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New U.S. tax law could impact paychecks by February

By ddzphoto from Pixabay

New U.S. tax law could impact paychecks by February

NEW YORK (Reuters) – The first paychecks of 2018 will be dispatched soon, but it may be weeks or months before taxpayers and payroll processors know how the new U.S. tax laws will affect your take-home pay.

The Internal Revenue Service said it expected to issue guidance in January on how much in taxes employers should withhold based on the new tax rates. Employers and payroll services would then implement those changes starting in February.

You might not even notice when it happens because the effect on your paycheck could be relatively small, depending on your income and your tax situation.

“When the taxes are reduced by 1 to 3 percent, that’s not going to be a huge noticeable difference. It’s not going to be hundreds of dollars,” said Pete Isberg, vice president of government relations at ADP, the largest payroll processor in the United States, servicing the paychecks of one out of every six workers.

A difference of $1,000, for instance, would be less than $40 a pop for a worker paid biweekly.

Your paycheck is not actually a clear indicator of whether your overall taxes have gone up or down because of the new tax law. There may be other factors in your tax situation – such as owning a property or having multiple children – that could affect how much you owe Uncle Sam at the end of the year.

Be prepared for tax uncertainty until you do your taxes for 2018 a year or so from now. You cannot even estimate your taxes until tax professionals and do-it-yourself services like TurboTax update their software. And that cannot happen until the IRS releases the new withholding tables and issues more guidance on the specifics of other tax changes.

“We will be ready to help our customers. We just need more information,” said David Williams, executive director of the Intuit Tax and Financial Center.


You may be tempted to get a jump on the IRS and change how much tax is taken out of your paycheck by adjusting your W-4 form, but that may be premature, warned Isberg.

The IRS said in its last note that it would be attempting to work with existing W-4 forms for now.

The standard federal W-4, which all employees fill out, is based on the notion of “allowances,” which you could adjust based on your personal situation.

In the past, a single person with three children and a home in a high-tax state like New York might have listed themselves as married and claim one allowance per person, plus a few extra because they were likely to itemize their deductions and owe less. A married person with a freelance spouse who owes quarterly taxes might have listed themselves as single to have enough taken out to cover both of them.

The goal of people adjusting their withholding was to come as close as possible to paying the correct amount of tax – rather than owing money at the end of the year or ending up with a giant refund.

But it will all be different math for 2018.

“For first few weeks of January stay put, and see what the IRS comes out with,” said Isberg, who also cautioned that employees should keep an eye on tax changes at the state level.

Above all, do not panic, said Farsheed Ferdowsi, president and CEO of Inova Payroll, which handles paychecks for more than 3,000 companies.

“When you have changes in taxes, it usually goes a lot smoother than most people know,” Ferdowsi said. “If the first (paycheck) is wrong, it catches up on the next one.”

Editing by Lauren Young and Lisa Shumaker

Published at Tue, 02 Jan 2018 21:41:43 +0000

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Why now’s not the time for expensive tax cuts


Senate approves tax reform bill
Senate approves tax reform bill

Why now’s not the time for expensive tax cuts


President Trump and Republicans in Congress are on the verge of delivering a big tax cut for businesses. There’s just one catch: Neither the economy nor corporate America needs it.

For years, the United States recovered from the Great Recession at a frustratingly slow pace. After the initial stimulus package in 2009, Congress offered little help, and even stunted growth by cutting federal spending in 2013.

Now the economy is finally healthy: Unemployment is at a 17-year low, growth is at a three-year high, and companies have never been more profitable. And Washington is providing stimulus anyway, adding to America’s mountain of debt.

“Passing the tax reform bill is like throwing a small cup of gasoline on a fire that’s already burning fairly well,” Dave Lafferty, chief market strategist at Natixis Investment Managers, wrote in a report on Wednesday.

By splurging on a $1.5 trillion package of tax cuts, Congress will probably have less ammo to fight the next downturn. That’s because the tax cuts will be paid for by borrowing more money.

“This tax cut makes us less equipped to deal with the next disaster, war or recession,” Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, wrote in a statement on Wednesday.

Calling it the “wrong legislation at the wrong time,” MacGuineas warned the tax plan will provide just a fleeting bump to economic growth at the expense of making the already daunting fiscal situation even worse.

Although Republicans argue that the tax overhaul will pay for itself with faster growth, independent analysts doubt that. Even accounting for projected growth, the legislation would still add about $1 trillion to deficits, according to the Joint Committee on Taxation.

Asked by CNNMoney about the fiscal impact of the tax plan, outgoing Federal Reserve chair Janet Yellen cautioned against “taking what is already a significant problem and making it worse.”

Of course, short-term-oriented Wall Street loves the tax plan. By cutting the corporate tax rate from 35% to 21%, the overhaul will boost already high profits and allow companies to reward shareholders with fatter dividends and bigger stock buybacks.

To be sure, almost everyone agrees that the outdated corporate tax code needs a makeover to close loopholes and help American businesses compete. Tax reform that doesn’t add to the deficit makes sense, regardless of the timing.

But some prominent voices in business are pushing back on the timing of deficit-financed stimulus.

Pointing to low unemployment and 3% economic growth, Goldman Sachs(GS) CEO Lloyd Blankfein recently told Bloomberg: “I don’t know that this is the moment that you provide the biggest stimulus.”

