Ron Paul Just Exposed How the New ‘Tax Cuts’ Will Actually ‘Hammer’ the Middle Class

Former Texas Congressman Ron Paul is calling out Congress for celebrating ostensible tax cuts—that will hammer middle-class Americans.

Who Feels the Tax Sting

Now that the massive new tax bill has passed, I thought I"d do a little experiment with a spreadsheet to see how a hypothetical Silicon Valley, California earner might be affected. I was sure his tax bill would be higher, but I am surprised at how much higher.I wouldn"t be surprised if some people decided not to stay in their homes since their tax bite is so substantial.

I will preface this by saying I"m not a tax expert, but I"ve got a pretty good understanding of taxes, and I put together a deliberately simplistic spreadsheet for this experiment. And while it may be simplistic, it still makes a powerful point, and the tiny amount of rounding error for an actual tax form won"t change the conclusion.

In this examination, I make the following assumptions:

• The individual earns a very handsome salary of $500,000


• He bought a $3 million house in Palo Alto (which is going to be a pretty decent but not opulent home). He has a $1 million mortgage at an interest rate of 4%.


• He pays property tax of 1.2%


• His state income tax rate comes in at 10% (California is actually 13.3%, but I"m making it a little lower to take into account lower income levels aren"t taxed as highly)


• His blended federal income tax rate is 30% (again, the actual highest rate is 37%, which is the new rate, reduced from 39.6%, but for this experiment, I"m moving it down quite a bit)

So here is the spreadsheet. I want to stress this is extremely simplified (hey, almost a tax return on a postcard!) but here we go:

In the left column, which is "pre-reform", this person has state income tax and property tax totaling $98,000, which he can used to offset income for the purposes of calculating federal income tax. In the right column, he is limited to $10,000. So suddenly he"s got an extra $88,000 in income which is taxed that wasn"t taxed before.

He"s already limited to deducting only the first $1 million of his mortgage, but even that drops down to $750,000 (we"re assuming his home purchase was after 12/15/2017, when the law changes).

So, in the end, his federal tax bill is $29,400 higher than it was. That isn"t small. That"s a nice new car. Or a year"s tuition at a private school. And it sure as hell isn"t tax "relief."

Now some of you who live in places with lower (or no) state income taxes or inexpensive real estate may be thinking, "Awww, fuck "em, those rich Californians." But this isn"t some scumbug Goldman Sachs managing director who is making tens of millions of dollars.

I also don"t have a personal ax to grind here. I bought my house so long ago, so cheaply, and I owe so little on it, that none of this applies to me personally. However, I think hardly any of those affected have any CLUE what is about to hit them. There is an enormous tidal wave heading toward huge masses of professionals in states like California, Washington, and New York that are about to have the rug pulled out from under their feet.

But, hey, what am I complaining about, with reassurances like this coming from the White House:

Oh, and since I"m in the Silicon Valley.......

Our poor hypothetical taxpayer has one more indignity to suffer: between (1) rising interest rates (2) the loss of deductibility in state income taxes (3) the reduction of deductibility in mortgage interest (4) the loss of deductibility in property taxes..............his house is going to sink in value as it dawns on people how badly they"ve been screwed. So on top of massively higher expenditures to pay federal taxes (after all, SOMEONE has to pay for Bob Corker"s tax cuts!), he"s making payments on a diminishing asset.

Congratulations, America. You"re not even sure what"s hit you yet.

Do You Know What Is In The Tax Bill That Congress Is About To Pass?

A conference committee has been merging the tax bills that were passed by the House of Representatives and the Senate, and even though we could still see some minor changes, it looks like the major parameters of the final bill have now been agreed upon.  The final bill will be known as the Tax Cuts and Jobs Act, and we are being told that it will be one of the largest tax cuts in U.S. history.  Unfortunately, the impact on our tax bills will be relatively minor, but at least it is a step in the right direction.  The following summary of the major provisions in the final bill comes from AOL…

• A less generous corporate rate cut: Republicans may cut the corporate rate to 21% from the current federal rate of 35%, instead of the 20% proposed in both the house and Senate bills. The new rate would start in 2018.


• A lower top individual tax rate: The top individual bracket would drop to 37% instead of the 38.5% proposed in the Senate bill. It would still be down from the current 39.6%.


• Keep the estate tax, but raise the threshold to qualify: Instead of phasing out the estate tax over time, like the House bill, the compromise bill would instead simply increase the threshold for an estate to qualify — from $5.6 million to around $11 million. That aligns with the Senate bill.


• Repeal the corporate alternative minimum tax (AMT): The corporate AMT in the Senate bill was a sore spot for many companies because it would have negated the effects of many popular deductions and credits, like the research and development credit.

The reduction in the corporate tax rate is probably the most important provision in this tax overhaul package.  For decades, the United States has had a much higher corporate tax rate than much of the rest of the world, and this has given large corporations an incentive to locate operations elsewhere.  By making the corporate tax rate more competitive with everyone else around the globe, it is hoped that this will mean more good jobs for American workers.

This bill also reduces individual tax rates, but not by that much.  So you will notice a reduction in your tax bill, but don’t expect anything “game changing” in nature.

In addition, this bill will eliminate the Obamacare individual mandate.  This is something that should have been done back in January, and I am very happy that Congress is finally getting it done.

It is anticipated that both the House and the Senate will vote on the final version of this tax bill next week.

Sadly, it is not a slam dunk that this bill will actually get through the Senate.

Senator Bob Corker voted against the original Senate bill, and he may vote against this version too.

Ron Johnson of Wisconsin and Susan Collins of Maine have also expressed reservations about this bill, and it is unclear how they will vote at this point.

And let us not forget that Senator John McCain’s health is rapidly failing.  Hopefully he would be present for any vote, but there is no guarantee that will happen.

In the end, Republicans can only lose two votes in the Senate, and so this is going to come down to the wire.

But President Trump is quite optimistic that this bill will succeed, and he says that it will “breathe new life into the American economy”…

“Our tax cuts will break down — and they’ll break it down fast — all forms of government and all forms of government barriers and breathe new life into the American economy,” Trump said.

“They will unleash the American people, they will tear down the constraints on discovery, innovation and creation, and they will restore the hopes and dreams of the American family. Millions of middle class families will win under our plan.”

Of course even if this bill passes, our tax code will still be a complete and utter nightmare.

The tax code will still be over two million words, and the regulations will still be more than seven million words.  Our system will still greatly favor those that can hire accountants and tax attorneys to find every conceivable loophole possible, and it will still be a tremendous burden on the middle class.

If I am elected to Congress, I am going to fight to completely abolish the IRS and the income tax.  As I travel around Idaho and speak to groups, many are extremely receptive to these proposals, but they wonder how we would fund the government without an income tax.

Well, the truth is that the individual income tax only accounts for about 46 percent of all federal revenue, so we could definitely eliminate the individual income tax but we would also have to dramatically reduce the size of the federal government at the same time.

And we have a historical precedent for what this would look like.

Between 1872 and 1913 there was no federal income tax, and it was the best period of economic growth in U.S. history.

Of course the Democrats are not just going to roll over and allow us to cut the size of the federal government in half, so in the short-term we can focus on some other solutions.  A flat tax or a fair tax would both be far superior to the system that we have today, and there are some very good proposals already out there that just need to be implemented.

