THE DAILY EDGE (27 April 2017): Tax Cuts!?

Trump’s Tax Cuts Face Narrow Path Through Congress President Trump’s tax proposal calls for deep reductions in business tax rates and major changes to the individual tax system. But the plan faces a narrow path to victory through Congress.

(…) What the administration delivered Wednesday largely hews to tax-cut proposals Mr. Trump made during his campaign last year, but includes some crucial changes. Most notably, he is proposing to repeal a provision of the tax code that allows individuals to deduct the state and local taxes they pay from their reportable income. That will hurt residents of high-tax states such as Mr. Trump’s home state of New York, New Jersey and California, and is already spurring objections from Republican lawmakers in those largely Democratic states.

Such a repeal has the potential to raise more than $1 trillion over a decade, which would help fund the reduction in rates and get the tax plan through Congress, which is focused on deficits in part because of budget rules. (…)

Unless Mr. Trump can attract votes from Democrats—which appears unlikely—the plan must comply with legislative procedures that allow for a party-line vote in the Senate, where Republicans have 52 seats out of 100.

The key to those procedures: Any tax plan can’t increase budget deficits beyond a 10-year period. The Committee for a Responsible Federal Budget said Wednesday that the plan would cost about $5.5 trillion in lost revenue over a decade. Those limitations could lead Republicans to make some or all of the tax cuts temporary to limit the long-run fiscal effect.

Mr. Trump’s team intends to argue that his tax cuts will spur economic growth and increase revenue, which would help avert increased deficits. Lawmakers and Congress’s nonpartisan tax policy scorekeepers—the Joint Committee on Taxation—need to agree for the plan to proceed. Independent experts cautioned that the administration’s growth assumptions appear optimistic. (…)

Mr. Trump’s plan leaves several crucial issues unresolved. They include how to treat business deductions for capital expenses; what happens to personal exemptions; how to tax the earnings of U.S. companies stockpiled overseas; how a break for child care would be structured; and where the tax brackets for individuals would be set.

Because of those omissions, it is difficult, if not impossible, to calculate the exact fiscal impact of the plan and how it would affect individual households. (…)

Cutting the pass-through tax rate to 15% while keeping top tax rates above 30% could put firms in the unusual position of having firm owners, such as law-firm partners and hedge-fund owners, paying much lower tax rates than their own employees. Averting such distortions would require complex new rules in the tax code. (…)

Mr. Mnuchin said key pieces of the business tax plan were still being worked out. The House GOP plan repeals the deductibility of interest and allows business to write off capital expenses immediately. Mr. Mnuchin said the administration favored some form of immediate write-off but didn’t commit to any details. He also said the administration knew that some industries, including real estate and utilities, were concerned about losing the interest deduction.

“We do think some level of expensing is important,” he said. “We’re sensitive to that certain industries are very sensitive to interest deductibility, and we want to make sure that we don’t do anything that creates uncertainty in the economy.”

• Trump’s Corporate Tax Rewrite Faces Major Obstacle: Its Cost

• Trump Tax Cut: Pro-Business Or Pro-Scams? Critics said measure creates an incentive to minimize compensation as a way of avoiding higher income and payroll taxes

(…) More than half of all business income is now earned by pass-through entities, which have surged in popularity in recent decades.

Of all pass-through income, more than half is earned by top-bracket taxpayers, according to estimates by the Tax Policy Center in Washington. The top brackets begin at $470,700 for married couples filing jointly and $418,400 for singles.

Under current law, pass-through owners have little income-tax incentive to distinguish between business income and compensation, although some have tried to minimize compensation in order to lower Medicare and Social Security taxes.

If this proposal becomes law, owners will likely try to reduce their compensation in order to save income taxes as well, says Troy Lewis, a certified public accountant in Draper, Utah, who advises wealthy clients. “People try to structure their affairs to achieve lower rates.”

For example, say a pass-through owner has $200,000 of net income currently taxed at the top 39.6% marginal rate. Under the proposal, the part that is compensation would be taxed at a 35% rate, and the portion that is business income would be taxed at a 15% rate.

So taking wages of $50,000 instead of $150,000 could save $20,000 in income taxes, plus any additional payroll-tax savings. While there are laws defining “reasonable” compensation, they are cumbersome for the IRS to enforce because each case is different.

It is still unclear whether the proposal would apply to self-employed workers and how much wealthy owners of hedge funds and private-equity firms would benefit, if at all.

Gregg Polsky, a tax-law professor at the University of Georgia, said the proposal wouldn’t immediately affect private-equity partners because much of their income is taxed already at lower capital-gains rates. On the other hand, he said, they could restructure arrangements to benefit from the lower 15% rate.

One adviser to hedge funds, Michael Laveman of accounting firm EisnerAmper LLP, said the proposal would act as a tax cut for hedge-fund owners who share management fee income. Management fees, he said, are typically taxed at the current top 39.6% rate.

Mr. Laveman’s own firm, also a partnership, would be among the beneficiaries. “I’m trying not to tell my wife about the huge tax break we are about to get,” he said.

Trump’s Tax Principles A pro-growth outline that focuses on weak capital investment.

From the WSJ editorial:

(…) Slashing the headline rate to 15% would instantly lead to a surge in capital investment. Mr. Trump would make small businesses like S corporations and other pass-throughs that now pay through the individual tax code eligible for the 15% rate. Tax parity among all companies is a useful goal, not least because owner-operated companies are an engine of hiring and growth.