New York Fed President Bill Dudley said he’s not in favor of deficit-financed stimulus because “the economy doesn’t need it.”

Too much stimulation could cause both the economy and the stock market to overheat. That in turn could force the Fed to accelerate interest rate hikes, offsetting the benefits of tax cuts. Treasury rates have begun to jump, a sign that investors are anticipating greater government borrowing.

“Yes, it could blow out deficits and that could be a big problem. There is no question about it,” said Peter Boockvar, chief market analyst at The Lindsey Group.

Meanwhile, companies are doing just fine without tax cuts. Corporate profits are already at record highs, as are cash levels. Companies can afford to hire more people.

“We don’t need the money,” Michael Bloomberg, the billionaire former New York mayor andCEO of Bloomberg LP, wrote in an op-ed last week.

“It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised,” he wrote.

Bloomberg slammed the tax overhaul as an “economically indefensible blunder that will harm our future” because it makes key challenges like rising deficits, growing wealth inequality and the skills crisis worse.

Trump defended the tax overhaul, tweeting on Wednesday that the “results will speak for themselves, starting very soon.” He added, “Jobs, Jobs, Jobs!”

The president is right that the jury is out. It’s possible that the tax overhaul will pay for itself by sparking stronger economic growth than economists expect. It wouldn’t be the first time economic forecasts were wrong.

And many executives are cheering. FedEx(FDX) CEO Fred Smith on Tuesday predicted the “pro-growth” tax plan will “power the economy” by making America more competitive.

But even if CEOs like the tax cuts, there’s no guarantee they will use them to create jobs. Even FedEx said it only “may” boost spending if the tax plan gets enacted.

Only 14% of CEOs surveyed by Yale University said their companies planned to make large, immediate capital investments in the United States if the tax plan became a reality.

One often forgotten obstacle: America faces a shortage of skilled workers — and the tax plan doesn’t fix that. This mismatch between the skills workers have and the talent companies need has driven job openings to record highs.

“My biggest fear is that we get this huge boom in business confidence but company hiring is stymied because we don’t have the workers,” said Joe Quinlan, a market strategist at Bank of America’s U.S. Trust division.

–CNNMoney’s Donna Borak contributed to this report.

Published at Wed, 20 Dec 2017 19:40:03 +0000

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Tax bill’s ‘pass-through’ rule will aid wealthy, not workers: critics


Tax bill’s ‘pass-through’ rule will aid wealthy, not workers: critics

WASHINGTON (Reuters) – Wealthy business owners, such as President Donald Trump, stand to gain from a provision in the Republican tax bill that creates a valuable deduction for owners of pass-through businesses, Democrats and some tax experts say.

The provision creates a 20-percent business income deduction, with some limits, for sole proprietors and owners in partnerships and other non-corporate enterprises.

It was initially sold by Republicans as a way to help small businesses and create jobs. But the final formula for determining what types of businesses can benefit has widened to take in companies with few, if any, workers, critics said.

“The president will try to tell the American people that his great political victory is a win for working people, but they see all the benefits going to his type of businesses: real estate pass-throughs,” Democratic Senator Jack Reed said on the Senate floor.

Trump, a real estate developer, wants to sign the Republican tax bill into law this week, which would give Republicans their first major legislative victory of 2017. The House of Representatives and Senate were hurrying toward passage of the bill on Tuesday, with a final House vote set for Wednesday.

On House Speaker Paul Ryan’s website, he said pass-through businesses employed about half of U.S. private-sector workers.

High tax rates, he said, “discourage investment and job creation, discourage business activity, and put American businesses at a competitive disadvantage.”


Pass-through businesses’ profits “pass through” their books directly to owners, unlike corporations, which parcel out profits through dividends to stockholders.

Under existing law, pass-through owners pay the individual income tax rate on those profits, not the corporate rate. Under the Republican bill, the corporate rate would be slashed to 21 percent, while the top individual income tax rate, which some pass-through business owners pay, would be 37 percent.

To address the disparity, Republicans included tax relief for pass-through owners in their bill, allowing them to deduct 20 percent of their pass-through business income.

Republicans put in anti-abuse measures to ensure owners of bona fide business operations claim the 20 percent deduction and prevent high earners from seeking to recategorize their income as pass-through income to take advantage of the deduction.

Republicans also capped the income eligible for the full 20-percent deduction at $315,000 for married couples and $157,500 for individuals. But they included a “capital element” in the formula for determining eligibility beyond those thresholds, presenting a lucrative tax break for some, including wealthy owners of commercial property, said tax experts.

“This seems ideally suited for commercial property businesses, where there aren’t a lot of workers, but there is a lot of valuable property around,” said Steven Rosenthal, senior fellow at the nonpartisan Tax Policy Center, a think tank.

Income above the pass-through caps can be eligible for the 20-percent deduction based on a formula: 50 percent of employee wages paid; or 25 percent of wages plus 2.5 percent of the value of qualified property at purchase, whichever is greater.

“The idea is to use the sum of the ‘2.5 percent rule’ plus 25 percent of wages … to get the full 20-percent deduction” on more income, said New York University School of Law Professor Daniel Shaviro, a tax law specialist, in an email.