I once spent an entire year studying our tax code, and I still shudder when I think about those 12 months.  Our tax code is a complete and utter abomination, and while I applaud Congress for trying to “simplify” it, the truth is that this bill that is about to be passed won’t make that much of a difference.

We need to fundamentally change the way that we fund government in this nation, and that is why I want to completely abolish the income tax.  The system that we have right now is simply not fixable, and we should not pretend that any “tax reform bill” is going to solve our problems.

The post Do You Know What Is In The Tax Bill That Congress Is About To Pass? appeared first on The Sleuth Journal.

Here Is The Full Text Of The Final Republican Tax Bill

Update: in addition to the previously leaked highlights (see below), Republicans on Friday evening released the final version of their legislation to slash tax rates for corporations and individuals. The 1,097 page document, containing the bill and an explanatory statement, was crafted by the House-Senate conference committee. The bill is expected to come up for votes in Congress next week.

Read the bill below, courtesy of The Hill:

The "shorter" - only 570 page long - explanatory statement of the conference committee can be found below:

* * *

Earlier:

Here are the full policy highlights of the Republicans" Tax Cuts & Jobs Act...

Policy Highlights

The Tax Cuts and Jobs Act (H.R. 1) overhauls America’s tax code to deliver historic tax relief for workers, families and job creators, and revitalize our nation’s economy. By lowering taxes across the board, eliminating costly special-interest tax breaks, and modernizing our international tax system, the Tax Cuts and Jobs Act will help create more jobs, increase paychecks, and make the tax code simpler and fairer for Americans of all walks of life. 

With this bill, the typical family of four earning the median family income of $73,000 will receive a tax cut of $2,059.

For individuals and families, the Tax Cuts and Jobs Act:

Lowers individual taxes and sets the rates at 0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37% so people can keep more of their hard-earned money.

Significantly increases the standard deduction to protect roughly double the amount of what you earn each year from taxes – from $6,350 and $12,700 under current law to $12,000 and $24,000 for individuals and married couples, respectively.

Continues to allow people to write off the cost of state and local taxes – just like current law – up to $10,000. Gives individuals and families the ability to choose among sales, income and property taxes to best fit their unique circumstances.

Takes action to support more American families by:

• Expanding the Child Tax Credit from $1,000 to $2,000 for single filers and married couples to help parents with the cost of raising children. The tax credit is fully refundable up to $1,400 and begins to phase-out for families making over $400,000. Parents must provide a child’s valid Social Security Number in order to receive this credit.


• Preserving the Child and Dependent Care Tax Credit to help families care for their children and older dependents such as a disabled grandparent who may need additional support.


• Preserving the Adoption Tax Credit so parents can continue to receive additional tax relief as they open their hearts and homes to an adopted child.

Preserves the mortgage interest deduction – providing tax relief to current and aspiring homeowners.

• For all homeowners with existing mortgages that were taken out to buy a home, there will be no change to the current mortgage interest deduction.


• For homeowners with new mortgages on a first or second home, the home mortgage interest deduction will be available up to $750,000.

Provides relief for Americans with expensive medical bills by expanding the medical expense deduction for 2018 and 2019 for medical expenses exceeding 7.5 percent of adjusted gross income, and rising to 10 percent beginning in 2020.

Continues and expands the deduction for charitable contributions so people can continue to donate to their local church, charity, or community organization.

Eliminates Obamacare’s individual mandate penalty tax – providing families with much-needed relief and flexibility to buy the health care that’s right for them if they choose.

Maintains the Earned Income Tax Credit to provide important tax relief for low-income Americans working to build better lives for themselves.

Improves savings vehicles for education by allowing families to use 529 accounts to save for elementary, secondary and higher education.

Provides support for graduate students by continuing to exempt the value of reduced tuition from taxes.

Retains popular retirement savings options such as 401(k)s and Individual Retirement Accounts (IRAs) so Americans can continue to save for their future.

Increases the exemption amount from the Alternative Minimum Tax (AMT) to reduce the complexity and tax burden for millions of Americans.

Provides immediate relief from the Death Tax by doubling the amount of the current exemption to reduce uncertainty and costs for many family-owned farms and businesses when they pass down their life’s work to the next generation.

For job creators of all sizes, the Tax Cuts and Jobs Act:

Lowers the corporate tax rate to 21% (beginning Jan. 1, 2018) – down from 35%, which today is the highest in the industrialized world – the largest reduction in the U.S. corporate tax rate in our nation’s history.

Delivers significant tax relief to Main Street job creators by:

• Offering a first-ever 20% tax deduction that applies to the first $315,000 of joint income earned by all businesses organized as S corporations, partnerships, LLCs, and sole proprietorships. For Main Street job creators with income above this level, the bill generally provides a deduction for up to 20% on business profits – reducing their effective marginal tax rate to no more than 29.6%.


• Establishing strong safeguards so that wage income does not receive the lower marginal effective tax rates on business income – helping to ensure that Main Street tax relief goes to the local job creators it was designed to help most.

Allows businesses to immediately write off the full cost of new equipment to improve operations and enhance the skills of their workers – unleashing growth of jobs, productivity, and paychecks.

Protects the ability of small businesses to write off interest on loans, helping these Main Street entrepreneurs start or expand a business, hire workers, and increase paychecks.

Preserves important elements of the existing business tax system, including:

• Retaining the low-income housing tax credit that encourages businesses to invest in affordable housing so families, individuals, and seniors can find a safe and comfortable place to call home.


• Preserving the Research & Development Tax Credit that encourages our businesses and workers to develop cutting-edge “Made in America” products and services. • Retaining the tax-preferred status of private-activity bonds that are used to finance valuable infrastructure projects.


• Eliminates the Corporate Alternative Minimum Tax, thereby lowering taxes and eliminating confusion and uncertainty so American job creators can focus on growing their business and hiring more workers, rather than on burdensome paperwork.

Modernizes our international tax system so America’s global businesses will no longer be held back by an outdated “worldwide” tax system that results in double taxation for many of our nation’s job creators.

Makes it easier for American businesses to bring home foreign earnings to invest in growing jobs and paychecks in our local communities.

Prevents American jobs, headquarters, and research from moving overseas by eliminating incentives that now reward companies for shifting jobs, profits, and manufacturing plants abroad.

For greater American energy security and economic growth, the Tax Cuts and Jobs Act:

Establishes an environmentally responsible oil and gas program in the non-wilderness 1002 Area of the Arctic National Wildlife Refuge (ANWR). Congress specifically set aside the 1.57-million acre 1002 Area for potential future development. Two lease sales will be held over the next decade and surface development will be limited to 2,000 federal acres – just one ten-thousandth of all of ANWR.

Significantly boosts American energy production. Responsible development in the 1002 Area will raise tens of billions of dollars for deficit reduction in the decades to come, while creating thousands of new jobs, reducing our dependence on foreign oil, and helping to keep energy affordable for American families and businesses.

Provides a temporary increase in offshore revenue sharing for the Gulf Coast in 2020 and 2021, allowing those states to invest in priorities such as coastal restoration and hurricane protection.

 

Will Your Taxes Go Up? Find Out With These 8 Scenarios

With Republicans having inexplicably sacrificed a crucial Senate seat last night by choosing to support a candidate accused of multiple counts of pedophilia, it"s unclear whether tax reform is even a remote possibility at this point.  Certainly, the challenge of forming a consensus among the GOP was difficult enough when they held a 2-seat advantage in the Senate so we can only assume it will be next to impossible now that that lead has been cut in half. 

