trade

Middle Class to Get 23% of Tax Cuts for Individuals Under GOP Bill

Middle-income households will get $61 billion in tax cuts in 2019 under the Republican tax plan poised for passage this week, according to an analysis released late Monday by Congress’s Joint Committee on Taxation.

That amounts to 23% of the tax cuts that go directly to individuals. By 2027, however, these households would get a net tax increase, because tax cuts are set to expire under the proposed law.

The calculations are based on JCT estimates of cuts going to households that earn $20,000 to $100,000 a year in wages, dividends and benefits. Those households account for about half of all U.S. tax filers, with nearly a quarter making more and a quarter making less. (…)

America’s most-affluent households, those earning $500,000 or more a year, which account for 1% of filers, would also get $61 billion in cuts in the first year, according to the JCT analysis. They would get a cut of $12 billion by 2027.

That includes income earned by pass-through businesses such as partnerships and S-corporations that pay taxes on individual returns. It doesn’t include the benefits of estate-tax reductions. (…)

While the middle class as a whole will see benefits, some people will end up worse off. Using an alternative measure of household income, the Tax Policy Center found that of those households in the very middle of the income distribution, making $48,600 to $86,100 a year, 91.3% would receive a tax cut next year. But 7.3% would receive a tax increase. By 2025, 10.9% would receive a tax increase. (…)

Here’s how the Tax Foundation sums it up for individuals:

• On a static basis, the Tax Cuts and Jobs Act would increase the after-tax incomes of taxpayers in every taxpayer group in 2018. The bottom 80 percent of taxpayers (those in the bottom four quintiles) would see an average increase in after-tax income ranging from 0.8 to 1.7 percent. Taxpayers in the top 1 percent would see an increase in after-tax income on a static basis of 1.6 percent, driven by the lower pass-through tax rate and the lower corporate income tax.
• On a static basis, the plan would lead to 0.3 percent lower after-tax income on average for all taxpayers and 0.6 percent lower after-tax income on average for the top 1 percent in 2027, due to the expiration of the majority of the individual income tax cuts, but retention of chained CPI. When accounting for the increased GDP, after-tax incomes of all taxpayers would increase by 1.1 percent in the long run.
• However, by 2027, the economic growth effects of the tax bill will have largely been realized. Taking these effects into account, taxpayers as a whole would see an increase in after-tax incomes of at least 1.1 percent. The bottom 80 percent of taxpayers would see their after-tax incomes increase from 0.8 to 1.7 percent. The top 1 percent of all taxpayers would see a decrease in after-tax income of -0.2 percent on a dynamic basis, largely due to chained CPI, the alternative minimum tax, and the net interest deduction limitation.

U.S. Businesses Find Welcome Surprises in Tax Overhaul The final tax bill offers much of what large companies hoped to gain from the Republican overhaul, while late modifications dropped some provisions that most worried companies.

(…) Among the provisions that made business leaders happiest was one that went missing in the final bill: the corporate alternative minimum tax. (…) The [21%] rate takes effect on Jan. 1, a year sooner than proposed in the Senate bill. That promises firms an extra year of lower tax and avoids a delay that worried many tax experts. (…)

Lawmakers ultimately dropped another closely watched interest-deduction limit, which would have applied where a disproportionate amount of a company’s borrowing came in the U.S. The provision was designed to help prevent “earnings stripping,” or shifting profits to lower-tax jurisdictions.

Lobbyists and corporate tax executives are still working through changes to some of the bill’s most complex provisions, which attempt to limit efforts to shift corporate profits to low-tax foreign jurisdictions.

One, dubbed the base-erosion and antiabuse tax, or BEAT, is triggered at large companies where at least 3% of their tax deductions stem from payments to foreign affiliates, down from a 4% threshold in the Senate bill. A House-bill provision disliked by many companies—a 20% excise tax on many transactions with foreign affiliates—was scrapped altogether.

Private-equity firms kept capital-gains treatment for “carried interest,” or their share of profits from portfolio investments, but only if the investment is held at least three years. Today, the treatment applies after a year.

Life insurers no longer face an 8% surtax on taxable income, a provision included in the House bill. (…)

• Tax Plan Strikes at Tech Giants’ Foreign Profits

(..) But tech giants could be pinched by provisions in the new tax code aimed at curbing the use of low-tax foreign jurisdictions. “Those firms that have been the world leaders in avoiding taxes will find their tax rates going up,” said Edward D. Kleinbard, a former U.S. tax official who is now a tax professor at the University of Southern California law school. (…)

• Tax Cuts and Jobs Act Puts the U.S. with its International Peers

• The tax bill is surely already impacting these forecasts

• The GOP tax bill could be even more costly than it looks

The Senate Republican tax bill is built on shaky assumptions, such as sunsets of the individual tax provisions that the GOP argues will never actually happen. So the actual cost could be well above the official estimate of around $1.4 trillion — and credible analyses of the bill estimate that the additional revenue it creates through economic growth won’t come close to offsetting that cost. (…)

U.S. Home Builder Index Strengthens

The housing market remains in good shape. The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo increased 7.2% to 74 during December, the highest level since July 1999, up 7.2% y/y. Expectations had been for a rise to 70. For all of this year, the index increased 11.2% following last year’s 3.8% rise. The NAHB figures are seasonally adjusted. During the last ten years, there has been a 67% correlation between the y/y change in the home builders index and the y/y change in housing starts.