Increasing the capital stock will raise productivity. The economic literature conservatively suggests that about half of the corporate tax burden is carried by workers in the form of lower wages. In other words, moving to 15% is a national pay raise. (…)

This 20-year chart from Ed Yardeni shows how tightly knit normally are capex and profits. What happened in 2014-16? The 75% collapse in oil prices which forced energy companies to severely cut expenditures.

• People Appear More in Need of Tax Break Than Corporations (BloombergBriefs)

From the NYT editorial:

President Trump’s Laughable Plan to Cut His Own Taxes

(…) As to the rationale offered up by Mr. Mnuchin and Mr. Cohn, even many conservative economists believe that the argument that tax cuts will pay for themselves, by increasing investment and creating jobs, is the same supply-side fantasy that has repeatedly been proved wrong. This durable nonsense would instead add mightily to a federal debt that Americans will be paying off for generations to come. (…)

In addition to lowering the top individual income tax rate to 35 percent, Mr. Trump would do away with the alternative minimum tax, which accounted for a vast majority of the taxes he paid in 2005, according to his leaked tax return from that year, and is one way of making sure that most well-off Americans pay a significant tax on ordinary income. He would also get rid of the estate tax, benefiting mainly wealthy families like his. (…)

From Bloomberg:

• Trump’s Misguided Approach to Tax Reform

• Trump’s Tax Plan Could Be Painful for New York, New Jersey, and California

From the FT:

• The unanswered questions in Trump’s tax plan Among the biggest holes is how the proposed cuts would be paid for

(…) The Committee for a Responsible Federal Budget estimated that over a 10-year period the proposals would lead to a loss of anywhere from $3tn to $7tn depending on how the details pan out. Among the most costly proposals is the corporate tax cut, which loses $2.2tn, the reduction in the tax rate on pass-through entities (that is, businesses that pass earnings to their owners as individuals), the doubling of the standard deduction, and the changes to the rates of individual income tax.

The plan’s defenders would argue this ignores the so-called dynamic effect of easing taxes — namely higher growth, which generates revenue. This is something Mr Mnuchin has repeatedly stressed, as he claims that his tax cuts would pay for themselves. However, the dynamic revenue score that matters most is the one produced by the Joint Committee on Taxation, a congressional watchdog that will run the numbers on whatever emerges from Congress. This uses highly conservative assumptions that will not show a big revenue fillip from higher growth.  

The administration’s brief tax document was cooked up in short order after Mr Trump ordered his team to energise tax reform by putting forward a road map. One of the key questions now is how the proposals mesh with an existing plan from Mr Ryan, which aims to be revenue-neutral.  Mr Ryan put a positive gloss on the proposals on Wednesday, saying the package was “along exactly the same lines that we want to go”, while Mr Mnuchin said the administration was on the same page as Republican leaders. (…)

Presidential leadership is seen as essential for tax reform to happen. It heralds an intensifying round of meetings between the administration and tax writers in Congress. If there is progress on healthcare reform — as appeared to be the case on Wednesday — it could further enhance the prospects of a tax bill eventually materialising.

• US tax reform: scrap yard President Trump is offering mostly red meat

(…) This fits Trump’s America first agenda. Many beneficiaries are wealthy individuals with US-based employees, not the multinationals that benefit from a pure corporate tax cut. It is also sweet for lawyers, who can set up more such structures. Steven Mnuchin, Treasury secretary, argues that increased economic growth arising from the changes will bolster tax receipts. That is generous. (…) The message is clear from the administration: fiscal responsibility is taking a back seat. And it thinks plenty will still want to come along for the ride.

• Still Confused About Trump’s 1-Page Tax Plan? Goldman Explains It All

David Rosenberg:

Trump Drops Nafta Pullout Threat The Trump administration said it was no longer considering pulling out of Nafta, following a day of intense lobbying from business leaders and lawmakers who rallied to quash internal White House discussion of the possibility.

Trump Administration Launches Probe of Aluminum Imports The Trump administration has launched a wide-ranging probe of aluminum imports and producers in Canada and China—by far the biggest aluminum exporters to the U.S.—could face the biggest impact from any tariffs coming out of the case.

EARNINGS WATCH

• 205 companies (43.4% of the S&P 500’s market cap) have reported. Earnings are beating by 5.6%, with 75% of companies surpassing bottom-line estimates. Revenues are surprising by 0.8%.
• Expectations are for revenue, earnings, and EPS growth of 6.9%, 10.4%, and 12.3%, respectively.
• EPS is on pace for 15.5%, assuming a typical beat rate for the remainder of the season.

Impressive, and really needed given this from Frank Holmes

OMINOUS SIGNS

My on going tab on signs we have finally gone full circle:

• Charles Schwab Profit Rises as New Accounts Surge

(…) New retail brokerage accounts tallied 235,000 during the quarter, up 44%. (…)

• Personal anecdote: a 53 year old door installer was watching his stock ptf. on his cell phone while doing work at my house this week…In fact, he asked us for access to our wi-fi network, not being able to get his own unlimited cell phone plan…
• Heard on NPR, a one hour “show” (between 4 and 5 pm) on on-line trading and how day-trading and/or “swing-trading” can “easily” take you to financial independence, whether markets go up, down or sideways. That “show” is really a one-hour advertising for OnlineTrading Academy which claims that “You don’t have to work on
  Wall Street to make money like Wall Street.”