Of course, Republicans seem to have every intent of passing a tax bill before Doug Jones gets seated in January...but, then again, they"ve missed almost every deadline they"ve set for themselves since Trump moved into the White House nearly a full year ago.

Be that as it may, just in case a bill gets passed at some point before winter break, Bloomberg, along with a little help from Baird Private Wealth Management, has put together a series of 8 tables which help to quantify exactly how you may be impacted by tax reform whether you"re a "millionaire, billionaire, private jet owner" living in Manhattan or an "average Joe" making $40k a year and renting an apartment in Milwaukee.  Here they are:

Scenario 1 - Manhattan Millionaires: These Manhattan residents have a jumbo mortgage (at an assumed 4 percent interest rate) and take a $40,000 deduction on mortgage interest; pay property taxes of $96,250 and state income tax of $135,360; and make annual charitable contributions totaling $100,000.

Unfortunately, contrary to what you might hear from Nancy Pelosi, these folks take a hit under both the House and Senate tax bill primarily due to the loss of the SALT deductions.

Scenario 2 - Malibu Millionaires:  A married couple has a primary residence in Malibu, California, and a second home in Lake Tahoe. The property tax on the Malibu home is $15,860, and $4,896 on their second home; they deduct $40,000 total in mortgage interest for the two homes; and give $50,000 to charity.

Scenario 3 - Small Business Owner:  This married couple with a small manufacturing business in Pittsburgh, Pennsylvania, has $300,000 in pass-through business income. Their deductible mortgage interest adds up to $6,000; their property tax is $8,600; and they give 5 percent of their income to charity.

Scenario 4 - Suburban Family:  A married couple in a New York City suburb has estimated state income tax of $17,290; their annual mortgage interest deduction is $14,000; and they pay property tax of $13,750 -- about the same amount they donate to charity.

Scenario 5 - Single Secretary In Manhattan: This New York City renter pays estimated state income tax of $8,148 and gives about $6,500 to charity.

Scenario 6 - Married Family In Austin:  This young couple rents and has income of $100,000. They give $5,000 a year to charity.

Scenario 7 - Median Income Couple In Portland:  This Portland, Oregon, couple earns close to the median household income for the U.S. Their property tax bill is $1,688; their deductible mortgage interest is $3,000; and estimated state income tax is $4,744.

Scenario 8 - Median Income Family In Milwaukee:  This married couple rents and has an estimated 2017 state income tax bill of $2,104.

Of course, this will all change when/if the GOP submits a final tax bill for consideration...but, like Obamacare, you may only find out how it truly impacts you after it has already been passed.

Senate Tax Debacle: Certain Pass-Through Entities Face Marginal Tax Rates Over 100% Under Current Bill

As the House and Senate continue to try to reconcile their two versions of a tax plan, the taxing structure for pass-through entities (s-corps, LLC"s, etc.) continues to be somewhat controversial, if not completely nonsensical. As we pointed out last week, the Senate bill somewhat randomly chose to exclude pass-through entities organized as family trusts from tax cuts which would ultimately leave them on the hook for much larger tax bills due to the elimination of other deductions. It"s unclear whether this bizarre exclusion was just an oversight or an intentional political hit on an easy target that no one in Washington DC would dare defend publicly: rich families organized as trusts.

Now, a new note from the Tax Policy Center lays out some scenarios whereby the marginal tax rate for high-income pass-through entities could soar to over 100%.  Of course, while two rational people can debate the impact of a ~40% tax rate on a person"s desire to work, we"re almost certain that a taxing structure that takes more than 100% of your marginal income will be a slight disincentive.  Here"s an example of how it works from the Wall Street Journal:

Consider, for example, a married, self-employed New Jersey lawyer with three children and earnings of about $615,000. Getting $100 more in business income would force the lawyer to pay $105.45 in federal and state taxes, according to calculations by the conservative-leaning Tax Foundation. That is more than double the marginal tax rate that household faces today.

 

If the New Jersey lawyer’s stay-at-home spouse wanted a job, the first $100 of the spouse’s wages would require $107.79 in taxes. And the tax rates for similarly situated residents of California and New York City would be even higher, the Tax Foundation found. Analyses by the Tax Policy Center, which is run by a former Obama administration official, find similar results, with federal marginal rates as high as 85%, and those don’t include items such as state taxes, self-employment taxes or the phase-out of child tax credits.

As Joseph Rosenberg of the Tax Policy Center notes, the penalty is greatest for high-income pass-through entities in highly taxed states. 

Consider the example of a married couple whose entire income is “specified service” income generated by a pass-through entity and who claims the standard deduction. At an income of $524,000, the couple could take an $87,000 deduction (17.4% of the couple’s taxable income “without regard” to the deduction) that would reduce their taxes by $30,450 (since they are in the 35% tax bracket), but the deduction is entirely phased out at an income of $624,000. On average, that amounts to more than a 30% surtax on top of the 35% statutory tax rate over that range of income.

 

The actual phase-out is much more complicated, as the bill’s text released Monday night makes clear, because the deduction continues to apply even as its benefit is phased out. (If that sounds convoluted, it’s because it is.) The couple’s marginal income tax rate would jump to 61.375% at $528,541 of income. And it would rise to 73% until their income reaches $624,000 and the deduction is fully phased-out, at which point their marginal tax rate would return to the 35 percent ordinary income tax rate. (Note that these calculations do not include the additional 3.8 percent in self-employment payroll tax or the net investment income tax).

Here is how the overall tax rate schedule for pass-through income would look:

“This is a big concern,” said Scott Greenberg, a Tax Foundation analyst. “It would be unfortunate if Congress passed a tax bill that had the effect of making additional work and additional income not worthwhile for any subgroup of households.”

Of course, in the end, this type of taxing structure just raises the returns on "gaming" the tax system in every way possible.  “I would expect a huge tax-gaming response once people fully understand how it works,” said Mr. Gamage, a former Treasury Department official, who said business owners have an easier time engaging in such tax avoidance than salaried employees do. “The payoff for gaming is huge, within the set of people who both face these rates and have flexible enough business structures.”

Not surprisingly, lawmakers are looking at changes to prevent this debacle from happening as they attempt to reconcile Senate and House versions of the tax bill this week. The formal House-Senate conference committee will meet on Wednesday, and GOP lawmakers have said they may unveil an agreement by week’s end...though they seem to consistently miss their own self-imposed deadlines.

But you shouldn"t worry about these issues too much as a spokeswoman for the Senate Finance Committee assured the Journal that as "with any major reform, there will always be unusual hypotheticals delivering anomalous results...The goal of Congress’s tax overhaul has been to lower taxes on the American people and by and large, according to a variety of analyses, we’re achieving that."

Tax Bill May Spark Exodus From High-Tax States

From FinancialSense.com via ValueWalk.com,

The following is a summary of our recent podcast, “Exodus – The Major Wealth Migration,” which can be listened to on our site here on on iTunes here.

It’s looking increasingly likely that we’ll see the GOP tax bill pass in the near future. Prepped for signing by the end of this year, the bill is sure to have sweeping effects on all taxpayers, especially those in high tax states.

Consider Dan White at Moody’s: Taxation Shift Spells Trouble for Underfunded States

“(Eliminating the state and local tax deduction) could help on the margins to drive people from those states to lower tax states because their burdens are going to increase significantly,” White said.

