Showing posts with label Economic policy of Donald Trump. Show all posts
Showing posts with label Economic policy of Donald Trump. Show all posts

Monday, December 25, 2017

As Good As It Gets?

Authored by Sven Henrich via NorthmanTrader.com,


So they got their tax cut done. In the middle of the night again no less, despite the vast majority of the American people not wanting it. The reason may simply be that the American public is not believing the false narratives that are being sold to them. And who can blame them? It starts at the top after all. When Donald Trump claims the tax plan would personally hurt him everyone knows that’s simply not true. And still his agents insists on defending the lie by lying some more.


So I had to ask, does truth still matter:



The answer may not reveal itself for months to come.


US cooperations will see benefits to GAAP earnings and they will increase dividends and buybacks. All true. But they will not hire more or pay more. We already know this:




And since none of these things have to do with organic business growth corporations will eventually face a situation where in the following years an unfavorable comparison will emerge as the artificial earnings benefits are priced in and then earnings growth will look to drag in comparison as the organic growth won’t make up for the artificial delta. Ironically then pressure for efficiency improvements will arise and companies will rightsize in the name of efficiency gains to make up the difference, i.e. layoffs. So ironically corporate tax cuts in the long term will do the opposite of what they were advertised to do. One can virtually see it coming. But hey. Party away.


Fact is the tax cuts will not pay for themselves and deficits will be gigantic and the US treasury is already set to sell $1.3 trillion in debt next year alone.


My general premise is that deficits will further explode once the economy slows as the tax base will have shrunk. Paul Ryan is already on the record wanting to cut social security and medicare benefits. And the AARP knows who will get hurt:



Short term gain, long term pain, but the architects of this construct will be long gone enjoying their gains.


It’s been said that bull markets end on good news and in this regard this may be as good as it gets.


2017 will go down in history as a year where markets got everything beyond their wildest imagination:


The most liquidity injections by central banks ever. (Over $2 trillion). The loosest financial conditions in cycle history:



A Fed that promised a reduction in its balance sheet but actually only delivered noise:



In addition markets got to enjoy solid earnings growth coming from weakness in the years before. Never mind that most of the price expansion was multiple expansion related:



Other factors favoring asset prices: Negative interest rates across the globe continued to force money into high risk assets (“pushing people“). Central banks such as the SNB kept buying billions of dollars of US stocks. Record inflows of passive ETF inflows chasing returns they can’t find elsewhere. The elimination of organic sellers as part of a normally functioning market place. Buybacks, while not at a record pace, still continuing with billions upon billions of dollars allocated to reduce the float of shares. None of it related to organic growth.


And hence the disconnect of asset valuations from the underlying economy is now larger than during previous market peaks:



My summation here: Things will never be better for bulls. The supply demand equation will never be tilted so uniformly in one direction as they are now.


The combined effect of what I summarized above has produced massive multiple expansion and the end of any corrective activity in markets accompanied by record volatility compression:



The elimination of any price discovery. And what this chart above shows in the macro we see in the daily price action every day: Gaps, ramps & camps with virtually no price discovery in between:



Every day:



This is hubris. It’s not rooted in an economic growth base to back up the valuation growth presumed going forward. And the technical dislocation is not sustainable and I maintain all these gaps will fill into 2018.


Has it gone farther than we expected? Sure. Once you remove sellers from a market who knows where it ends up.


After all we find ourselves in an environment where companies can reach $10 billion market caps in the blink of an eye based on absolutely nothing.


The very definition of a mania.


So when I asked the other day whether we are sitting on a generational opportunity to sell equities I meant this not as a facetious question. Now granted I can’t say whether we top here, today or next year.


After all we now have a president literally promising higher stock prices on twitter:



Stock prices are now a matter of national security. The Fed views a sudden decline in asset prices as a threat to the economy and the president sees stock market levels, the poster child of widening wealth inequality in the population, as a benchmark of his presidency:



What hasn’t been priced in: Less looser financial conditions, less central bank liquidity, no more tax cut carrot. But perhaps more importantly? How sensitive will the consumer be to higher rates? I asked this question in Riddle me this.


Fact is consumers keep piling into debt while rates are rising:




And with rising rates come higher interest payments:



I trust you see the math problem there. Indeed the majority of Americans may find that the tax cut crumbs coming their way may go toward servicing their debt:



Perhaps that’s ok if unemployment stays low forever:



The unemployment chart however suggests that this is as good as it gets.









Monday, December 4, 2017

Trump Tax Plan Greatest Gift Establishment Ever Got

The following article by David Haggith was published on The Great Recession Blog:


Trump tax plan trumps the middle class

As soon as President Trump put his Goldman boys, Gary Cohn and Steven Mnuchin, in charge of his tax plan, I knew Trump’s tax plan would never fulfill his and his henchmen’s promises of helping the middle class and of not giving additional tax breaks to the rich. The Trump Tax plan, as it now exists, proves those conjoined promises to be the greatest lie Trump ever told.


After two decades with Goldman Sachs, Munchkin (as he shall hereinafter be known for he lives on the Goldman-bricked road) bought his own bank, IndyMac. He renamed it OneWest and turned it into a mega repo machine in 2009, whirring out hyuuge amounts of crash cash during the Great Recession. His revamped bank set a speed record for putting homeowners out on the street, foreclosing one home every thirty seconds. A vice president of OneWest even admitted in court she shortened her signature so that she could spend less than thirty seconds processing each foreclosure. As a result of this rush to foreclose, the court found the bank had frequently mishandled documents because it did not even read many of them before foreclosing.


Munchkin’s grim reaper of a bank closed its greedy grip on a whopping 35,000 homes during the Great Recession. The bank was even so unscrupulous as to instruct homeowners to stop making payments, ostensibly because it was going to modify the loans, but in reality in order to purify its argument for repossession. (For more on the Munchkin’s greed, read “U.S. Treasury Becomes a Laughing Stock.”)


Cohn, meanwhile, was president and COO of Goldman Sachs during the years when the Goldman squid monstrously raped its own clients by encouraging them to make investments that it bet its own money against. Cohn claimed in his own testimony that never happened, and his defense consisted of arguing that his company lost money during the Great Recession, so this couldn’t be true … as if a complex company with many areas of business couldn’t lose money overall during a crisis while making money in one area of business where it bet against its own advice to its clients. (See WSJ: “Gary Cohn Testimony: Goldman Didn’t Bet Against Clients.”


The senate subcommittee Cohn was speaking to on the matter disagreed in its own conclusion:


 


“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis. They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.” (The Independent: “Goldman ‘bet against securities it sold to clients"”)



 


The SEC ultimately fined Goldman half a billion dollars for its dishonesty, and Goldman conceded to its dishonesty. (See “Goldman Sachs and The ABACUS Deal.”)


By placing these financial weasels in full charge of creating his tax plan, Trump proved to my satisfaction that he never intended to serve the middle class. Some people, however, did not accept my claims putting the worst swamp creatures in charge of his signature campaign pledge did not prove Trump would prove to be a Trojan horse for the establishment. Now that we have seen both Senate and House versions of the plan, however, the proof is in the pudding (the sloppy mess that envelops Trump’s tax plan).


The Trump tax plan, in either of its current conceptions, will be the worst thing that ever happened to America, even though it will certainly boost stocks, and I’ll tell you why below. Still, many will refuse to see the truth and will be addled in their evaluations down the road by the fact that the plan did kick the stock market into even higher gear.


 


Trump tax plan is a loophole haven for the richest of the rich


 


One of the biggest promises of tax reform was that it would, in Trump parlance, hyuugelysimplify the tax code by eliminating loopholes. This loophole elimination would make sure that any reduction in the upper tax bracket for the rich did not create additional tax savings for the top one percent so that, this time around, tax revision would benefit the middle class.