An assessment of the Republican bill by 13 tax experts, mostly academics, said the formula would “expand the ability of highly paid owners in certain industries – and particularly those heavy in property but light in employees, like real estate – to qualify for the pass-through deduction.”

Additional reporting by David Morgan; Editing by Kevin Drawbaugh and Peter Cooney

Published at Wed, 20 Dec 2017 11:50:08 +0000

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U.S. House to vote again on tax bill, Trump on verge of win


U.S. House to vote again on tax bill, Trump on verge of win

WASHINGTON (Reuters) – The Republican-controlled U.S. House of Representatives on Wednesday was expected to give final approval to a sweeping tax bill and send it to President Donald Trump to sign into law, sealing his first major legislative victory in office.

In the largest overhaul of the U.S. tax code in 30 years, Republicans in mere weeks have steamrolled over the opposition of Democrats in an effort to slash taxes for corporations and the wealthy, while offering mixed, temporary tax relief to working American individuals and families.

The Senate approved the bill in the wee hours of Wednesday morning on a 51-48 vote, but had to send it back to the House, which had passed it on Tuesday, for a re-vote due to a procedural foul-up that embarrassed Republicans, but was not expected to change the outcome. The re-vote was expected to take place before noon in the House on Wednesday.

The sprawling, debt-financed legislation cuts the U.S. corporate income tax rate to 21 percent from 35 percent, gives other business owners a new 20 percent deduction on business income and reshapes how America taxes multinationals along lines the country’s largest businesses have recommended for years.

Millions of Americans would stop itemizing deductions under the bill, putting tax breaks that incentivize home ownership and charitable donations out of their reach, but also making their tax returns somewhat simpler and shorter.

It keeps the present number of tax brackets, but adjusts many, though not all, of the rates and income levels for each one. The top tax rate for high earners is reduced. The estate tax on inheritances is changed so far fewer people will pay.

In two provisions added on to secure needed Republican votes, it also repeals part of the Obamacare health system and allows oil drilling in Alaska’s Arctic National Wildlife Refuge.

Democrats have railed against the legislation as a giveaway to the wealthy and the business community that will widen the income gap between rich and poor, while adding $1.5 trillion over the next decade to the $20 trillion national debt, which Trump promised in 2016 he would eliminate as president.

Democratic Senator Chris Van Hollen said the bill “will harm millions of middle-class families … It contains huge, permanent giveaways for big banks and corporations, and asks our children, millions of working Americans and senior citizens, and future generations to pay the price.”

A few Republicans, whose party was once defined by its fiscal hawkishness, have protested deficit-spending entailed by the bill. But most of them have voted for it anyway, saying it would help businesses and individuals, while boosting an already expanding economy they see as not growing fast enough.

“We’ve had two quarters in a row of 3 percent growth. The stock market is up. Optimism is high. Coupled with this tax reform, America is ready to start performing as it should have for a number of years,” said Senate Republican leader Mitch McConnell after the chamber’s vote.

Despite Trump administration promises that the tax overhaul would focus on the middle class and not cut taxes for the rich, the nonpartisan Tax Policy Center, a think tank in Washington, estimated middle-income households would see an average tax cut of $900 next year under the bill, while the wealthiest 1 percent of Americans would see an average cut of $51,000.

The prospect of a Republican victory came tinged with embarrassment. House lawmakers initially voted 227-203, largely along party lines, to approve the bill on Tuesday afternoon.

That sent the measure to the Senate, where the Senate parliamentarian ruled three minor provisions in violation of an arcane Senate rule. To proceed, the Senate deleted the three provisions and then approved the bill.

Because the House and Senate must approve the same legislation before Trump can sign it into law, the Senate’s late Tuesday vote only ping-ponged the bill back to the House.

Democrats pounced on the mistake as evidence of the hurried, often secretive process used by Republicans in developing the bill. Ignoring Democrats and much of their own rank and file, Republican congressional leaders and White House officials drafted the bill behind closed doors, unveiling it on Sept. 27.

No public hearings were held on the measure. Numerous narrow amendments favored by lobbyists were added late in the process, tilting the package more toward businesses and the wealthy.

“When future generations look back at the short and messy history of the Republican tax bill, its most enduring lesson will be what it has taught us about how not to legislate,” said Senate Democratic Leader Chuck Schumer on the Senate floor.

“After only a few months of frantic backroom negotiations by only one party, we are left with a product as sloppy and as partisan as the process used to draft it… What a disgrace.”

Reporting by David Morgan and Amanda Becker; Editing by Kevin Drawbaugh, Paul Tait and Nick Macfie

Published at Wed, 20 Dec 2017 07:07:13 +0000

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Healthcare draws election-year worry, but 2016 repeat not seen


Healthcare draws election-year worry, but 2016 repeat not seen

NEW YORK (Reuters) – With another election year looming, investors in the healthcare sector are wary the coming months could reopen wounds suffered during the 2016 U.S. presidential race.

Healthcare becoming as a hot an issue in the 2018 midterm elections as it was two years earlier could threaten the sector. A big risk stems from voters giving majorities to Democrats in the U.S. Senate and House of Representatives, in a rejection of President Donald Trump’s Republican party.

Investors worry that shift would pressure the industry, including through a greater focus on prescription drug prices, even if Trump’s grip on the presidency tempers any regulatory changes.

In 2016, similar scrutiny had plagued the healthcare sector, particularly pharmaceutical and biotechnology shares.