 

“What’s more, it’s going to make it more difficult during the next recession for states to increase taxes without being burdensome to the underlying economy.”

Many of the Rich Will Pay Under New Tax Plan

If we take the example of a high-net-worth individual living in California and making $1 million a year, that person’s state taxes amount to $102,000. If that person owns a $1.5 million home, property taxes would be around $27,000. As the new plan eliminates mortgage interest deduction above $500,000, this person would lose the ability to deduct roughly $20,000 in interest expenses.

In total, this person would lose roughly $150,000 in deductions. At a 40 percent tax rate, this person would end up paying around $60,000 more in taxes under the GOP plan.

“The idea that this is a tax giveaway to the rich just doesn’t hold true,” Financial Sense’s Jim Puplava said.

 

“It may help somebody that lives in Florida, who doesn’t have to worry about state tax deductions, because there’s no state income tax. And it does help out corporations by lowering their tax rate… but as far as individuals who lose their itemized deductions, this is going to, in effect, be a tax increase.”

Millionaire Migration Patterns

Generally, high-net-worth individuals don’t tend to move state-to-state very often, but that’s probably about to change.

One notable example occurred last year when billionaire hedge fund manager David Tepper relocated from high income tax New Jersey to Florida, which doesn’t have a state income tax. This not only saved Tepper millions of dollars, but also cost New Jersey as well.

If the GOP plan goes through, high tax states may have to rethink their tax strategy.

“I think we’re going to see a big migration,” Jim Puplava told listeners this week.

 

“We’re already losing almost 100,000 taxpayers per year in California. … If this tax bill goes through, this is really going to force a lot of people out. This is going to have a major impact on those high-tax states, and this is going to be a revenue drain.”

Ramifications Down the Road

With the deductibility of state and property taxes under threat, where every dollar paid saves 40 cents in federal taxes, we could see the effective tax rate spike.

Also, historically, when the federal government has eliminated deductions in exchange for lower tax rates, it has a habit of hiking those rates back up in short order. This happened in 1986 under Ronald Reagan’s tax reform where we saw President Bush Sr. and President Clinton hike rates up to the current 39.6 percent rate on the high end.

“This is a major game changer,” Puplava said.

 

“Now that it looks like we have a greater likelihood of this tax bill getting passed, we’re going to see a demographic migration.”

Listen to all our daily interviews with leading guest experts by clicking here.

Republicans Reverse, May Allow State Income Tax Deduction

One day after the top Senate Republicans realized they probably should have read the tax bill they voted for in the deep of the night on Saturday morning, and announced they are seeking to repeal the Alternative Minimum Tax they passed just days earlier, realizing it could punish growing companies, they now also appear to be reversing on the controversial repeal of State and Local Tax Deductions, and as Bloomberg reports, Republican lawmakers "are discussing a compromise on state and local tax deductions that would allow taxpayers to deduct state income tax, House Ways and Means Chairman Kevin Brady said."

According to one proposal being discussed, taxpayers could deduct both their state income tax and state and local property taxes up to a combined limit of $10,000. This differs from the currently circulating bills which preserve the individual deduction for state and local property taxes - capped at $10,000 - but not for income taxes. The push to include income taxes could help those in high-tax states who don’t own property.

Mitch McConnell confirmed he’s open to tweaking final tax legislation to appease lawmakers who want to let constituents deduct state income taxes: "There’s some in the House who would like to see that applied not just to property, but to income tax, you know, where you can sort of pick which state and local tax you want to deduct,” the Kentucky Republican said on conservative radio host Hugh Hewitt’s show. “That sounds like a kind of reasonable idea.”

Summarizing the conference process, McConnell said "There are a lot of these things that are floating back and forth,” adding that he cannot predict “exactly how the final product turns out” once the House and Senate complete their conference negotiations.

Indicating that SALT repeal was conceived as an entirely political move meant to punish "rich", predominantly blue states, House Republican leaders - hearing significant pushback from their own constituents - signaled openness to "relieving the burden for residents of high-tax states."

Plans for the so-called SALT deduction have prompted more tension in the House than in the Senate, because there aren’t any Republican senators from states with the highest taxes. Twelve out of the 13 GOP House lawmakers who voted against the bill last month were from high-tax states. Still, including the property tax deduction in the Senate bill was a last-minute change to help get the support of Republican Senator Susan Collins of Maine.

 

Two House members from New Jersey -- Leonard Lance, a Republican, and Josh Gottheimer, a Democrat -- plan to submit a joint proposal to the conference committee that would maintain SALT in its entirety.

 

The lawmakers said repealing the break will lead to "double taxation" and "pay for reform on the backs of just a few states that already pay significantly more than other states in federal taxes." One of those net donor states, they note, is New Jersey.

Brady, who’s overseeing the House-Senate conference committee for tax negotiations, said Wednesday that allowing income tax deductions is one of five options on the table. Others include potential adjustments to rates, brackets, the individual alternative minimum tax and the family tax credit.

There is just one problem with the bill which is already cutting it dangerously close to the $1.5Tn extra deficit limit: where does the money come from?

As Bloomberg writes, it"s unclear how lawmakers would pay for any such modifications to the state and local tax break. Preserving the property tax deduction up to $10,000 would cost about $148 billion over a decade, according to the Joint Committee on Taxation. McConnell has been said to want any proposed changes presented with ways to pay for them.

Among the proposed revenue offset include changing estate tax rules about stepped-up basis and closing what they call a loophole for charitable donations to private foundations as ways to offset some of the lost revenue that would result from keeping SALT.

Paul Craig Roberts Exposes "Plunder Capitalism"

Authored by Paul Craig Roberts,

I deplore the tax cut that has passed Congress. It is not an economic policy tax cut, and it has nothing whatsoever to do with supply-side economics. The entire purpose is to raise equity prices by providing equity owners with more capital gains and dividends.

In other words, it is legislation that makes equity owners richer, thus further polarizing society into a vast arena of poverty and near-poverty and the One Percent, or more precisely a fraction of the One Percent wallowing in billions of dollars. Unless our rulers can continue to control the explanations, the tax cut edges us closer to revolution resulting from complete distrust of government.

The current tax legislation drops the corporate tax rate to 20%. This means that global corporations registered in the US will be taxed at a lower income tax rate than a licensed practical nurse making $50,000 per year. The nurse, if single, faces in 2017 a 25% marginal tax rate on all income over $37,950.

A single person is taxed at a rate of 33% on all income above $191,651. 33% was the top tax rate extracted from medieval serfs, and approaches the tax rate on US 19th century slaves. Such an upper middle class income as $191,651 sounds extraordinary to most Americans, but it is so far from the multi-million dollar annual incomes of the rich as to be invisible. In America, it is the shrinking middle and upper middle class incomes that bear the burden of income taxation. The rich with their capital gains from their equity holdings are taxed at 15%.

Even single individuals who earn between $1 and $9,325 are taxed at 10% on their pittance.

The neoliberal economists who are the shills for the rich, Wall Street, and the Banks-Too-Big-Too-Fail claim, erroneously, that by cutting the corporate income tax rate to 20% all sorts of offshored profits will be brought back to the US and lead to a booming economy and higher wages.