Contrary to the Goldman boys’ promises, both the senate and house versions of the Trump tax plan create the most massive tax cuts the rich have ever received because they leave most of the loopholes in place. Even President Reagan’s tax designer, David Stockman, calls the Trump tax plan “a wish list of … Wall Street.” Why wouldn’t it be when it was designed by Wall Street moguls whose snaky mouths revealed a forked tongue at their corner whenever they smiled and promised their plans would not include tax cuts for the rich?


This tax plan, in either incarnation, is the Christmas Wish Book for Wall Street, and it is built on total economic denial about the rampant deficits it will create as far as the eye can see.


The biggest loophole of all, the one loved by hedge-fund managers, lawyers and stock brokers, is left firmly in place. The House bill preserves for its wealthiest cronies on Wall Street the carried-interest tax loophole for private-equity managers, venture capitalists, hedge-fund managers and certain real estate investors … like Trump. Trump and Cohn specifically stated they were committed to ending this special provision that helps hedge-fund managers, but this grand loophole they bedeviled during the campaign is still there. (So, watch carefully to see how loudly they argue for its removal now that we can all see it remains firmly in place.)


 


The plan, as it stands in the Senate, allows “pass-through” businesses …. to deduct 22 percent of their income before paying taxes, up to a certain limit. In the House, it allows those pass-throughs to pay taxes at a special low rate. The pool of pass-through businesses includes any number of cookie shops and bodegas and corner stores, but also law firms, hedge funds, consulting firms, real-estate development companies, investment partnerships, and lobbying businesses. An estimated 70 percent of the benefits for such pass-through firms go to the top 1 percent of income earners—meaning this benefit is more about helping rich families than it is about helping small local businesses.


 

Moreover, such changes to the way pass-through businesses are taxed complicate the code and create a preferential category for rich individuals to try to work their income into…. The new provisions have “the potential to become the single greatest inducement to tax arbitrage ever enacted by a single Congress,” the tax expert Daniel Shaviro of New York University Law School has written, also saying that they “might end up being the single worst structural change in the history of the U.S. federal income tax.” (The Atlantic)



 


“After I saw that tax bill, I lost hope with the drain the swamp concept,” Gundlach said. “The swamp keeps getting bigger.” (NewsMax)



 


Swamp wins all in this plan. In either of its currently approved forms, the Trump tax plan trumps the middle class for decades to come!


 


Capital gains tax cuts preserved in Trump tax plan


 


If President Trump’s tax plan was intended to help the middle class, the first thing it would do is finally end the one tax provision that has created the biggest income disparity in history between the top ten percent of tax payers and all the rest of us. It would eliminate the special capital-gains tax break that has built real-estate bubbles and stock bubbles but done nothing to create jobs for the middle class in spite of endless promises that it will — promises that are now believed by blue-collar Republicans at the level of religious dogma.


While the new plans offer no additional capital-gains tax reduction for the rich, they keep this now sacred loophole locked in place. Republicans and Democrats wouldn’t dare talk about further reductions in this area because that would risk putting this special rate that has served the one percent so well at risk by putting it back into the discussion. Best to be happy with the massive gains the rich have already secured in this area and focus on opening entirely new areas of gains for the rich rather than to bring this up for discussion again.


I’m bringing it up precisely because they don’t.


Recently I’ve listened to Rush Limbaugh (because I listen to broadcasters on all sides) repeat and re-repreat his oft’ told lie that the rich are already taxed more than the middle class because the rich — say the top twenty percent — pay more in income tax than the entire eighty percent beneath them. It’s a lie in the form of a half truth. Rush and others like him fully know this; but you will never hear them tell the remainder of the truth. The lie turns on your natural assumption when you hear the truth that 20% of the people are paying 80% of the income taxes — that the rich are clearly doing the lion’s share of the pulling.


Limbaugh and other establishment shills make it sound like the rich are incredibly generous but that only works because the real truth is so incredible — so obscene — that it never occurs to people. The untold half of this truth is that this 20% are making more than 80% of all the income in the US. So, if they were even paying an equal share, they would be paying more than eighty percent of all the income taxes in the US. (Limbaugh even as the audacity to rebrand himself as being anti-establishment as he repeats this old canard and supports Trump.)


Here’s the catch with the special capital-gains tax rate that has been enshrined in the tax code for decades: the rich do not make most of their money off of salaries! They make it off of their stock options in the companies they manage and other stock investments, and off of trading bonds and buying and selling real estate, football teams and art. All of the profit from those activities is taxed as capital gains, and if you hold those investments for longer than a year, income from those investments is all taxed at a rate that is insanely lower than the middle class income tax rates! The rich pay only 15%! (Only the top one percenters pay the slightly higher cap-gains tax rate of 20%, which is till lower than the tax rates paid on ordinary income by most of the middle class.)


Tell me that the privileged capital gains tax rate is not a tax savings that is almost exclusively for the richest of the very rich! Believe it not, 56% of the benefit of privileged lower tax rates on capital gains goes to the top 0.1% of the US population! Yes, you heard that right: not the top ten percent, not the top one percent, but just one-tenth of the top one percent receive 56% of ALL the tax savings realized by the nation’s preferred lower tax rate on capital gains!


That’s why this privileged loophole isn’t being talked about by anyone. It’s already the single-largest reason the rich pay far less than their fair share in taxes, and it is the single-greatest reason for the wealth disparity that has grown so wide in the US since the Reagan years. The form of money making that the rich use gets taxed at a much lower rate than your form of money making. That’s the dirty little secret that hides in plain sight.


The fact that the richest people do not make their money off of wages and salaries explains why Donald Trump could not care less about getting paid a salary to be president. His willingness to forego a presidential salary was pure showboating because even a presidential salary is chump change compared to how much money the Donald will make from becoming president if his new tax cuts become law (and how much he already saves by this preferential rate on his gains from real-estate investments which is new tax plan preserves for him and his kind). What Trump’s tax plan does is continue to enshrine for years to come the disproportionately beneficial tax treatment the rich already receive for their primary source of income.


Yet, the middle class majority happily allows the rich this filthy special privilege on their kind of income. They are beguiled by the current top income-tax rate of 39.6%, which is nothing but smoke and mirrors, to believe the rich are paying higher taxes. In truth, the rich rarely even pay that higher rate on their ordinary income due to loopholes, but ordinary income is by far the SMALLEST source of their personal income. That high tax rate is simply there to complete the illusion so the middle masses will continue to believe the rich are already doing more than their fair share. It enables Rush and others to say, “Look, the Rich are already paying more than their fair share.”


The establishment Republican’s argument for this privileged from of income in the tax code has always been that a lower cap-gains tax rate creates jobs. Really? Do you suppose that people getting capital-gains tax breaks are spending their savings building new factories, as Ronald Reagan promised they would when he first trotted out voodoo economics?


Of course, they are not. Why on earth would they? They use the money to buy more stock in companies that already exist, bidding up the stock market because that is the low-hanging fruit. Why would anyone build a factory in the US or any other kind of business that creates jobs with their tax savings when the deferred profit from that factory would all have to be taxed as ordinary income? Why would you try to reinvest your tax savings in a area where your next profits will be taxed at a much higher rate? That’s insane. Why wouldn’t you, instead, invest in more stocks where the future gains on your re-investment will all be taxed at the preferred cap-gains tax rate you just enjoyed? The concept that the rich would ever invest in new factories is ludicrous just from a simple tax principle.