“If we woke up tomorrow and it was a given fact (the Democrats) were going to take over the House and the Senate, healthcare would be one of the worst-performing sectors of the market,” said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina.

Momentum behind such a shift appears to be building after Democrat Doug Jones on Tuesday won a special Senate election in Alabama that will cut the Republicans’ Senate edge to 51 seats against 49 Democrat seats.

Even so, healthcare shares would likely stand up better to election risk in 2018 than they did to the scrutiny of the sector in 2016.

For one, the sector is cheaper relative to the broader market following 2016’s struggles. Investors also say it could benefit from a potential boost in merger activity if drugmakers and other multinational companies bring back cash held overseas under the tax overhaul bill moving through U.S. Congress.

The stocks also may be less vulnerable now to news about high drug prices and other healthcare developments, having already weathered those headlines in 2016, investors say.

And some investors are also less concerned that healthcare will be a significant topic on the campaign trail this time around, given other issues that have come to the forefront since Trump’s election.

“I think there will be fears. Do they come in March? Do they come in May? I don’t know when they come, but yes there will be fears of the election,” said Teresa McRoberts, a portfolio manager who focuses on healthcare at Fred Alger Management in New York.

Still, McRoberts added: ”The downside in the group – it’s hard for me to see that it is going to be as much as it was in ’16.”

Healthcare shares had struggled for most of 2016, undermined by investor fears about new drug pricing rules or other regulations, especially should Democratic presidential candidate Hillary Clinton have won.

The sector .SPXHC declined 4.4 percent that year, making it the worst performer of all major sectors, while the overall S&P 500 .SPX rose 9.5 percent. Biotech and pharmaceutical shares were hit particularly hard.

Healthcare’s underperformance in 2016 was its worst since 1999, and its worst in an election year since 1992.

On balance, however, midterm election years have treated healthcare stocks well.

According to Thomson Reuters data dating back to 1990, the sector’s annual performance on average topped the broad S&P 500 by 2.7 percentage points. But in the seven midterm years over that time, it outperformed by 6.2 percentage points on average, with the sector outperforming in five of those years.

To be sure, certain healthcare issues, including the cost of medicine, have drawn broad attention as a populist issue, including from some Republicans like Trump himself.

But Democrats as a whole are seen as more likely to push for changes, such as the ability for the U.S. government to negotiate drug prices through the Medicare health program.

”If the 2018 elections were to see a change of leadership … then I think the drug pricing issue would be very much back in the picture for all of the pharmaceutical and biotech companies,” said George Strietmann, portfolio manager with Cincinnati investment advisory firm Bahl & Gaynor.

Healthcare stocks rebounded by 21.5 percent so far in 2017, but that was nearly matched by the 19.3 percent rise for the S&P 500.

The sector, at 16.4 times forward earnings estimates, trades at a roughly 10 percent discount to the 18.2 price-to-earnings ratio for the S&P 500, according to Thomson Reuters Datastream.

That stands out especially when compared with the sector’s nearly 18 percent premium to the S&P 500, historically, as well as its 4 percent premium in late 2015, before election-related concerns spiked.

“It’s still reasonably cheap,” said Nathan Thooft, co-head of global asset allocation, Manulife Asset Management in Boston, which is overweight the healthcare sector.

Healthcare becoming a campaign issue is ”definitely a risk,“ Thooft said. ”I just don’t think it’s going to be the prominent debate of the midterm election.”

Reporting by Lewis Krauskopf; Editing by Meredith Mazzilli

Published at Sat, 16 Dec 2017 01:50:29 +0000

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U.S. tax repatriation plan may not cure long-term dollar weakness

By Skitterphoto from Pixabay

U.S. tax repatriation plan may not cure long-term dollar weakness

NEW YORK (Reuters) – Investors looking for the U.S. Republican tax bill to prompt multinational companies to convert foreign profits into dollars and end the worst slide in the greenback in a decade may have to temper their hopes for a prolonged rebound.

The plan, designed in part to give U.S. multinationals a reason to repatriate the roughly $2.6 trillion in profits held by their foreign subsidiaries, would slash tax rates on such previously accumulated earnings. Companies have been slow to recognize those profits on their balance sheets so they can avoid paying U.S. corporate taxes, which stand at a rate of 35 percent. (Graphic: Overseas Cash Stash – reut.rs/2ABRzTu)

The dollar is down roughly 8.1 percent so far this year against a basket of currencies. The greenback has suffered as the Federal Reserve has raised interest rates more slowly than expected and President Donald Trump has not been able to sign any major legislation into law. (Graphic: Dollar Rise During 2005 Tax Holiday – reut.rs/2A77Y5o)

Yet analysts say that even if the tax bill becomes law, the dollar may not benefit in the long term because the legislation gives companies little incentive to convert their foreign profits right away. At the same time, many large companies already have those profits in dollar-denominated securities.

The Republicans’ proposals differ from the last tax break on foreign profits, which global financial services company Unicredit said brought roughly $300 billion to the United States.

The bill President George W. Bush signed in October 2004 drastically reduced tax rates to 5.25 percent over a 12-month window and, along with aggressive tightening by the Federal Reserve, helped send the dollar nearly 13 percent higher the following year.