This is absolute total nonsense. The money won’t come back, because it is invested abroad where labor costs are lower, if invested at all instead of buying back the corporation’s stock or buying other existing companies. After 20 years of offshoring US manufacturing and professional tradable skills and the incomes associated with the jobs, who is going to invest in America? The American population has no income with which to purchase the goods and services from new investment, and the American population’s credit cards are maxed out.

All that is going to happen is that Wall Street will calculate the lower tax rate into a higher equity price. Wall Street can do this without any of the offshored earnings coming home. Suddenly, everyone who owns equities will experience a boost in wealth, or the boost has already occurred in anticipation of the handout.

The deficit-conscious Republicans have put into the Bill for Enhancement of the Rich’s Wealth, cuts in social services in order to “save workers from higher interest rates from budget deficits.” This is more dishonesty. If the Fed lets real interest rates rise to any meaningful amount, derivatives will unwind, and the Fed will have to create trillions more in new dollars to keep its ponzi scheme in place. The deficit that results from the tax cut will be covered by the Fed purchasing the Treasuries, not by a rise in interest rates.

What we are witnessing in the US and indeed throughout the western world is the total failure of capitalism. Capitalism is now merely a looting machine. The financial sector no longer supplies capital for production. What the financial sector does is to turn discretionary consumer income into interest and fee payments to banks. Aggregate demand can only grow through debt expansion, and the consumers reach a point where they cannot expand their debt.

Capitalism, hiding behind “globalism,” which is misrepresented as a good thing when it is death itself, locates production where labor is cheapest, thus depriving First World labor of good wages and work opportunities and putting First World countries on the path to becoming Third World countries.

Short-term profits and executive and board bonuses and stock options are maximized at the cost of the destruction of the domestic consumer market.

Plunder Capitalism also privatizes as much of the public sector, such as the military, as possible, thus driving up the cost of the Pentagon’s budget. Jobs that the soldiers themselves formerly did are given to politically-connected firms. What was once KP (kitchen patrol) is now provided by an outside private service. Private mercenaries hired by the Pentagon collect as much in a month as troops in the line of fire earn in a year. I don’t know that the army any longer has a supply organization other than the private business that has the contract.

Medicare and Medicaid are the next to be privatized, along with Social Security. The tax cut will result in deficit and high interest rate hype, and these lies will be used to save the workers from high interest rates on their mortgage, credit card, and student loan debt by scaling back or privatizing Medicare, Medicaid, and Social Security.

The environment and public lands will be sacrificed to the private profits of timber, mining, and energy companies. Grizzly bears and wolves are losing their protection under the endangered species act so that states can sell trophy hunting licenses to men who have to prove their manhood by killing an animal with a high-powerful rifle at a safe distance.

What we are witnessing is the complete looting of America and the entirety of the West. While the Western World collapses, the insouciant, submissive people sit there sucking their thumbs while they are being ruined.

Nothing is left of the West except looters at work.

This tax bill is an abomination, an act of brutal plunder. Its sponsors should be tarred and feathered and ridden out of town on a rail, if not hung from a lamp post.

Dalio Confirms GOP Tax Plan "Good For Business", Bad For Democratic States

Confirming what many have suggested, the billionaire founder of the world"s largest hedge fund, warns in his latest letter to watch out for the effects of tax reform on migration, the fiscal conditions of affected states and cities, and an increased polarity in America.

Birdgewater"s Ray Dalio writes (via LinkedIn),

While we have talked a lot about the effects of growing wealth and opportunity disparities in America, we haven’t talked enough about the tax migration that is taking place because of growing differences in state and local tax rates. This tax migration issue is especially important to focus on now because of the expected elimination (under the new tax legislation) of the deductibility of state and local taxes (SALT) against federal income taxes.

The dynamic that I’m referring to is the inevitable and self-reinforcing process in which those high SALT locations that a) have big disparities in income and fiscal shortfalls and b) can neither cut their financial supports to the “have-nots” (because their conditions are already unacceptably low) nor raise taxes on the “haves” (because they will move due to tax rates) suffer from tax migration.

Of course, those low SALT locations with the opposite circumstances benefit from this migration.

The dynamic works as follows. As state and local tax rates and debts rise because there are shortfalls that can’t be narrowed, it is financially smart for high income taxpayers to escape these taxes and debt burdens by moving to lower tax and less indebted locations, so they do. As they do, property values decline, further raising the costs of staying in the high SALT location. In other words, the financial cost of being in one of those high tax locations equals the tax rate difference plus the property value decline, which can be substantial. Also, the reduced population of higher income and higher spending folks leads to reduced spending in these locations, which further depresses the high SALT economies. Also, the fiscal conditions of these locations suffer. Because both the remaining high income and low income folks are increasingly stressed and tend to blame the other, tensions rise, which makes these environments even more inhospitable, which further contributes to high income earners’ emigration. Realizing this, other locations increasingly appeal to the “haves” by offering tax incentives and creating environments in which they are more comfortable living with other “haves.” For these reasons, this “hollowing out” dynamic is self-reinforcing. Of course, the reverse is true in states that attack these rich tax migrants. This dynamic causes even greater polarity. Because the rich and the poor typically have different values, which are also reflected in different laws and different politics, it probably will make the polarity greater and conflicts even more intractable.

It appears to us that the expected new tax law that eliminates the state and local deductions against one’s federal income taxes will significantly contribute to this dynamic. Consider the fact that this change in SALT deductibility is one of the largest increased sources of revenue in the tax bill, accounting for nearly $1 trillion in new taxes over the next 10 years. In other words, it is expected that those people who stay in high tax states will pay nearly $1 trillion more to stay there. Of course, these changed rates will prompt more people in high SALT locations to consider moving. To the extent they do move, it would increasingly lead to more prosperous states that are occupied by, and cater to, more rich people and more depressed states that are occupied by, and cater to, more poor people, and increased polarity between them.

While we are talking about the tax migration, we see such location cost arbitrage motivated migrations happen all the time, so we should be well acquainted with them. For example, in New York City we saw migration from the Upper East Side to Downtown and then to Brooklyn brought about by cost arbitrages. Every area in the world has this sort of cost and desirability motivated migration going on constantly. Cost differences drive migrations that change the characters and costs of neighborhoods and happen in self-reinforcing ways until the cost differences change to make the newly hot neighborhoods expensive and other areas relatively cheap, so the immigration shifts to emigration.

Estimating the Impact of Cutting the SALT Deductions

We played around with the numbers to get a feel for the directions and the impacts of this, and we show our scratch pad estimates below. We will first show our very rough estimates of the impact of ending deductibility on state tax revenues and migration patterns. 

First, to summarize, we estimate that:

• 
  

  Ending SALT deductibility will result in a sizable increase in the effective tax rate faced by high earners in high tax states (3-5% for most making over $500,000), notable outbound migration of high income filers (we estimate 1-2.5% will leave for most states we looked at), and a hit to state tax revenues (around 1%). In our opinion, these numbers understate the impacts, especially for the highest taxpayers (who pay the most taxes), because it is the nominal level of dollars of increased taxes that matters more than percentages, and we don’t fully account for all the second- and third-order consequences previously mentioned. In terms of economic impact, we estimate that it is the present value of all future year tax differences (and other costs such as declining real estate values) that is the best gauge of the cost of staying, and these are very big numbers. As I just noted, the effects on property values and living conditions are not properly considered in our estimates. Already, without the SALT deductibility changes, some higher SALT states are experiencing notable outbound migration (shown further below), which is straining tax revenues and risks the strengthening of a downward spiral where states adjust by cutting spending/raising taxes, which encourages even more people to leave.