Show me the thousands of new factories created across America since we started down this road under Reagan. Show me how the middle class has seen its income grow. Show me how much middle-class benefits have grown during our decades of lower capital-gains tax rates. Show me how the continuance of these low rates kept us out of economic crashes in the intervening years by providing sustained economic growth from Reagan to now. (A privileged rate has been in play that long, but we’ve had plenty of busts during that time.) Show how in any manner the middle class is better off today — more robust — because of this huge tax gift to the so-called “job creators.”


Even if you assume the rich are too dumb to reinvest the money they save back into stocks where they can continue to benefit from a much lower tax rate, why would they invest in building new factories with all the liabilities and legal and political obstacles involved in building a factory? Why would you take on the huge risk of a new venture when you can just invest in a going concern? It’s ludicrous to think that is where this tax savings goes.


So, why on earth do blue-collar Republicans continue to believe it is only fair to give the richest of all Americans a MUCH LOWER tax rate on the largest portion of their income than the middle class pays? (I put it in caps and underline it to scream it out because for decades people keep believing the nonsense that the rich establishment feeds them, and Democrats really do nothing to stop it because they serve the same establishment.)


Why? Because of the pure fantasy that someday they will be there. When their ship finally comes in, they don’t want it taxed away. It’s a lottery mentality. As in any lottery or casino, the jackpot almost never comes, but it hits just often enough to keep the fantasy afloat.


Follow the money. Where has the tax savings really gone? It was used to bid up the price of ball teams, to bid up the stock market, to bid up the real-estate market, to buy bigger yachts and more lavish mansions and bigger car collections and art collections. That’s why most of those things have appreciated extravagantly while the middle class has shrunk.


The savings are thoroughly locked up in assets that will be passed along (mostly untaxed) to the wealthiest of children, who will either piss it all away or, in rare cases, continue to build up daddy’s dynasty … not by creating jobs, just by hoarding more assets.


Disgustingly, there is one exception to the Republicans’ choice not to tangle with capital-gains tax breaks under the new Trump tax plan. In the one area of capital gains that helps the average person the most — the elimination of all capital-gains tax on the first $250,000 in gains on the sale of one’s personal residence ($500k per couple) — Republicans want to make that exemption harder for the average person to get. They are now raising the number of years one must have resided in their personal residence from two years to five. It must have bothered members of congress to see that this tax exemption helped the average person disproportionately compared to the rich for whom the first $250,000 would be a small part of their total gains on the sale of their mansions. They also want to remove the tax loss you can claim if your house burns to the ground.


 


Trump tax plan completely eliminates the estate tax


 


Trump and his good ol’ Goldman boys score a victory that inures purely to the top one percent with this one, which means the beneficiaries include Trump. This gift goes only to the rich because the federal inheritance tax already includes an exemption for the first $5.49 million of any estate PER HEIR. (i.e., an $11 million exemption per married couple, even though — with the exception of the deepest backwoods swampy parts of the south — only one person in any couple is an actual heir by blood.


The estate tax has already been whittled down by Bush and others over the years to where only 0.2% of the estates in the US ever pay any estate/inheritance tax. In it’s already reduced form, the estate tax is a tax that only hits the dynasties of the wealthiest of all Americans, but the effective tax (already much lower than it used to be) can range as high as 40% of the estate. (Because of the massive exclusion, no estate ever pays anything near the rate of 50% that you hear people talk about.) The average windfall for the top 0.2% from the elimination of this tax will be about $3 million PER HEIR. For the crème de la crème, however, the tax savings is $20 million per heir and higher.


Those who love to feed the rich on a silver spoon call this a “death tax,” even though no one who dies in America pays this tax. It is only the very richest of wealthy heirs who continue living who pay this tax on the gift they receive from daddy’s dynasty.


Now you can see why Donald Trump, in his eighties, is willing to work the presidency for just $1 per year. When you are the Donald’s age and have so much time and ego tied up in establishing vast real-estate holdings, your greatest concern is preserving the empire you have worked your life to build and that displays your ego, especially when your name is written all over it. Handing down the dynasty into which you were born and which you further developed is your last great ego accomplishment, and the complete repeal of the estate tax will assure that all of the Donald’s wealthy children inherit the entire empire unbroken, completely tax free.


Trump’s nemesis, The New York Times, calculates this revision in the tax code will save Trump’s heirs over a billion dollars, making this one reform the greatest Christmas gift the Donald could give those who will remain as an extension of his ego when he passes on. This tax savings clearly does nothing to create jobs. It merely assures that the family mansions remain occupied by the progeny of the Great One.


The original idea of the estate tax was to plow these tycoon estates back into the common ground so they don’t keep building up as ever-expanding empires for generations to come. Those who feel sorry for the top 1% should be in favor of this tax break. This one serves only to make sure the families of the banksters of Wall Street keep their ill-gotten gains. At best for all the rest, it may assure we retain a handful of jobs as gardeners, butlers, and maids to warm their milk and tie their ties.


If you believe the nonsense that repeal of the estate tax will save some family farms, ranches and small businesses, forget it. Only about 80 small businesses and family farms in the entire United States would pay any estate tax in 2017 under current law, and most of those would pay very little because of the large exemption. It is estimated that those 80 farms and businesses that get taxed as estates in any year pay less than 6% of the estate’s value in inheritance tax.


Some will say that it is unfair to go after the rich, but consider how many of them are banksters who made their wealth in unscrupulous manner and who were bailed out by you when they broke their banks. This tax is a final way to claw back those unscrupulous gains after you’ve allowed the banksters to enjoy them to the end of their lives. If fact, I think it is a fairly safe bet that most of the 1% have only climbed to that rarified height by employing some fairly unscrupulous tactics. (Not all; just most. Call me jaded.)


If the Donald really cared about the middle class, he’d eliminate of the manifold loopholes (such as grantor retained annuity trusts) that the rich use to dodge estate taxes altogether. Most large estates would have sufficient liquid assets to cover the tax, and existing law allows payments to be made at little interest over a period of fifteen years. (Remember, that estates often have large sources of income they can use to make these payments without having to sell off assets.)


Of course, the assets of major estates like the Donald’s — whether tied up in buildings or stocks or art — is wealth that has appreciated during the many years those assets were held, which means the rich have not paid any capital-gains tax on that added wealth before passing the gain down to their children. It is entirely untaxed wealth accumulation (if there is no estate tax) that gets passed along and continues to build tax free until the asset is finally sold.


That is one of the big reasons estate tax was created in 1916 — to stop this pass through of completely untaxed gains by people like the Rockerfellers and Vanderbilts, who owned vast amounts of stock in their own corporations. Wouldn’t it be ghastly if the top one percent of rich kids had to work for their money, instead of just inherit it all tax-free after it has gained in value for decades?


Given the minuscule number of people who will benefit from this Trump revision, you might think elimination of the estate tax does not amount to enough government revenue being lost to even be worth contemplating. But think again: current estate taxes, reduced as they already are, provide enough revenue each year to fund the entire Food and Drug Administration and the Centers for Disease and Prevention and the EPA. O.K. so you’re one who hates the EPA. No problem, just substitute in the National Parks Service or some branch of government that you somewhat like.


You start talking about a billion dollars here and a billion dollars there, and pretty soon you’re talking about real money.


 


Trump tax plan cuts corporate income tax from 35% to 20%


 


I’m not opposed to eliminating corporate income tax on the basis that it is double taxation. (First, you tax the profits of the corporation as a corporation. Then you distribute the remainder of those profits to the stockholders and tax them again as personal income.) I also see that corporations are job-producing economic giants, so I can see an argument that says, “Let’s not suck all the fuel out of our economic engines. Tax it when it only when becomes personal income.”