This time, however, the Republican bills before a conference committee would permanently change how U.S. companies’ foreign profits are taxed.

The United States would no longer collect taxes on most future earnings a company makes beyond its borders. As a result, companies would have fewer incentives to bring previously accumulated foreign profits home quickly because rates are not scheduled to revert higher.

Up to $250 billion in foreign earnings could be repatriated over an indefinite period, according to TD Securities. While that could provide some boost to the dollar, repatriation will probably not be a significant ongoing factor in the $4.5 trillion global currency market, analysts said.

“It was a one-off repatriation and mandatory in 2005 so companies took advantage of it, and the dollar benefited from it,” said Mark McCormick, North American head of FX strategy at TD Securities in Toronto. “But this tax bill doesn’t have that same urgency.”

So far, there is no final version of the tax bill. Legislation passed by the House of Representatives would allow companies to bring back foreign profits at a 14 percent repatriation tax rate, as opposed to the current 35 percent, over eight years. The Senate bill, approved over the weekend, puts the rate at 14.49 percent.

Neither bill requires companies to convert foreign profits into dollars.


Prospects of a tax break on companies’ foreign earnings and expectations of wider U.S. budget deficits helped boost the dollar to its highest levels since 2002 soon after Trump’s presidential victory in November 2016.

Now that the tax bills have passed both houses of Congress, “dollar bulls have started banging their drums” again, analysts at Unicredit said. However, they said this attitude is misguided because the vast majority of the earnings that companies will repatriate are probably already in dollar-denominated securities in the United States.

“Even a significant wave of repatriation might not lift the dollar directly, as some of the largest U.S. corporations already hold a lot of cash in dollar-denominated assets,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

In many cases, foreign profits are based in dollars held in accounts at U.S. banks, yet are treated as overseas assets on a company’s balance sheet. As a result, they are not recognized as U.S. income and are therefore not subject to U.S. taxes.

The Brookings Institution, a non-profit public policy organization based in Washington, estimates that at the 15 U.S. companies with the largest cash balances abroad, 95 percent of foreign profits are held in U.S. dollar-denominated cash or equivalents.

For example, Microsoft Corp noted in its annual report that as of June 30, roughly 92 percent of the cash and short-term investments held by its foreign units was already invested in U.S. dollar assets.

Despite some skepticism about U.S. repatriation flows, some analysts say the dollar could get a short-term boost.

“Immediately after tax reform is passed, you’re going to hear this giant sucking sound as money is heading home very quickly,” said David Woo, head of global rates and currencies research at Bank of America Merrill Lynch. Yet he does not expect a dollar rally to continue beyond the second quarter of 2018, partly due to concerns about the tax plan’s impact on the U.S. fiscal deficit.

Over the long term, the dollar will probably continue to slide, said Brian Jacobsen, multi-asset strategist at Wells Fargo Asset Management. The effects of the tax bill are already largely priced into the currency market, leaving little unexpected demand over the following 12 months, he said.

“We are positioning client portfolios for a little more dollar weakness,” he said. “Not strength.”

Reporting by Gertrude Chavez-Dreyfuss and David Randall; Additional reporting by Saqib Iqbal Ahmed and Megan Davies; Editing by Megan Davies, Jennifer Ablan and Lisa Von Ahn

Published at Fri, 08 Dec 2017 17:15:59 +0000

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Is Tax “Reform” Good for the US Dollar?


Is Tax “Reform” Good for the US Dollar?

By: Mike Shedlock | Wed, Dec 6, 2017

Let’s investigate what happened after the last 3 major tax reforms. Another “reform” is on deck.

I picked up this idea from Holger Zschaepitz, @Schuldensuehner, who made the following Tweet, posting a chart from Bloomberg.

In the following chart, I add a key piece of legislation that someone inadvertently overlooked.

Tax Reform vs US Dollar 1986-Present


US Dollar Synopsis

  • Following the 1986 legislation, the dollar fell about 22% over the next six years.
  • Following the 2001 legislation and continuing with the 2003 legislation, the dollar fell about 37% over the next seven years.

What’s Next?

The Senate version of the bill is likely to add over $1 trillion to the deficit, while not even cutting taxes beyond 2027.

A bill that adds so much to the deficit is not US dollar supportive, to say the least.

However, one cannot view these things in isolation. How the dollar reacts also depends on events in the Eurozone, China, and Japan, as well as Fed interest rate policy.

Global Currency Debasement

Global currency debasement is underway.

Things may be even crazier elsewhere, so a decline in the dollar is not guaranteed.

A Driver for Gold

Sooner or later, competitive currency debasement will matter.

Gold is likely to be the primary beneficiary.

I wish I could tell you when this matters in a major way.

Gold vs. Faith in Central Banks


Amazing Non-Reform Act of 2017

I have a suggestion for the name of the pending legislation: The Amazing Non-Reform Tax Act of 2017.

By Mike Shedlock

Mike Shedlock

Mike Shedlock / Mish
Mish Talk

Mike Shedlock

Michael “Mish” Shedlock is a registered investment advisor
representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to
learn more about wealth management for investors seeking strong performance
with low volatility.

Copyright © 2005-2017 Mike Shedlock

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

Published at Wed, 06 Dec 2017 15:37:45 +0000

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Republicans say CFPB is crippling the economy. Really?