  
  


• 
  

  Still, the table below conveys a rough picture of where the vulnerabilities lie. It shows a) the existing marginal tax rate, b) the effective tax rate with the deduction, c) the effective increase in the tax rate due to the elimination of the deduction, d) that increase relative to the US average and e) relative to states they are likely to emigrate to (e.g., their neighbors), f) the estimated medium-term size of the migration as a percent of the high earning population,* g) the estimated number of high earners leaving, h) the lost tax revenue to the state, and i) that lost tax revenue relative to the total tax revenue of the state. To be clear, these are VERY IMPRECISE ESTIMATES. 

  
  

We looked at a number of factors to come up with our rough estimates, so we will show you some. 

While the previous table looks at the impact of migration on state budgets, below we show a simpler cut: our rough estimates of how relative incomes between states will change when people in high tax states get a greater tax increase than people in low tax states. The chart on the left shows the absolute levels in real per capita earnings by state versus the national average before and after the tax change. These numbers are adjusted by what the Bureau of Economic Analysis believes about relative price levels between states (trying to get at some measure of competitiveness). The chart on the right shows the net shift that occurs with the tax change. As you can see, states with both higher than average incomes and higher than average taxes (especially New York, Connecticut, New Jersey, and California) are most vulnerable by this measure.

The vulnerability of a state to tax emigration is also affected by tax revenue being concentrated in the hands of those high income earners who are most affected by the changes. This concentration is shown below for the states with the highest income taxes. 

For these states, the high earning taxpayers are a very small proportion of the population—from 0.5% of households in Vermont to 1.7% in DC and Connecticut. That means that it would take only a tiny percentage of the population to move to have a devastating effect on the state’s finances. Clearly, all of these states are very vulnerable.

The next two tables show the states where people have been leaving fastest from and going fastest to, and a number of influences on these movements, such as economic conditions and the tax burden. 

As you can see, everything points toward states like New York, Connecticut, New Jersey, California, and Illinois being the most vulnerable, and states like Florida, Texas, Nevada, Washington, and Arizona benefiting the most from this shift.

Our look at these states’ finances and their muni bond markets will follow in the next few days. 

P.S.

As for the effects of the budget changes, below we show where the money is expected to come from and where it is expected to go.

So, our big picture perspective is that, on the margin, the tax law changes are going to be significant and bad for high SALT locations and good for low SALT locations, and are going to be good for businesses and business owners (and hopefully those who the money trickles down to), so those businesses in low SALT states will get a double whammy benefit.

Why Eliminating The State And Local Tax Deduction Is A Terrible Idea

Authored by Ryan McMaken via The Mises Institute,

The tax "reform" currently being discussed in Washington is mostly a political exercise for politicians who can use the process to extract more campaign contributions from supporters, and punish non-supporters. The actual tax burden imposed on Americans overall will change little.

The proposed elimination of the deduction for state and local taxes (SALT) is an excellent illustration of how the tax reform is really about playing political games. Forever in pursuit of "revenue neutral" tax reform, the GOP is simply turning to the elimination of the SALT deduction so it can raise federal revenues, and this allows for a tax cut for some other well-heeled special interest group. Using bizarre "logic," supporters of the deduction"s elimination claim that an increase in the federal tax burden will somehow lower state and local taxes — some day. Why? They imagine that if they raise federal taxes for people in states with high taxes (i.e., California, New York) then the majority of voters in those states will then be clamoring for a cut in state and local taxes. The GOP also relies on the tired claim that that a tax deduction (e.g., the home mortgage interest deduction) "subsidizes" those who claim the exemption. But only in the Orwellian world of Washington doublespeak is a tax break a "subsidy."  Moreover, given that states like California and New York are among the least reliant on federal funds, claiming that taxpayers there are "subsidized" by the rest of the country is an odd claim indeed.

There are several problems with this approach...

First of all, the SALT  deduction — like all federal tax increases —  will drive ever more tax revenues to the federal government, putting more power, both in relative terms and absolute terms, in the hands of the federal government. This is one reason federal tax increases are even worse than state and local tax increases. They skew political power in the US ever more toward the federal government. By increasing the federal government"s share of all tax revenues collected, the federal government will also then be in a better position to manipulate state governments and state policymakers with federal grants. The federal government does this today by using federal highway funds. As the old saying goes, "he who pays the piper calls the tune." 

An additional problem is that the elimination of the deduction is specifically aimed at increasing federal power at the expense of state and local power. There is no doubt that some conservatives and libertarians will cheer this. For many of them, the federal government and the county government are pretty much the same thing. In their minds, a Congress of out-of-touch millionaires 2,000 miles away is more or less the same thing as — or maybe even preferable to — a cash-strapped local government headed by middle-income part-time legislators.

This naive attitude is totally understandable for those who have never witnessed the very real differences between Washington politics and the politics of the local city council. But, there is a reason that subsidiarity and decentralization in politics have long been foundational elements of libertarian ideologies. Decentralization weakens political institutions, increases options for taxpayers, and contributes to a more vibrant private sector. 

The GOP"s efforts at eliminating the state and local tax deduction works in the opposite direction. The reform"s likely effect will be to further federalize the tax burden while making states more reliant on federal programs and federal grants. 

Americans Pay Most of their Taxes to the Federal Government 

At the core of the GOP"s drive to eliminate the SALT deduction is the assumption that state and local taxes are "too high" while federal taxes are apparently either just right, or even too low.  

But, it"s hard to see how anyone could come to the conclusion that the federal tax burden is the more harmless piece of the puzzle. The federal government already — by far — receives the largest share of the tax revenue pie.

If we look at how much Americans pay to each level of government, we find that the federal government receives approximately two-thirds of all tax revenue, while only one third goes to state and local governments — combined.

In 2016, the federal government collected more than $3.4 trillion dollars in revenue via income taxes, customs duties, fees, and revenues from federally-owned lands. 

State governments, on the other hand, collected only $1.1 trillion in revenues. Local governments pulled in even less, with under $800 billion in revenues.

What the GOP is now telling us is that the federal government"s huge share of the pie is too small, and federal revenues ought to be increased further via elimination of the deduction. This, we"re then told, will lead to declines in state and local taxes. 

The GOP doesn"t mention, naturally, that state and local governments are already falling in their share of overall tax collections. 

During the current economic expansion, the share of local tax collections — as a percentage of all tax collections — dropped from 17 percent to 15 percent. State tax collections meanwhile dropped from 22 percent to 20 percent. The federal government"s share of the pie, however, increased from 60 percent to 64 percent. 

The federal government now controls nearly two-thirds of all revenues paid into governments in the United States, and if current trends continue, we may soon see the feds in control of 70 percent, or maybe even three-fourths of all tax revenue. 

If this is the GOP"s plan, this is a rather odd position to take for a political coalition that claims to be in favor of "local control" and decentralization and federalism. In reality, the outcome of this war on the SALT deduction is to make the American political system even more dominated by federal power. 

Federal Revenues vs. State Revenues 

Even in high-tax states, the federal government plays a disproportionately large role in tax collection.

If we compare state tax collections to IRS collections in each state, we find that taxpayers pay much more to the federal government than they pay to the state government. 