HOWEVER, and it is a BIG “however” that must be writ large, that is not what will happen with this huge corporate tax cut. If Trump and his sly Goldman boys wanted to do that, their corporate tax cuts would come with restrictions that make certain the money is used for job creation. The problem I have with this huge new tax break is that it comes with no such provisions.


Here is what will really happen with almost all of that money, and we know if for a fact because of years of experience: stockholders have established a clear pattern in this country of making themselves rich through stock buybacks, which do nothing whatsoever to grow the business or to create jobs. That is what will happen with nearly all of these tax savings. Now that central banks are promising to suck money out of the system, which has fueled stock buybacks up to the present, the Trump Rescue team is coming in with a HYUUGE new source of money.


Corporate boards will spend their newfound tax savings either buying up other corporations and consolidating (which always kills jobs; it never creates jobs) or spend it on stock buybacks and dividends to shareholders. Here again, the top ten percent of the population benefit disproportionately over the rest of the populace.


Stock buybacks do two things simultaneously that directly benefit the rich board members who who are the ones who vote to do the buybacks: 1) they reduce the supply of shares on the market, bringing up the value of each remaining share; 2) they create a huge buyer (the corporation) that is more than willing to buy the board members’ own stocks at any escalating price in order to keep pushing the price up.


The Dom Perignon corks will be popping all over Wall Street if this one becomes law as it is the biggest boost the establishment has seen since capital-gains tax breaks were introduced. It’s a whole new realm for growth in income disparity.


Now, if Trump ever intended to help the middle class or Cohn and Munchkin ever intended to live up to their promises that there would be no tax cuts for the rich, then this tax cut would come with the clear restriction that no company benefiting from the lower corporate tax rate could engage in stock buybacks or use it to boost dividends. I’ll bet you haven’t heard ANY talk about that, and you never will because it was always Trump’s, Cohn’s, and Munchkin’s intention to give the greatest tax break in history to the supremely rich and cover it by saying, “This is to help businesses build jobs.” No, if you wanted it to build jobs, you’d put provisions in the tax code that require all of this tax benefit to be spent doing exactly that! Then it would actually juice the overall economy and not just the stock market. Not there!


Ask yourself one question: Why would an American board of stockholders, infamously known as they are for focusing on short-term quarterly gains, choose to reinvest billions of dollars saved on corporate taxes into creating new US factories with all of the regulations, liabilities, employment issues, construction issues, etc. that are involved in such expansion when they can just buy back the company’s stocks, making their own shares worth 20% more every year with no effort and no liability and no wait for a return on investment?


There will be NO jobs created from this kind of corporate tax cut unless it comes with restrictions, which it won’t because job creation has never been the real concern. What willbe created, if some form of the Trump tax plan passes both houses, is more inflation in the speculation-driven stock market … and about a trillion dollars (some say much more) of additional federal debt to pay for this gift to the rich so they can continue to play in their casinos a little longer before the tops come down.


You now know that Republicans only talk like deficit hawks when they know they’re not the party that will be in charge of actually passing a budget. This year, when they finally control all branches of government, fiscal spending was higher than in any year in the history of the US government, other than 2009 when the stops were first pulled out to try to end the financial crisis. The deficit from their profligate spending this year was well over half a trillion dollars, and that was with the second-highest income-tax revenue in the history of the United States, which will be greatly reduced if some version of this plan makes it through both houses.


Surprise, surprise, Republicans are not truly deficit hawks at all! Their debt concerns were pure fraud. It was easy to sound like they cared about fiscal responsibility when they knew Democrats would be the ones deciding the budget. The Republican budget recently passed didn’t curb any of this spending, and the projected revenue increases of the present tax plans are based on dreams that were already disproven in the Reagan era, when even Reagan’s tax man has admitted the administration had to scramble to quickly raise taxes back up some because of the yawning debt that immediately opened up when revenue failed to grow due to tax cuts to the extent the administration had promised. These cuts go far beyond those, so the damage will be worse.


You might wonder how Republicans are managing to pass these huge deficits through the Senate while avoiding the filibuster. The answer is, they are scheduling all the individual tax breaks that bust the budget to end in 2025. In fact, people making less than $75,000 a year will see a tax increase by 2027. That allows tax revenue to go back up just as the new tax plan becomes ten years old, meeting the “reconciliation” process says there can be no filibuster unless a bill creates a greater deficit ten years down the road.


While there will still be massive deficits after 2027, even with the end of the middle-class tax breaks, the Republican choice to run a massive deficit this past year has enabled them to establish an easy deficit threshold to come back down to. While the individual tax breaks that slightly help the middle class end quickly, the corporate tax breaks and capital-gains breaks that primarily help the rich will continue forever.


 


Middle class bears the burdens of breaks for the rich under Trump’s tax plan


 


The middle class pays for these tax-breaks to the rich by having their mortgage interest deduction capped, as well as their property tax deduction and their deductions for state and local taxes. These caps or eliminations hit the fabulously wealthy, too, but the wealthy get all the new benefits to far more than compensate while the middle class does not.


A study by Congress’s nonpartisan Joint Committee on Taxation says the senate plan will raise taxes for 13.8 million moderate-income American households making between 75,000 a year and 200,000. After 2023, 22% of Americans will pay more in taxes (and none of those will be in the one-percent class).


While the Trump tax plan throws a little candy in the form of tax breaks for the middle class initially to smooth its passage, you get trumped bigly in the end.


Even with all this boost for the establishment, Trump was not satisfied with the tax benefits for the rich and asked that even the smoke-screen 39.6% top income-tax rate be brought down to 35%. Even the window dressing rate apparently appeared too hard on the rich.


Trump is such a good snake-oil salesman that he has actually managed to con the middle class into cheering him with slogans at rallies as he shafts them and their children to enrich himself and his children in the years to come. His legacy will be that his kids are much richer than they are now, and yours are not. Cheer him all you want, but that’s where this ends up.


Kept entirely out of the tax discussion are payroll taxes, such as Social Security and Medicare where the rich pay much less as a percentage of their total income because those taxes have low caps on them and do not apply at all to capital gains. The rich pay nothing on any income above a certain level.


Democrat or Republican politicians prefer not to talk about that. What they talk about, instead, is the need to someday cut the amount you are entitled to. (You are entitledbecause they promised when they took your money they would give it back to you as retirement, so it is YOUR money they have been holding in trust. You’re entitled to it, because they took it from you with a promise to give it back later.) Instead, of cutting back on what the middle class is entitled to (since it was all their money taken in trust), they should talk about removing the tax caps that protect the rich in order to end the entitlement problem. They won’t.


If Trump and Republicans wanted real tax reform, they would eliminate income tax entirely and replace it with a value-added tax (or better yet, a simple sales tax on the end consumer), which would allow them to end the tyranny of the IRS by cutting the agency’s size by 90%, as sales tax is such an easy tax to monitor and collect. THAT would be true reform. Instead, their much ballyhooed reforms still leave us with the most complicated tax system in the world!


 


If these tax plans are reconciled and approved in something near their current shape, there will be a lot of merry moguls this Christmas.


Trump"s Tax Cut - FDR Would Be Envious

Authored by Tom Luongo,


The first rule of politics is feather your own nest.  President Trump’s tax cut proposal always had this in mind.



Congress has passed a bill which tinkers at the edges but leaves most of Trump’s core proposal intact.  It’s obvious to me that Trump has the political acumen of another brilliant U.S. politician, the loathsome Franklin Delano Roosevelt.


Yeah, I’m not a fan of FDR.  But I do respect his political skill in the same way I respect the way sharks hunt their prey.


FDR repackaged Herbert Hoover’s Works Progress Administration as “The New Deal” which set him on a course of near perpetual re-election thanks to the wealth redistribution it engendered.