The index of present sales conditions in the housing market rose 5.2% to 81 (8.0% y/y), also the highest level since 1999. The index for conditions in the next six months improved 3.9% (1.3% y/y) to 79.

Home builders reported that the traffic of prospective buyers index jumped to the highest level since December 1998, up 11.5% y/y.

From the NY Fed service sector Business Leaders Survey

Best reading since the Financial Crisis:

• The business climate has markedly improved since the elections but many indicators of actual decisions made have not kept pace:

• These next charts plot expectations 6 months ahead. Wages are expected to rise, prices paid to flatten while prices received could rise a little. We shall see about that…

The U.S. Is Left Behind on Trade The new Japan-EU deal will hurt a slew of American exporters.

Europe and Japan finalized a trade deal late last week that shows how Donald Trump’s protectionism will harm American companies and farmers. The agreement eliminates tariffs on more than 95% of products and reduces nontariff barriers. Europeans will gain access in particular to Japan’s lucrative agricultural markets that the U.S. lost by walking away from the 12-nation Trans-Pacific Partnership trade pact. (…)

The Japan-EU deal will eliminate quotas on European pork in Japan and cut the tariff to about 17% from 80% over 10 years, according to the U.S. Department of Agriculture. That will hurt American farmers, who currently hold 58% of the market for fresh and chilled pork and 63% for processed pork, while Europe provides 62% of Japan’s frozen pork.

While Europe isn’t a major beef exporter, it will get the same 15-year tariff reduction to 9% from 38.5% that was part of TPP. The EU will also be exempt from measures like the temporary 50% tariff that is being imposed on American frozen beef until the end of March. High-end EU beef producers could horn in on the market for USDA prime steaks.

European vintners will savor the elimination of Japan’s 15% tax on imported alcohol as soon as the agreement goes into effect. Also blessed are the cheesemakers, who will see a 30% duty disappear. The EU expects its processed-foods exports to Japan to increase in value by 170% to 180%. That will be sour grapes for Californian wineries and hard cheese luck for Midwestern dairy farmers.

Japan imposes no tariff on imported cars, but American carmakers have long complained that nontariff barriers stop the Watanabes from buying Detroit vehicles. Tokyo has pledged to reduce such roadblocks for European-made autos. The EU-South Korea trade deal that went into effect in 2011 included similar provisions, and European exports to Korea tripled in the following four years.

In return for Japan’s opening, Europe has agreed to zero out its 10% tariff on cars and 3% duty on car parts. The Japanese auto industry, which sends about 13% of its exports to Europe, sees opportunities to expand in a massive market. American carmakers were lobbying for similar treatment, but U.S.-EU trade talks have stalled and the Trump Administration seems happy to let them die.

Tariff reductions are important, but safety requirements and other regulations can pose a larger obstacle to trade. The EU-Japan deal promises to harmonize these rules for food, vehicles, drugs and medical devices. This threatens to leave American firms at a significant competitive disadvantage.

BTW, Canada also just signed a trade pact with the E.U.

Canada: Mr Poloz’s nightmare before Christmas

Mr. Poloz shared with a Toronto audience last week that youth underemployment was one of three slow-moving nagging issues that keep him awake at night. The BoC governor is apparently losing sleep over the fact that the participation rate of people aged 15-24 is only around 64%, the lowest in almost 20 years.

That’s one nightmare we cannot interpret. If Mr. Poloz is indeed having bad dreams about youth underemployment, than he probably consider Mrs. Yellen to be one of the world’s most reckless central bankers for hiking rates in spite of the extremely low youth participation rate in that country (a whopping 8 percentage points below Canada’s).

Yet, Mr. Poloz continues to claim that that the U.S. is closer to full employment than Canada! What’s more, our analysis reveals that the decline in youth participation in Canada since 2007 is exclusively driven by students (mostly those aged 15-19). For non-students, the participation rate has remained unchanged at around 87%.What’s wrong with having a bigger proportion of youth attending school?

Two decades ago, only 32% of Canadians aged 25-34 had post-secondary education. The proportion now stands at almost 62%, the highest in the OECD and about 15 percentage points above that in the U.S. The more educated the population is, the more likely workers are to remain employed as they move into prime age (25-54).

As today’s Hot Charts show, that’s exactly what’s happening in Canada. Nightmares notwithstanding, eventually reality will catch up with you. There are no compelling arguments for keeping real interest rates negative in Canada at this time. Incoming data (GDP, CPI inflation, Employment/wages and the BoC business outlook survey) may still convince the Bank of Canada to hike on January 17, 2018. (Stephane Marion, NBF)