Barney Frank: CFPB out of control? Give me an example.
Barney Frank: CFPB out of control? Give me an example.

 Republicans say CFPB is crippling the economy. Really?


President Trump argues that the Consumer Financial Protection Bureau is a “disaster” that has “devastated” banks and hurt Americans by stifling loans.

Mick Mulvaney, the official Trump installed as the agency’s acting director, claimed on his first day that the CFPB is “trampling on capitalism” by “strangling access” to loans.

Yet Republicans’ description of the CFPB as a renegade regulator handcuffing banks doesn’t match up with reality.

The CFPB has enacted rules to safeguard consumers from financial predators, but there’s little evidence those rules are crippling the economy. In fact, America’s banks are hauling in record profits, and households have more debt than ever before. Bank loans to businesses are also at all-time highs.

Not to mention that the U.S. economy has grown at a healthy 3% pace the past six months, and the stock market has never been higher.

“They talk about an agency that is out of control, it’s a bureaucratic monster. You would think there would be some horror stories,” Barney Frank, a Democratic former congressman and one of the authors of the Dodd-Frank law, which created the CFPB, told CNN on Monday.

Booming bank profits

It’s true that the CFPB has moved to crack down on risky mortgages, prevent shady payday lending and penalize big banks like Wells Fargo(WFC) for breaking the law.

Yet U.S. banks made $171.3 billion in profit last year, their third record in the past four years, according to the FDIC. Bank profits are on track for another record in 2017, and just 3.9% of banks suffered losses during the third quarter.

“The banks are doing just fine,” Richard Cordray, the Obama-appointed former director of the CFPB, told CNN on Tuesday. “The question is: Will someone be looking over their shoulders to make sure they do things the right way?”

chart bank profit loss

Record business loans

There’s no question that Dodd-Frank, the post-crisis law that created the CFPB, forced banks to spend heavily on consultants and technology as well as curtail risky activity that may have been lucrative in the past. And even Barney Frank has admitted Dodd-Frank may have unfairly hurt some smaller banks.

Still, Trump has painted a dire picture that doesn’t jibe with the numbers. For instance, he said in February that “many friends of mine who have nice businesses” can’t get loans because of Dodd-Frank.

Yet banks are lending plenty of money to businesses.

Commercial and industrial loans from commercial banks hit an all-time high of $2.1 trillion in October, according to the Federal Reserve. That’s nearly twice as many as much in business loans as banks had on their balance sheets in July 2011, when the CFPB opened its doors.

It is true that bank loans to businesses have slowed to a near-halt in recent quarters. But financial analysts don’t blame the CFPB for that.

Harvey Lei, a Bloomberg Intelligence analyst covering U.S. regional banks, said possible reasons for the slowdown include “uncertainty” among businesses about the Trump administration’s tax proposals and an ability to borrow even more cheaply from the bond market.

“It seems like the supply of loans is there,” Lei said. “The demand is less clear from clients.” He said the CFPB is “definitely not” to blame.

business loans banks record high

Americans have more debt than in 2008

Mulvaney, who as a member of Congress voted to kill the CFPB, said he wants the agency to “protect people” without “choking off access to financial services that are so critical to many folks.”

But Americans don’t seem to be having trouble taking on more debt. Total household debt reached an all-time high of $12.96 trillion during the third quarter, according to the New York Federal Reserve.

Americans now have $280 billion more debt than they did during the prior peak in 2008. Household debt has climbed 16.2% fromthe low point in 2013, the Fed says. Consumer confidence hit a 17-year high in November, according to the Conference Board.

Asked for instances when the CFPB erred, White House press secretary Sarah Sanders criticized the agency for auto lending guidance that has hurt consumer access to car loans.

Yet the New York Fed recently said that a record 107 million Americans have auto debt. They took out $150.6 billion worth of car loans in the third quarter, “among the highest” the New York Fed has ever seen.

household debt record high

Housing is recovering despite mortgage crackdown

The CFPB’s restrictions on mortgages have been unpopular among some in the real estate industry. For instance, the CFPB’s qualified mortgage rules banned risky loans such as “interest-only” and “negative amortization” mortgages.

And it’s true that mortgages have not recovered to pre-crisis levels. Just over 2 million mortgage loans were issued during the second quarter of 2017, compared with a peak of 4.2 million in 2006, according to Attom Data Solutions, formerly known as RealtyTrac.

Bloomberg’s Lei said CFPB rules aren’t to blame. “Post-crisis, banks essentially stopped doing these kinds of mortgages anyway,” he said.

While the CFPB may be having a “chilling effect” on some mortgage loans, Attom senior vice president Daren Blomquist agrees that much of this is “self-imposed.”

“A lot of big banks got burned by the housing bubble and are voluntarily taking on more restrictive lending practices,” he said.

It’s also hard to argue the housing market is in shambles. New numbers released this week show that new home sales hit a seven-year high in October and home prices rose at their fastest pace since mid-2014.

“To the extent that the market has a short memory, the CFPB is there to hold it in check,” Blomquist said.

Published at Tue, 28 Nov 2017 20:20:35 +0000

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Your Money: Uncertain future for those counting on medical deductions


Your Money: Uncertain future for those counting on medical deductions

NEW YORK (Reuters) – At a retirement community near Chicago, Jay Schachner and his friends are nervously awaiting the fate of their medical expenses amid U.S. tax overhaul.