Am I saying the New Deal was nothing more than a vote-buying scheme?  Yeah, pretty much.  FDR knew that politicizing the Supreme Court and pushing the New Deal, even if he did it for the right reasons, would reshape the Federal election landscape for generations.


Trump’s tax plan will have similar effects.  And it’s why there was such staunch opposition to it in Congress.


Democratic leadership understand that the triple-whammy of eliminating the State and Local Tax exemption, lowering corporate tax rate to 20% and incentivizing the on-shoring of corporate profits held overseas will gut their support at the electoral college level.


Why?


Mr. Trump, Tear Down that Blue Wall!


The incentives are now aligned to accelerate the exodus of workers and businesses from high tax, high-regulation states like New York, New Jersey, Illinois and California to low-tax, lower regulation states like Florida, Georgia, Tennessee and Texas.


In other words the Blue Wall will crumble.


The bill is not 48 hours old and already the mainstream media is trying to tell us how horrible this is.  From CBS News via MSN.com comes a four-way case study of taxpayers under the new law, in three of their four case studies taxes drop significantly.  In one they try and scare old people about how their health insurance costs will rise.


But, in gutting Obamacare, everyone’s health care costs are going to fall, so….


In that one case, John and Maya their “Married Couple with Two Kids” become the “Married Couple with One Kid from New Jersey,” does the taxpayer get the shaft.


The whole article is a mess of gamesmanship.  A married couple with 1 kid making a combined $71,000 should not be living in a $600,000 house!


In New Jersey!


Putting 10% of their income into their 401k!


Do they eat dirt?


That version of John and Maya doesn’t exist.  And if they do, they shouldn’t. And the tax code should not be gamed to allow them to do so, because then it’s a tax subsidy from the self-employed to the fake middle class.


In fact, another benefit of this tax code will be the bursting of over-priced middle class real estate in high-tax states as John and Maya face financial reality.


In software parlance, that’s not a bug, it’s a feature.  It’s called political retribution.


In the current market John and Maya are better off selling their house, taking the equity, buying a nice house in a secondary market in Florida or Alabama and living mortgage free or nearly so while building new careers locally.


They could practically live on the child and EIC while working at Home Depot, thanks to 1) the increased exemptions for lower-income workers and 2) local construction will be booming.


Bringing Home the Bacon


Turning to the onshoring of corporate profits.  All of that capital returning from overseas to invest in infrastructure and production won’t go to the big ‘Blue Wall’ states like New Jersey but to the new production belt in places like Chattanooga.


That’s where the jobs will be and that’s where the people will gravitate.  Moreover, the effect I just described for John and Maya will become an epidemic in places like L.A. (where Hollywood will be getting smaller) and Seattle (software development is moving towards blockchain).


These people will see their overall tax bill rise unless they make the rational choice to sell their over-valued property to some European or Chinese ‘investor’ looking to flee economic chaos locally, pocket the profit and cut their tax bill in half.


Congress’ Joint Commission on Taxes severely low-balled the amount of capital U.S. firms will repatriate.  According to this article by Larry Kudlow (not normally someone I would quote, but here he’s rational), the JCT estimated just $500 billion out of $3 trillion in offshore corporate profits will come home over 3 years.


And then they said 1-2% growth, which, with a tax structure like this, is a low ball.  The JCT’s own rate of estimated repatriation ($280 billion in 2018) alone would add more than 1% to GDP as corporate savings is added to Gross National Spending.  So, spare me the class-warfare histrionics.


This is mainly how they came to conclude the tax bill would cost us $1.4 trillion over ten years.  That’s $140 billion a year.  Surely, 1) we can cut spending by that much and 2) we waste ten times that in off-budget wars and subsidies every year.


There’s plenty of room to cover the ‘costs’ of this tax cut.


The FOMO Trade


The tax bill itself will make the U.S. more competitive than the sclerotic social welfare states in Europe and Japan.  Capital flight into U.S. real estate as a safe-haven play will keep demand up as Americans migrate away from the taxes and Europeans and Asians flee currency devaluation and bursting debt bubbles.


The old tax system was designed to make us competitive with Europe.  In other words, normalizing our tax system with theirs while we still pay for their defense, the U.N. and bear the burden of the world’s reserve currency and all the issues of Triffin’s paradox that entails.


In short, the tax code was designed to redistribute America’s wealth around the world in pure Marxist style.  Raise our costs instead of forcing them to lower theirs.


In fact, this tax bill will only accelerate those processes already underway. The Dow is making new highs while the German DAX is struggling.


That fire under the Dow Jones and the cryptocurrency markets is only just beginning as the middle class is freed from the yoke of Obamacare to begin taking part in the current runaway bull markets.


This year’s tax refunds will fuel a whole lotta FOMO, folks.


A Good Start


The tax cut bill moving through Congress now is by no means perfect.  Eliminating income taxes is the ideal. But, that’s not possible so in evaluating it I’m looking for whether it solves the big problem, namely the incentives to push capital out of the U.S.


It does this.


Lowering the corporate tax rate alone is a major win for Trump.  Yes, personal tax rates need to go down.  Yes, a lot more work needs to be done for small entrepreneurs and the self-employed who are still massively disadvantaged by the code.  But, this bill is a major step in the right direction of reversing the flow of real wealth and incentivizing it to stay onshore.


Don’t let the Michael Moore’s of the world influence you one whit.  That man has nine houses and is a multi-millionaire.  He’s also a fat, stupid hypocrite and an economic ignoramus.  Fix the business environment first.  Invite capital back onshore.  Get U.S. corporates spending at home.


Meanwhile Ted Cruz, Rand Paul and the incoming freshman class of MAGA guys can amend this bill to make it even better for the middle class.  In Hollywood terms, they can fix this in post-production.


The cuts that Trump has ordered to the cabinet departments will begin having the biggest impact in the second half of his term.


The capital flight I just described will add to the mix, and for a short time, the U.S. will likely see an economic boom it hasn’t seen since the days of Volcker, Stockman and Reagan.  And that, my friends, is what the Democrats truly fear, a 2020 election that puts Kamala Harris into the role of Walter Mondale.


FDR would be proud.









Tuesday, November 7, 2017

Trump"s "Beautiful Tax Plan"... Fuggedaboutit!

Via MurraySabrin.com,


Last week President Trump’s tax plan was unveiled with great fanfare by the Congressional Republican leadership. Although President Trump babbled what he claimed to be the biggest tax cut in American history, the evidence is quite to the contrary.


Former Reagan budget director David Stockman dissects the “beautiful tax plan,” concluding that it is nothing less than a big scam. Tax cuts are not targeted toward the middle class but the highest income earners in the country and corporations. That is not to say that taxes should not be cut for upper income individuals, families and businesses, but all taxes should be reduced for everyone.



Closing so-called loopholes is another egregious flaw in Trump’s tax “reform.”  There are no tax “loopholes” in the tax code.  There are only exemptions. deduction and credits.  A loophole is term used by politicians and tax grabbers who think any individual, family or business that pays less taxes is getting away with not paying their “fair share.”  “Fair taxation” is an oxymoron if there ever was one.  Taxes are coerced from workers and business owners.  Thus, taxation should have no place in a free society.


If the American people really want to live in a free society (and that is a big if considering who we have elected as president, legislators or governor around the country for decades) that will create the greatest prosperity for all working folks, they should agitate for the abolition of all taxes. I make the case for abolishing all taxes America in my 1995 book Tax Free 2000: The Rebirth of American Liberty.


Why should taxes be reduced substantially or abolished altogether? Reducing taxes does three things for families and businesses.


First, less money going to the taxman means that people can spend more on their families’ needs.


 


Second, less money going to the taxman means that people can save more for the future.


