the Great Recession began at the end of 2007, but they have cooled since then. That could pose a problem for the economy.

Without higher wages, Americans may pull back on spending — regardless of whether tax cuts are coming from President Trump and the Republican-led Congress.

“Despite a roaring U.S. labor market, average wage growth remains stubbornly muted,” said Dr. Andrew Chamberlain, chief economist with job search site Glassdoor, in a report.

“Until that trend reverses, the gains from today’s economy will not be translating into improved paychecks for the average American worker,” Chamberlain added.

Usually, employers start to offer higher pay as the economy improves and workers become harder to find. One reason that’s not happening may be that employers are hiring workers who were left behind during the recession and are happy to be finding jobs at all.

When employers realize they don’t need to offer big salaries to attract the workers they need, that keeps a lid on wages.

“It is clear that employers need to do little to attract and retain the workers they want and any significant signs of labor shortages are simply not showing up,” Elise Gould, senior economist with the Economic Policy Institute, wrote in a report.

Still, others think that the modest increase in wages will be good enough to keep Americansin a good mood.

Doug Duncan, chief economist at Fannie Mae, said in a report that it would be a mistake to “nitpick” the gain in wages, adding that the steady rise over the past year “isn’t too shabby.”

It’s also worth noting that many companies in some lower-paying sectors, such as restaurants, leisure and hospitality, are starting to hire more workers.

That may be holding down wages overall, but it’s still a good sign that people are able to find work.

“Low-wage industries grew fastest in July,” said Jed Kolko, chief economist with job search site Indeed, in a report.

“That’s helping the least-educated Americans get back to work. The recovery is now strong and long enough to lift many of the people hurt most by the recession,” Kolko added.

And at least one economist thinks the tide might be turning for all job-seekers. Wage growth should eventually pick up and return to more normal levels as the overall labor market improves.

“It’s simple logic … that as the job market further tightens, workers will be able to demand higher salaries or take their skills to a competitor that will pay a higher wage,” Ameriprise senior economist Russell Price wrote in a report.

“Over time, there’s little doubt that as the labor market gets tighter and tighter, wages and salaries will eventually rise. Workers will start changing jobs to move to the highest bidder,” Price added.

 Published at Fri, 04 Aug 2017 16:30:12 +0000

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FOMC Statement: No Change to Policy, Balance Sheet Change Coming “Relatively Soon”


FOMC Statement: No Change to Policy, Balance Sheet Change Coming “Relatively Soon”

by Bill McBride on 7/26/2017 02:02:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
emphasis added

Published at Wed, 26 Jul 2017 18:02:00 +0000

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