“Everyone is running scared, frankly,” said Schachner, an 86-year-old retired property law attorney who lives in a planned senior-living community in Chicago.

The U.S. House of Representatives voted in favor of a bill that would eliminate the deduction for medical expenses. The Senate version leaves it alone.

For most Americans, the medical deduction is currently available for expenses above 10 percent of adjusted gross income.

That is a pretty high bar for most people to clear, and only about 9 million claim it. Those who do are typically old, sick and not wealthy. About 75 percent of Americans who take the medical deduction are over 50, and 70 percent make $75,000 a year or less, according to AARP.

“It’s a very middle-income deduction,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP.

For Schachner, the deduction for medical expenses provides a useful annual financial boost of several thousand dollars. The community where he lives is part of the Kendal system, a nonprofit continuing care retirement community. Residents pay an entry fee that averages around $250,000, along with monthly fees of about $3,000. A portion of those fees, from 20 percent to 30 percent, are counted as medical expenses that can be deducted.

Since the Schachners are spending down their nest egg, they are offsetting some of the tax bite from selling assets by taking a deduction for medical expenses. However, if the rules change and their calculations are off, they will have to scramble to make up the difference.


Richard Garrison, a 71-year-old retired chemical engineer who lives in a Kendal property in Maryland, says that eliminating the medical deduction will be a killer for planned communities like his, where people sign up for a living arrangement that will carry them from independent apartments to nursing care.

Already more than 60 percent of Social Security beneficiaries receive at least half their income from Social Security, according to the Social Security Administration. Those that completely run out of options end up on Medicaid, the social safety net that ends up paying for a lot of end-of-life care.

Just 1 percent of Kendal’s 13 affiliates transition to Medicaid now, said Marvell Adams, executive director of the Collington Community, a Kendal affiliate.

Another snowball factor of eliminating the medical deduction starts with seniors who suddenly have to cover several thousand dollars more in medical expenses a year. They will have to draw down more of their savings to cover those costs, putting them in danger of running out of money faster.

And the more they withdraw from their saving in a year, the more their Social Security benefits become taxable.

“It’s a double hit to a lot of these folks,” said John Dundon, a tax accountant and enrolled agent from Denver.

Dire medical conditions also take a tax toll on pre-retirees. Jennifer MacMillan, a tax accountant in Santa Barbara, California, has a client who is in her 60s and still working, making $120,000 a year. Her husband has Alzheimer‘s, and the annual cost for him to live in a facility is $60,000.

With big medical expenses since 2015, she ended up with very little tax and got a refund, MacMillan said.

“Without that deduction, for anyone with a family member with a serious illness, it will be devastating,” she added.

(This version of the story corrects the title for Cristina Martin Firvida in the 6th paragraph)

Editing by Lauren Young and Jonathan Oatis

Published at Wed, 22 Nov 2017 17:00:55 +0000

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Your Money: Gear up for a big year of giving

by padrinan from Pixabay


Your Money: Gear up for a big year of giving

CHICAGO (Reuters) – If proposed tax overhaul changes are adopted, giving to charity for tax reasons will no longer be as valuable for most people as it is this year.

So advisers are pushing clients to rush before year-end to give large donations before opportunities to maximize tax-cuts run out.

Neither of the proposals currently on the table from Congress eliminate the deduction for charitable contributions, but both plans from the U.S. House of Representatives and the Senate increase the standard deduction so much that many people will no longer itemize their returns, said Robert Keebler, of tax advisory firm Keebler & Associates.

The Tax Policy Center think tank estimates that only 5 percent of people will itemize compared with about 30 percent now. Even a taxpayer who does still itemize might see less value because of tax bracket changes.

Earlier this year, the center ran the numbers on possible shift from a high rate of 39.6 percent to 33 percent. For a typical wealthy taxpayer with the top tax rate of 39.6 percent, every $100 of donation now has an after-tax cost of $60.40 because of the value of the deduction.

But if a taxpayer were to fall from the current top rate to 33 percent, the after-tax cost for the taxpayer would be $67. Currently, the plans for tax brackets vary considerably in the House and Senate, with the 39.6 percent bracket still in the House version, but with different income thresholds.

No matter what happens, the consequences could be dire for organizations that depend on donors. The Lilly Family School of Philanthropy at Indiana University estimated in May that charitable contributions could fall about $13 billion because of tax overhaul.

With the possibility that the tax laws might change, an easy way to make a large donation quickly in the last month of this year is to use a donor-advised fund, said Keebler. These are accounts you can create at a financial institution like Fidelity or Vanguard that allow you to set the money aside for charity and claim the tax deduction, but then hold off on actually giving away until a later date. People with windfalls often give large donations during a year of extraordinary gains, but also often use the funds for regular giving to build up a big balance over time.

Financial adviser Megan Gorman of San Francisco has been using a donor-advised fund for years, and is coaching clients now on how to maximize the value as the tax overhaul negotiations keep churning.

She and her husband began slowly, first putting $5,000 into a Schwab donor-advised fund that would let them give gifts as small as $500 over many years to any charitable organization that appealed to them. Their first was an AIDS education charity; later came a charity that delivers fresh fruit and vegetables to struggling seniors.

Each year, they increased the sum in their Schwab fund as they became more comfortable with the process of selecting charities and cutting their taxes by using the deduction for charitable contributions.