 


Third, less money go to the taxman means that people can increase their charitable contributions.



But the big government proponents would scream in horror… “What about the poor?” “What about the elderly and disabled?” “What about the children and education?” “What about infrastructure?” “What about our national security?” “What about all the regulatory agencies?” And on and on and on. (I explain in Tax Free 2000 how the services that people want will be funded by voluntary exchange, and how people will make choices about what social welfare services they want to support with their charitable contributions. I also discussed the transition from the current welfare-warfare state to a free society.)


For both liberals (progressives) and conservatives they cannot conceive of a free society… one in which people are in charge of their earned incomes as opposed to having to cough up anywhere from 10 to 50% of their income to the political elites that run the country who are supported by special interests and crony capitalists that put them into office.


In addition, one of the major benefits of a tax-free society would be the end of U.S. military intervention overseas. A tax-free America would end undeclared wars and bring the troops home from the hundreds of military bases around the world, ending the military industrial complex’s global empire. Substantially lower taxes or a tax-free society would end America’s welfare-warfare state once and for all, and make the United States the greatest magnet for capital, which would boost both employment and living standards considerably.


Trump’s tax plan should be deep-sixed because it does not address the fundamental issue – federal government spending. As long as the federal government spends $4 trillion a year, which keep on increasing in good and bad times, America’s welfare-warfare state will eventually lead us to national bankruptcy, because growing entitlements and global military commitments are financially unsustainable.


Trumpnomics does nothing to take us on a journey toward a freer economy. In fact, Trump’s tax plan continues the bipartisan consensus in Washington DC, namely that without the federal government spending $4 trillion a year the economy would implode. Now is the time to have the debate that former President Clinton said we should have years ago about the role of government in a free society.


I am an unabashed, unapologetic proponent of reducing both taxes and federal spending substantially, with the goal of creating a tax-free society. Where do you stand? For liberty or statism?









Sunday, October 29, 2017

Trump Will Own The Next Fed But "All Their Models Are In Ruins"

Authored by James Rickards via The Daily Reckoning,


President Trump is expected to nominate the next Federal Reserve chair within a matter of days.


As I’ve explained before, Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve system at one time than any president since Woodrow Wilson.


President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when they had a vacant board. At that time, the law said the secretary of the Treasury and the comptroller of the currency were automatically on the Fed’s board of governors. But besides that, President Wilson selected all of the other participating members.


Due to vacancies he inherited and key resignations, Trump now has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then.


That’s pretty amazing when you think about it.


To review, the Federal Reserve’s Board of Governors is made up of seven appointees. That means that they can make a majority decision with four votes. If you’re reading about the Fed, you might also see reference to “regional reserve bank presidents.” These are roles within the Federal Reserve System, but the real power is found on seven-member Board of Governors.


Trump will own the Fed.


Meaning, whatever the president wants monetary policy to be, he’ll get. In other words, Donald Trump will be able to shape the Fed’s majority. But the tricky part is figuring out how he plans to shape it...


During the campaign season, Trump called China and other nations currency manipulators. That signaled he believed the dollar was too strong and wanted it to weaken. But then the North Korean nuclear crisis rose to the fore.


Trump backed off his threats against China because China has the most economic influence over North Korea, and Trump wanted China to use that leverage to convince the North to back off its nuclear program.


But China didn’t deliver as Trump had hoped, and a trade war with China is now likely. That’s especially true now. Chinese president Xi Jinping has solidified his hold on power after the Chinese Politburo re-appointed him yesterday. Xi had avoided rocking the boat in recent months while his position was uncertain. But now that his lock on power is secure, Xi can afford to be much more confrontational with Trump.


Trump’s trade policy has led many to believe that Trump will appoint a lot of “doves” to the Board. But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations.


Trump advisers include hard-money advocates like Dr. Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice.


Which brings us to Janet Yellen and the next Federal Reserve Chair…


Janet Yellen’s term as chair is up at the end of January - just over three months from now. Whoever President Trump appoints to replace her will be subject to Senate confirmation.


Because that process takes time, that means the president has to name Yellen’s successor around November or December.


And again, he’s expected to make that announcement by Nov. 3, before he heads to China.


The market is tightly focused on President Trump’s pick. As of now, betting markets had the approximate probabilities as follows:



Powell’s main qualification seems to be that he’s just like Yellen except he’s a Republican. So, if we combine their votes, that a 68% chance that policy will continue unchanged, which means more rate hikes ahead.


The next in line is John Taylor, who is considered the most hawkish of the group. If we add his votes to the Powell + Yellen pool, that an 85% probability that policy will either be the same or tighter.


No relief for gold in the Fed sweepstakes.


Now, as I’ve been saying for months, my money’s on Kevin Warsh. Warsh is the likely next chair of the Fed.


Warsh has previously served on the board. After being nominated by President George W. Bush he was a Fed governor where he served from 2006 until he resigned early in 2011.


Kevin Warsh is a pragmatist, not an ideologue like Yellen. He’s not beholden to obsolete Fed models like Phillips curve that says low unemployment means higher inflation. Warsh understands that disinflation is a serious problem for a country with a 105% debt-to-GDP ratio, like the U.S.


Warsh and the pragmatists understand that inflation is needed for the U.S. to have any hope of getting the debt problem under control.


Warsh believed that the Federal Reserve should have raised interest rates a long time ago. But with disinflation a much more pressing concern than inflation right now, being a pragmatist means he won’t commit to tightening if conditions don’t warrant it.


We’ll see how this all plays out probably late this week or early next before Trump leaves for China.


But it’s important to realize that institutions boil down to people. And there’s going to be a lot of turnover at the Fed under Trump. It’s not just limited to his choice of Fed chair.


Yes, Yellen will likely be out. But so are Fed officials that align with her, like Vice President Stanley Fischer, who announced his resignation in September.


As I indicated, the new, emerging Fed will have less faith in traditional models. For example, in September, Fed governor Lael Brainard delivered one of the most significant Fed speeches ever. Translating from Fed-speak to plain English, she more or less admitted the Fed has no idea how inflation works.


Brainard pointed out that the Fed began its current monetary policy tightening cycle in the belief that tight labor markets implied inflation was coming with a lag. The Fed raised rates in December 2015, December 2016, March 2017 and June 2017 in part to get out ahead of this coming inflation.


Instead the opposite happened.


The Fed’s favorite measure of inflation plunged from 1.9% to 1.3% between January and August 2017 even as job creation continued and the unemployment rate fell. In other words, the relationship between tight labor markets and inflation turned out to be the exact opposite of what the Fed believed.


Their models are in ruins.


Of course, this is what I’ve been telling my readers to expect all year. The Fed was tightening into weakness, not strength, and would soon have to flip back to ease in order to avoid an outright U.S. recession. And ease is exactly what Brainard called for in her speech.


In the meantime, a lot of uncertainty over the Fed’s direction will hover over the market, as if there wasn’t enough uncertainty in the market already.


But one thing is certain:


The next Fed head will have a lot on his (or her) plate.


The biggest winner will be gold. The time to enter your gold position, if you don’t already have one, is now.









Sunday, October 22, 2017

"Carnival Barker" Krugman & The Inevitable Weimar Endgame

Authored by Jeffrey Snider via Alhambra Investment Partners,


Who President Trump ultimately picks as the next Federal Reserve Chairman doesn’t really matter. Unless he goes really far afield to someone totally unexpected, whoever that person will be will be largely more of the same. It won’t be a categorical change, a different philosophical direction that is badly needed.


Still, politically, it does matter to some significant degree. It’s just that the political division isn’t the usual R vs. D, left vs. right. That’s how many are making it out to be, and in doing so exposing what’s really going on.