In California, for example, the federal government collects $405 billion from California taxpayers. The state government, meanwhile, collects $155 billion. Federal revenues in California are more than two-and-a-half times as large as state-level revenues. 

In many states, of course, the results are even more lopsided. 

In Minnesota, for example, federal revenues are more than four times the size of state revenues. In Colorado, federal revenues are more than three times the size of state revenues. 

We don"t have data on specific local revenues here, but given that local revenues make up only 15 percent of tax collections nationwide, its a safe bet that federal taxes are considerably larger than local revenues in most cases. 

And yet, to hear the GOP tell it, its state and local taxes that are imposing the real burden on Americans. Their solution? Pay more taxes to the federal government! 

Decentralize the Taxes 

None of this is to say that state and local taxes are a good thing. There is no shortage of waste, corruption, and cronyism at the state level — but compared to the federal government the dollar amounts are tiny in state-level boondoggles. 

Nevertheless, the diversity of tax regimes across states and localities has long been one of the good things about the relatively decentralized political system in the United States. 

As we"ve already been seeing, this reality has allowed countless productive Americans to vote with their feet and to move from high tax jurisdictions to low tax ones. This phenomenon thus imposes pressure on many jurisdiction to keep taxes low compared to other nearby jurisdictions. This is known as "tax competition" and it results only when states and localities have considerable autonomy over their tax rates.

Unfortunately, tax competition is restrained by the fact that tax revenues in the United States are primarily a federal matter. Taxpayers thus have far less power to change their tax fortunes by moving across state lines that would be the case in a truly decentralized system. 

The downside to local autonomy, of course, is that some states and localities will have especially high taxes. The solution to this, of course, is to avoid investing in those areas until tax competition is sufficient to force more restraint on tax rates. 

Raising federal revenues via eliminating the SALT deduction — as the GOP seeks to do — is hardly any sort of solution at all. Indeed, Congress should be moving in the opposite direction. Instead of eliminating the deduction, Congress should substitute a tax credit instead. Every dollar that state and local taxes increase would lead to an equal drop in federal taxes. Then, we might start to see some real diversity in tax burdens across the United States. 

In reality, we"re seeing quite the opposite. Our current situation is made worse as federal taxes make up a larger and larger share of the overall American tax burden. This leads to greater homogenization of tax rates across the United States, which makes it even harder to escape from especially bad tax policy. If the tax burden is ever "equalized" across all states, then taxation will all simply be equally bad nationwide, and moving across state lines will bring no relief.

The Taxman Cometh: Court Orders Coinbase To Hand Over Information On Cryptocurrency Users

Most could see the writing on the wall: the taxman cometh.  The Internal Revenue Service has been upset that Americans are daring to make money that they cannot tax, but not for much longer.

Bitcoin’s initial big draw was that it was unregulated by the government.  Most digital currencies exist in a sort of twilight state just beyond the grasp of federal regulators, but the U.S. tax authority is starting to get upset that they cannot steal this money, so they’ve figured out how to do just that.

On Wednesday, a federal judge in San Francisco ruled that Coinbase must supply the IRS with identifying information on users who had more than $20,000 in annual transactions on its platform between 2013 and 2015. After noticing that the number of tax returns claiming gains from virtual currency didn’t line up with the emerging popularity of digital currencies like bitcoin as an investment vehicle, the IRS asked Coinbase to hand over a broad swath of information on its users. Coinbase pushed back, and now the court has landed on a compromise that the company is calling a “partial victory.” –Tech Crucnch

“Coinbase itself admits that the Narrowed Summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders. That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains,” the court documents read.

If you are a US citizen and have been speculated /trading Bitcoin you have ordinary income gains that need to be reported…coinbase has to turn over your account records and the IRS is coming for you

— FxMacro (@fxmacro) November 30, 2017

The fact that the government couldn’t tax bitcoin was a big selling point for many. Cryptocurrency users who value the decentralization and privacy afforded by digital currencies won’t be happy, but there is a bit of good news. Coinbase succeeded in limiting the government’s initial request for information on all Coinbase users who made transactions from 2013 to 2015 to the smaller subset of high-value users.

The court narrowed the scope of documents that the IRS can request from Coinbase to taxpayer ID number, name, date of birth, address, transaction logs and account statements, deeming the rest of the documents “not necessary.” Again, these personal data requests will only apply to accounts that have bought, sold, sent or received more than $20,000 in any of those types of transactions between 2013 and 2015.

Make no mistake, the taxman cometh.

Could Trump"s Tax Bill Trigger A Mass Exodus From Manhattan? Goldman Seems To Think So...

New York"s billionaire hedge fund managers have blazed the trail south in recent years with the likes of David Tepper, Paul Tudor Jones and Eddie Lampert all ditching the Empire State for Florida...a state which brings not only pristine beaches and year-round golf weather but also the added benefit of a 0% personal income tax rate. 

Meanwhile, as Bloomberg once again points out this morning, the decision to ditch the over-taxed states of New York, New Jersey and Connecticut will be even easier if Trump"s tax plan succeeds in eliminating the state and local income tax deduction...a deduction which could cost a New Yorker making $1,000,000 a year a cool $21,000 in extra taxes.

The problem for the Connecticut hedge-fund set -- and, more broadly, for a lot of the Wall Street crowd -- is that Republican proposals in both the House and Senate would drive up taxes for many high-earners in the New York City area. By eliminating the deduction for most state and local taxes, an individual making a yearly salary of $1,000,000 -- a figure not uncommon in the financial industry -- would owe the Internal Revenue Service an additional $21,000, according to a preliminary analysis by accounting firm Marcum LLP.

 

“It would almost be irresponsible if you weren’t thinking about moving,” he said.

 

Not surprisingly, Miami is exploiting the potential tax change to woo Manhattan"s most successful "millionaire, billionaire, private jet owners" (to cite Obama) as Miami"s luxury real estate agents say they"re having a hard time keeping up with the sudden surge in demand.

The Miami Downtown Development Authority is throwing a party next month during the annual Art Basel show, and Nitin Motwani, a real estate developer, has invited wealthy Northeasterners who’ve expressed interest in moving to the area. Because the proposed tax changes are practically begging them to relocate, Motwani expects a crowd.

 

State and local taxes, also called SALT, “can and should be a major catalyst,” said Motwani, a development authority board member. Tax reform will “certainly be something we’re highlighting” at the party, in the Perez Art Museum. “Inertia is a tough thing, but you add on another tax bill and maybe that pushes you over the edge.”

 

Jeff Miller, director of luxury sales for Brown Harris Stevens in the Miami area, said he’s fielded a half-dozen calls from clients motivated by higher taxes to step up their search for South Florida property.

 

Two clients who work at New York City financial firms have scheduled tours of a newly completed 7,000-square-foot (650-square-meter) home on the Venetian Islands, Miller said. The $22.5 million asking price buys views of Biscayne Bay and a spot to moor a yacht.

 

“Usually it’s a snowstorm that would push them to pick up the phone,” Miller said. “The tax plan has the same effect.”

So what does this mean for the overall impact on domestic migration patterns?  Well, Goldman figures that the changes currently contemplated on the Senate bill could ultimately result in 2-4% of Manhattan"s top earners relocating to lower taxing jurisdictions...