While people may be too busy in 2017 to choose charities, Gorman says a simple approach is to put $5,000, which is usually the minimum to start an account, and then dole it out at a later time.

Choosing a firm where you already have investments makes the process of moving money from an existing account into a charitable account simple, said Gorman. She advocates donating a stock or fund that has appreciated so much that it may decline, or an investment that has become an oversized portion of your portfolio.

The individual simply donates that asset to the donor fund, the fund managers sell it with no tax consequence. The individual gets the entire value of the asset as a tax deduction in 2017.

“This is really fun to do. Many clients decide on charities as a family project,” said Gorman.

This year Gorman is planning a massive donation so she can maximize her tax reduction and commit a large chunk to Napa fire victims, after seeing her friends lose homes.

Editing by Beth Pinsker and Jonathan Oatis

Our Standards:The Thomson Reuters Trust Principles.

Published at Tue, 21 Nov 2017 20:40:24 +0000

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Rising Medicare costs leave many U.S. seniors with a flat COLA


A pair of elderly couples view the ocean and waves along the beach in La Jolla, California March 8, 2012. REUTERS/Mike Blake


Rising Medicare costs leave many U.S. seniors with a flat COLA

CHICAGO (Reuters) – Millicent Graves will get a raise from Social Security next year, but her household budget will get worse, not better.

The 2 percent cost-of-living adjustment (COLA) announced by Social Security for 2018 last month will boost Graves’ monthly benefit by $20.70. But in reality, that increase will be wiped out by a higher Medicare Part B premium, which will be deducted from her Social Security benefit.

The federal government announced last Friday that the standard Part B premium will be $134 per month next year, unchanged from 2017. That sounds like good news at first blush. But for roughly 70 percent of seniors, Social Security benefit amounts will stay flat due to the relationship between the premium and the Social Security cost-of-living adjustment.

Graves is 73 and lives near Williamsburg, Virginia. Her Social Security benefit – a little less than $1,000 after Medicare Part B is deducted – provides roughly half of her total income. The rest comes from retirement savings, which she will use to close the budget gaps next year. “It is frustrating, but I’m lucky in that I can handle it. I know plenty of other people who are living just on Social Security, and it will be hard for them to get by.”

COLAs are determined by an automatic formula tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). From 2013 to 2015, the annual increases ranged around 1.5 percent. No COLA at all was awarded in 2016; this year, the adjustment was a paltry 0.3 percent.

For most beneficiaries, Medicare Part B premiums are deducted from Social Security. The impact of the Part B premium on net benefits next year will vary due to what is known as the “hold harmless” provision governing Social Security.

By law, the dollar amount of Part B premium increases cannot exceed the dollar amount of the COLA – a feature that ensures net Social Security benefits do not fall. The hold-harmless provision applies to the 70 percent of the Medicare population enrolled in both programs. Those not held harmless include anyone delaying their filing for Social Security benefits, but others affected include some federal and state government retirees. Affluent seniors who pay high-income Medicare premium surcharges also are not protected.

The stingy COLAs of the past two years were rare – but they also set the stage for the odd 2018 situation now facing Graves and millions of others.


The recent flat COLAs meant that nonprotected Medicare enrollees shouldered most of the burden of rising Part B premiums; the premiums for this group jumped sharply in 2016 and 2017. This year, they are paying $134 per month, while protected beneficiaries are paying an average of $109.

But the more-generous 2018 COLA will spread higher Part B program costs across the entire Medicare population. That means premiums will stay flat for this year’s nonprotected enrollees, while the protected group will pay more.

“The lower the benefit the lower the Medicare Part B premium people were paying in 2017 and the more they need to reach $134,” said Mary Johnson, a policy consultant at the Senior Citizens League. “The upshot is Part B will take their entire COLA.”

The hold-harmless situation affects people differently according to the level of their Social Security benefit. A held-harmless beneficiary with a $2,000 monthly benefit would still receive a net COLA of $15 next year, for example. But the COLA flattens to zero with a monthly benefit of around $1,250 and below.

The math matters to many seniors living on fixed incomes. Half of all Medicare beneficiaries had income below $26,200 in 2016, according to the Kaiser Family Foundation – a figure that includes Social Security, pensions, retirement account withdrawals, wages, and other miscellaneous income sources.

At the same time, 62 percent of beneficiaries relied on Social Security for more than half of their income in 2015, according to the Social Security Administration; 34 percent relied on the program for 90 percent or more of income. Seniors heavily reliant on Social Security find themselves forced to make tough choices as healthcare consumes a larger share of income.

Graves is a former veterinary technician who also sold real estate for a few years before retiring. She claimed Social Security at the earliest possible age – 62 – to help pay the premiums on her health insurance. Now, she finds a variety of expenses rising sharply, including her Medigap and Part D prescription drug plans, homeowners insurance and utilities.

“I never realized before how people can just work all their lives and then retire and find themselves living on the edge,” she said. “I am not going to starve because of this, but I know people who could.”

(The writer is a Reuters columnist. The opinions expressed are his own.)

Editing by Matthew Lewis

Published at Mon, 20 Nov 2017 18:44:44 +0000

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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. (urbn.is/1Vj06A3).

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 (reut.rs/2hACrwq).

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

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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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