As usual, the perfect example for these divisions is provided by Paul Krugman. The Nobel Prize Winner ceased being an economist a long time ago, and has become largely a partisan carnival barker. He opines about economic issues, but framed always from that perspective.


To the very idea of a next Fed Chair beyond Yellen, he wrote a few weeks ago, “we’re living in the age of Trump, which means that we should actually expect the worst.” Dr. Krugman wants more of the same, and Candidate Trump campaigned directly against that. As such, there is the non-trivial chance that President Trump lives up to that promise.


Again, it sounds like a left vs. right issue, but it isn’t. The political winds are changing, and the parties themselves are being realigned in different directions (which is not something new; there have been several re-alignments throughout American history even though the two major parties have been entrenched since the 1850’s when Republicans first appeared). Who the next Fed Chair is could tell us something about how far along we are in this evolution.


What Krugman wants, meaning, it is safe to assume, what all those like him want, is simple: success. He believes that the central bank has given us exactly that, therefore it is stupid to upset what works.


In particular, both Bernanke and Yellen responded effectively to a once-in-three-generations economic crisis despite constant heckling from back-seat drivers in Congress and on the political right in general. And their intellectual and moral courage has been completely vindicated by events.



This is right here is the very central point of political difference that is pulling the world slowly apart. Krugman offers no evidence for his assertion, that the Fed has performed admirably and successfully, he just states it as if it was so (a common tactic in the mainstream, the fallacy of authority). Whenever challenged on this contention, the argument will always go back to “jobs saved.”



A worse counterfactual downside is not a rational standard for evaluation in any discipline or context. The only benchmark that should matter is recovery, as any economy facing recession, even an unusually severe one, has to make it back to the prior condition. On that score the Fed has utterly and unambiguously failed.


One reason for it is the one thing Economists like Krugman never bring up; the 2008 panic. How can anyone claim the Fed under Yellen or Bernanke performed even minimally well? The very fact that the panic happened at all is a direct indictment on monetary policy and the people who were there during it (you had one job to do!).





That’s not really what is at issue here, only it has become one battle in what is a larger war. That struggle is betrayed in Krugman’s own words by which he means to raise up both Bernanke and Yellen as examples of what needs to continue.


For more than a decade the Fed chair has been a distinguished academic economist — first Ben Bernanke, then Janet Yellen. You might wonder how such people, who have never been in the business world, who have never met a payroll, would deal with real-world economic problems; the answer, in both cases: superbly…


Given this track record, you might expect to see either Yellen reappointed or an equally qualified technocrat take her place.



This is all really about Economics. It has failed and most publicly so in the form of its principle public adherents in the Federal Reserve piloted by Bernanke and Yellen. The technocratic stars of the faith have been dramatically dimmed by events. Economists are not scientists, clearly, and so they are desperately seeking to circle the wagons by rewriting history; the last ten years weren’t all that bad, and they really could have been worse if it wasn’t for Economics.


The irrational, emotional defense for the ideology is what is driving political upheaval, including Donald Trump’s occupying the White House.


To most people, Krugman’s ideas and assertions are nonsense. They don’t have to know anything about QE’s effect on the TBA market and dollar rolls, how exactly McDonald’s was borrowing from FRBNY, or what it was that AIG did that ultimately made the Federal Reserve profits. People know the Fed did a bunch of stuff that didn’t work because they can tell there is something very wrong with the economy.



And after ten years of being told not to worry about it, or that it was being expertly handled, the people are Fed up with the defense of ideology first at the expense of actual answers. That’s really where we are; Economics has no more solutions (more QE!), therefore Economists have been forced to re-evaluate everything but only along those lines. If Economics can’t solve the problem, then they believe this has to be as good as it gets. And everyone should just stop complaining and appreciate the heroic and inspired effort that “saved” so many “jobs.”


Trump’s candidacy, as Bernie Sanders’, as an ideal was a grave threat to the status quo because it started with the premise that, no, this isn’t as good as it can be and that we need to look for real solutions. Whether he forwards that ideal as President is and has been another matter, and who he picks as Fed Chair might be some small indication of where he currently stands consistent with that idea, or perhaps having second thoughts about it.


The technocracy doesn’t work because it isn’t technically competent (thus 2008).


That’s the real political debate in 2017 and going forward; technical incompetence where the defense of the technocracy refuses to even allow the suggestion that this might be true. I go back to Weimar Germany not because I expect a global hyperinflationary breakdown, but in how that one particular form of systemic breakdown exposed timeless flaws inherent in all economic and financial systems. They all run to some extent on trust and (good) faith:


In other words, German monetary officials, particularly Reichsbank head Rudolf von Havenstein and Minister of Finance Karl Helfferich, denied that Germany had an inflation problem at all – right up until the end. Minister Helfferich declared that Germany had better gold coverage after the war than before it, despite that more than quadrupling of currency volume. One economics professor, Julius Wolf, wrote in 1922 that, “in proportion to the need, less money circulates in Germany now than before the war.”


 


As much as the easy-to-see Versailles excuse played a part, there can be no doubt that beyond 1921 the German people themselves began to recognize that authorities had no idea what they were doing; worse, they came to see that even though policymakers were inept and incompetent, officials themselves would never admit as much and thus nothing would prevent Germany from its fate. That awakening meant an increase in danger that French occupation could never have unleashed on its own.










Thursday, October 12, 2017

Trump "Angry" After Learning What State And Local Tax Repeal Really Means

In what may be the final nail in President Trump"s tax reform proposal, months after the White House proposed ending a tax break for people in high-tax states - which would suggest Trump had more than enough time familiarize himself with how it all works -  Trump reportedly "grew angry" when he learned that the change would hurt some middle-income taxpayers, Bloomberg reports citing people familiar with his thinking.


As Bloomberg amusingly adds, "It’s not clear why the president didn’t know the implications of the SALT deduction for middle-class taxpayers when the plan was released."


Trump"s confusion appears to have led to even more confusion everywhere else: according to Bloomberg, Trump’s concerns led him to say this week that “we’ll be adjusting” the tax-overhaul framework, but it’s not clear how he and congressional leaders would make up for the $1+ trillion in revenue that would be lost without ballooning the deficit or torpedoing support for the plan among hard-line conservative Republicans. Meanwhile, Trump’s top economic adviser Gary Cohn said Thursday morning that the president "is not rethinking his position on repealing the state and local tax deduction" contradicting what Trump himself said previously.


In any case, while the plan to eliminate State and Local tax deductions may have been prompted by an initial assumption that such a move would mostly hit blue states as shown below...



... the realization that it would have a dire impact on republican politicians in NY, NJ and CT may have given Trump reason to reevaluate.


The White House press office on Wednesday night declined to comment on internal deliberations, but released a general statement that said in part: “The president has made it unequivocally clear that a key priority for tax reform is to cut taxes for America’s hardworking middle class families.”


But Trump"s chief economic advisor, Gary Cohn, said Thursday that the president is not rethinking his position on the state and local tax deduction, which allows households to deduct state and local taxes on their federal returns. Cohn declined to take other questions. Cohn had previously suggested that the White House was open to negotiation on the issue.


With many - among them Goldman - speculating that Trump"s tax plan may be phased in (if it even passes) amid revenue offset concerns, the so-called SALT deduction has emerged as a key flash point in the tax debate, "one that could determine whether Trump has enough votes or will fail again on one of his top legislative priorities."





“This is probably the biggest obstacle they have to overcome to get to 218,” the number of votes needed to pass a tax bill in the House, said Representative Peter King, a Republican who represents Long Island. “Right now, they can’t get there without us.”



As Bloomberg put it, the numbers are daunting for Trump: Roughly two dozen House Republicans are concerned about eliminating the deduction - and he can’t afford to lose too many more votes than that in the House.