The increased effective tax differential between high- and low-tax areas may increase movement from the former to the latter. Exhibit 4 shows the increase in effective tax rate differentials for a few relevant pairs of states. For instance, we estimate that the TCJA would increase the gap between the combined S&L income tax rates in New York City vs. Connecticut by about 2pp to 5-6%. States with zero income tax such as Texas and Washington would experience the largest gains in relative tax competitiveness. The simple median increase in the tax gap across the six illustrative pairs is a bit above 1.5pp.

 

For our initial analysis of the potential migration effects, we review the academic literature on taxes and mobility. The reviewed studies shown in Exhibit 5 focus on high-income earners, because the literature tends to ?nd only small tax effects among lower- and middle-income earners. The studies are mixed, but the median study suggests a 2% decline in the number of top-income earners after 3-10 years per percentage point increase in the tax rate gap. Combining this median 2% mobility estimate with the 1-2 percentage point increase in the tax gap between New York City and New Jersey/Connecticut suggests that the TCJA would eventually lower the number of top-income earners in New York City by 2-4%, for example.

...and if that"s not at least somewhat concerning to legislators in Albany, Trenton and Sacramento...it should be.

Tepper, who heads Appaloosa Management, relocated to Miami Beach in 2015 from Short Hills, New Jersey. Jones kept Tudor Investment Corp. in Greenwich, Connecticut, when he moved to Palm Beach, Florida, last year. In 2012, Lampert, best known as Sears Holdings Corp.’s chief executive officer, took his hedge fund to Miami from the same tony Connecticut town.

 

State budgets feel the impact. When Tepper moved his firm to Florida, forecasters warned it could jeopardize New Jersey’s budget because the firm generated more than $100 million in state income tax. In 2013, state income tax generated by residents of seven of the wealthiest towns in Fairfield County amounted to $1.8 billion, according to the Hartford Courant, or about 9 percent of the Connecticut state budget.

 

“There is a certain amount of burying one’s head in the sand and naivete in Hartford,” Connecticut’s capital, McGuire said. “I don’t think they believe it can happen.”

Oh well, it"s not as if New Jersey is teetering on the edge of solvency courtesy of a massively underfunded public pension ponzi...

How Tax Reform Can Still Blow Up: A Side-By-Side Comparison Of The House And Senate Tax Plans

To much fanfare, mostly out of president Trump, on Thursday the House passed their version of the tax bill 227-205 along party lines, with 13 Republicans opposing. The passage of the House bill was met with muted market reaction. The Senate version of the tax reform is currently going through the Senate Finance Committee for additional amendments and should be ready for a full floor debate in a few weeks. While some, like Goldman, give corporate tax cuts (if not broad tax reform), an 80% chance of eventually becoming law in the first quarter of 2018, others like UBS and various prominent skeptics, do not see the House and Senate plans coherently merging into a survivable proposal. 

Indeed, while momentum seemingly is building for the tax plan, some prominent analysts believe there are several issues down the road that could trip up or even stall a comprehensive tax plan from passing the Congress, the chief of which is how to combine the House and Senate plans into one viable bill.

How are the two plans different? 

Below we present a side by side comparison of the two plans from Bank of America, which notes that the House and the Senate are likely to pass different tax plans with areas of disagreement (see table below). This means that the two chambers will need to form a conference committee to hash out the differences. There are three major friction points:

1. the repeal of the state and local tax deductions (SALT),


2. capping mortgage interest deductions and


3. the delay in the corporate tax cut.

The House seems strongly opposed to fully repealing SALT and delaying the corporate tax cuts and the Senate could push back on changing the mortgage interest deductions. Finding compromise on these issues without disturbing other parts of the plan while keeping the price tag under the $1.5tn over 10 years could be challenging.

Here are the key sticking points per BofA:

• Skinny ACA repeal: The repeal of the individual mandate is back on the table. It would free up approximately $300bn in revenue to pay for the tax plan. But this likely means no Democratic Senator will support the bill. This could prove costly as the Republicans can only afford to lose 2 votes and several Republican Senators are already on the fence on the tax plan.


• Byrd Rule means tax plan might not hatch: Reconciliation directives allow the tax plan to add $1.5tn to the deficit in the first 10 years (See appendix for breakdown of the cost of each plan). However, rules in the Senate state that any bill passed under reconciliation has to be revenue neutral beyond the 10 year budget window. Given that the Republicans are hoping to make the corporate tax cuts permanent, it would mean that they would need to find additional revenue in the out years while sunsetting all other tax cut provisions (e.g. personal tax cuts). This will mean the personal tax code at best will revert back to current law or at worst roll back the cuts and preserve the repeal of the deduction which would amount to a tax increase on households after ten years. Currently, the Senate plan would let reduction in the personal tax rates, expansions of the standard deduction and child tax credit and other provisions expire after 2025. The court of public opinion could threaten the tax plan.

And while it remains to be seen if tax reform will pass the Senate, or like Obamacare repeal, it will get shot down by the like of McCain (and perhaps Corker), another key question, is whether the US even needs tax reform at this point - the Fed certainly could do without the added inflationary pressure - and whereas former Goldman COO and Trump"s econ advisor, Gary Cohn certainly thinks so, his former boss, Lloyd Blankfein disagrees. So does Bank of America, which maintains that at this stage of the business cycle, tax cuts are not needed to sustain the current expansion. Nevertheless, BofA concedes the passage of a comprehensive tax plan would likely lead to a short term boost to growth which would translate to further declines in the unemployment rate and higher inflation.

Then, as the economy begins to heat up, the Fed will likely lean against the economy by implementing a faster hiking cycle than currently projected, which will ultimately spark the next market crash, recession and financial crisis. Ironically, the seed of Trump"s own destruction would be planted by his biggest political victory yet (assuming tax reform passes, of course).

* * *

As a bonus, here is a simulation BofA ran using the Fed"s FRB/US model to calculate the potential costs of the tax plans. BofA ran its simulations assuming model consistent expectations for all sectors of the economy and using the inertial Taylor rule to set the path of the federal funds rate: "o simulate the impact of the fiscal stimulus brought on by the tax cuts, we make the fiscal setting exogenous during the first 10 year period and adjust the path for corporate and personal income taxes to take into account the government revenue effects from the tax plan."

Costs aside, to get a sense of the economic impact from the two tax plans, BofA similarly models the two plans" outcomes using the FRB/US macroeconomic model. The simulation results suggest under the House plan, the US would see a boost to aggregate demand as growth would be approximately 0.4pp higher relative to baseline in 2018 and 0.3pp higher in 2019. Better aggregate demand would reduce the unemployment rate by 0.3pp by 2019 and put upward pressure on inflation. These growth and price dynamics would lead the FOMC to raise rates an additional 1 to 2 hikes over the next two years. The economic impact from the Senate plan would be slightly more modest but in the same ballpark as the House plan. Under the Senate plan, the model predicts growth to be approximately 0.3pp higher in both 2018 and 2019 and similar dynamics for the unemployment rate and inflation as seen in the House plan, leading the FOMC to tighten quicker than the current baseline path.

There is also an "alternative" scenario where we a watered down version of the tax plan passes (i.e. modest tax cuts for middle-income households and a corporate tax cut near 25-28% that is deficit increasing by $600bn-$800bn on a static basis). Under the "alternative" scenario, we would see approximately half the economic impact that is seen under the House plan. Given that such a plan would likely only generate modest inflationary pressures, the Fed"s response likely would be relatively muted and it would likely stay on its baseline path.