Predicably, republican lawmakers from the states that would be most impacted from the SALT deduction are worried, and are scheduled to meet Thursday with the House’s chief tax writer, Ways and Means Chairman Kevin Brady, to discuss the issue. Many come from the high-tax states that would be hardest hit, including New York and New Jersey.





King on Wednesday floated the idea of limiting the use of the deduction to people with incomes less than $400,000 -- a cap that that has drawn some support, including from New Jersey’s Tom MacArthur. MacArthur was one of the key Republicans who forged a compromise in the House over a bill to repeal Obamacare. That effort ended last month when the Senate failed to vote on its own repeal-and-replace legislation.



MacArthur said he’s taken his concerns to House leaders and the White House “because I think it’s important that everyone involved understands -- you can’t gloss over this, this is a big issue, and we can’t do tax reform on the backs of six or seven states. It’s just not fair.”



House Speaker Paul Ryan defended the repeal of state and local tax deductions at an event in Washington on Thursday, criticizing the break for “propping up profligate big government states.”
“People are going to be better off no matter what state you come from,” Ryan said, citing the tax plan’s call to double the standard deduction and increase the child tax credit.



Trump’s White House first proposed ending the SALT deduction in April, in a one-page outline of the president’s tax goals. Its repeal is estimated to generate about $1.3 trillion over 10 years, making it an important way to help pay for the business and individual tax-rate cuts Trump and congressional leaders propose.


Representative Chris Collins, a New York Republican who’s close to Trump said he thought the president has been more focused on cutting taxes for corporations and pass-through businesses to stimulate the economy. “And he’s left it to others for the details of how we get there” and “how we pay for it,” a confused Collins said.


At the same time, many conservatives argue that the tax break should be abolished because it subsidizes state and local governments that tax their citizens heavily - a view Trump echoed during an interview that Fox News aired Wednesday night. “It is finally time to say, ‘Make sure your politicians do a good job of running your state,”’ he told interviewer Sean Hannity.


* * *


Of course, should the SALT provision be amended, absent any additional government revenues, it would greatly increase the federal deficit that would result from Trump"s tax bill - endangering the legislation’s support among some lawmakers or limiting the size and duration of its cuts.


In the White House, Trump’s point-person on tax policy, Shahira Knight, met Wednesday with representatives of groups that want to preserve the tax break, including the National Association of Realtors. But earlier in the day, Kevin Hassett, one of the president’s top economic advisers, said the administration still expects to see a tax bill with permanent rate cuts and no deduction for state and local taxes. The state and local tax deduction primarily benefits high-income people in high-tax states, including New York, New Jersey and California - i.e. largely blue states as shown in the chart above. But about 10 percent of tax filers with incomes less than $50,000 claimed the deduction in 2014, according to the Tax Policy Center, a Washington policy group. People who make more than $100,000 a year accounted for about two-thirds of the SALT deductions claimed that year.


Meanwhile, in its latest assessment of the Trump tax plan, Goldman said that "it seems likely that Congress will phase in the tax cut over time. Congressional Republicans are likely to try to provide some near-term tax benefit to individuals ahead of the midterm election, but the greater emphasis in our view will be to reduce statutory tax rates while keeping the overall cost within the parameters laid out in the pending budget resolution. This would argue for a somewhat backloaded tax cut."


In any case, judging by the market, and specifically the ratio of "High tax" corporates to the overall market, as of this moment, the market is once again convinced that Trump"s tax reform is effectively dead.


Wednesday, October 4, 2017

"Credit Negative For U.S. Government": Moody's Threatens Downgrade If Trump Tax Plan Is Passed

As various institutions continue to publish very detailed estimates of how Trump"s tax plan will impact the federal budget, which is somewhat amazing since income brackets haven"t even been assigned yet, Moody"s published a note today threatening to finally strip the U.S. of its AAA credit rating if the tax plan is ultimately passed as currently contemplated.





President Donald Trump’s tax proposal would probably weigh on the U.S. government’s credit outlook, on concerns that it would cause the federal deficit to swell, according to Moody’s Investors Service.



“The Trump tax framework is likely credit negative for the U.S. government,” Moody’s said in a statement. “Tax cuts would not be offset by equivalent cuts to spending, which would put upward pressure on the federal budget deficit and debt,” while “the tax reform’s effect on economic growth and, in turn, federal government revenue would also affect U.S. credit strength.”



By contrast, banks, insurers and asset managers would benefit from a lower tax rate, Moody’s said.



Moodys


As we pointed out last Friday, the Tax Policy Center found that Trump"s plan would cost $2.4 trillion over the first decade, assuming no spending cuts, and result in federal deficits soaring by several hundred billion dollars each year. 


  • The proposal would reduce federal revenues by $2.4 trillion over the first ten years and $3.2 in the second decade. This means that absent a matched deduction in spending, US deficit and debt will increase by a similar amount. This is a problem as a Senate GOP budget resolution unveiled on Friday only allows for adding $1.5 trillion to the debt, implying a revenue shortfall of just under $1 trillion.
    • The business income tax provisions—including those affecting corporations and pass-through businesses—would reduce revenues by $2.6 trillion over the first ten years. Elimination of estate and gift taxes would lose another $240 billion. The individual income tax provisions (excluding those related to business income) would increase revenues by about $470 billion over the same period.



So, just to summarize Moody"s position on this issue, a ~$1.5 trillion budget deficit in 2009 was no problem at all but a ~$1 trillion budget deficit today would suddenly merit a downgrade.



Of course, the Trump administration has argued that increased GDP growth will offset lower tax receipts and actually result in lower deficits rather than higher. 


To that end, Deutsche Bank"s economists took a shot a estimating what kind of GDP boost could be expected from the Trump tax plan and found that a 0.4% - 0.5% boost might be reasonable...





Given the size and scope of the tax plan presented, it is worthwhile to investigate the potential macroeconomic implications of the bill. We use the Fed’s model of the US economy (FRB/US) to do just that.



The full tax plan provides a meaningful lift to growth in the coming years (Figure 7). Year-over-year growth in Q4 2018 and Q4 2019 is about 0.4pp and 0.5pp higher than the no ?scal stimulus baseline.  Higher growth leads to a tighter labor market. The unemployment rate falls to 4% by end-2018 and 3.85% by end-2019 under the full plan, 0.2pp and 0.35pp below the baseline with no tax cuts (Figure 8). The more modest, and in our view more realistic, tax plan intuitively produces more modest results for growth and the unemployment rate. Growth is higher by about 0.2pp and 0.3pp, and the unemployment rate is 0.1pp and 0.2pp lower, by end-2018 and end-2019, respectively.




...that said, they also found that any increase in growth expectations would just be offset by quicker interest rate hikes from the Fed.





Despite assuming a gradual response by the Fed, the implied fed funds rate is significantly higher in response to the tax cuts, as the Fed at least partially o?sets the further decline in the unemployment rate below NAIRU (Figure 9). By end-2018, the fed funds rate would be 13bp higher in response to the full tax plan and 5bp higher under the more modest tax plan scenario. The gap between the no-stimulus scenario and tax cut scenarios is considerably wider further out. By end-2019, the fed funds rate would be 40bp higher in response to the full tax plan and 20bp higher under the more modest tax plan scenario. These differences rise to 60bp and 30bp by end-2020 – more than two hikes more under the full tax cut scenario and more than one additional hike under the modest stimulus compared with the baseline.




Of course, the most comical part of all of this is that, after years of exponential debt growth, Moody"s has finally decided that Trump"s tax cuts will be the final straw that forces them to strip the U.S. of its pristine debt rating...