The Endlessness Of A Temporary Tax

Authored by Jeff Thomas via InternationalMan.com,

Governments regularly claim that they favour tax reform. When this claim has been repeated so many times that virtually no one believes them anymore, they announce a tax reform, to show that they really mean it. They then reshuffle the existing taxes to give the appearance that taxation will actually be lowered.

When it becomes apparent that the reform is a sham, they often pull a rabbit out of a hat in the form of a “temporary” tax, that’s pre-legislated to end sometime in the future.

Sounds promising.

So, let’s have a look at one such temporary tax and see how things worked out.

The US government introduced the War Revenue Act of 1898—a tax on telephone use—under the claim that it was necessary to pay for the Spanish American War.

In what way does telephone use pertain to a government invading another country? Well, actually, one has nothing to do with the other. But, let’s leave that discussion for another day and see how this temporary tax played out.

The Act was repealed in 1902 but was reinstated, this time as the Emergency Internal Revenue Tax Act of 1914. The justification then given was that another war was on the way and increased taxation to pay for it couldn’t begin too soon. Telephone users needed to cough up.

It was decided by both parties to increase the tax on telephones and the War Revenue Act of 1917 was created. It hadn’t passed the debate stage until the war was over, but they decided that they’d implement it anyway, as the work had already been done. In the bargain, they introduced not only increased rates, but graduated rates.

This act was also repealed, in 1924, but was reinstated with the Revenue Act of 1932. Since that date, it has been reauthorised 29 times.

In 1941, an increase was put in place to pay for (you guessed it) another war—World War II. This was increased again in 1943, but people complained and the new law contained a provision that the increased rates would end six months after “the date of termination of hostilities in the present war.” However, the Excise Tax Act of 1947 was passed to assure that the tax would continue indefinitely.

Over the subsequent years, periodic changes were made. Although the rates went up and down like a bride’s nightie, most, not surprisingly, were upward.

As further (undeclared) wars came and went, taxation on telephone calls repeatedly needed to be increased and, regardless of the party in power, increases continued.

At long last, on 14 September, 2000, the House of Representatives took up legislation which included the repeal of the telephone excise tax. This measure passed both houses, but the fix was in. President Clinton vetoed the repeal. (The legislative branch and the executive branch have to take turns playing the bad cop, but the outcome is the same: increased taxation.)

Then, in 2006, a case was made (in the words of the Treasury Secretary), to amend the Internal Revenue Code “of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history.”

Finally, American citizens could wash their hands of a one-hundred-year theft of their earnings that, even at the start, was based upon a ludicrous concept.

Unfortunately… it didn’t happen.

The repeal was never enacted and Americans continue to pay for the Spanish American War today.

So, what’s the takeaway here?

Well, first off, this little history serves as a reminder that there’s nothing so permanent as a temporary government measure.

Second, although not a month goes by without one politician or another, from one party or the other, rising up in righteous indignation that a new tax or an expanded tax is absolutely necessary to continue the welfare of the American people, there is, in truth, no sincerity in their claim. They simply want more money.

Third, no amount of money is ever enough. Even if Washington, D.C., is the only part of the US that is enjoying prosperity, even if no congressman leaves office without more zeroes behind his net worth than when he went in, virtually every legislator will vote for increases in taxation.

And, fourth, there’s no such thing as tax reform. From time to time, legislators will need to trot out the idea of tax reform, and be seen to be arguing over the details, but will ultimately always do the same: the deck will be reshuffled, but somehow, taxes will rise once again.

But the overall lesson to be learned is that Government is, and has always been, a shell game. Its purpose is not to serve the electorate; it is to separate them from the fruits of their labours.

Full stop.

As former US Chief Justice John Marshall stated,

The power to tax involves the power to destroy.

More recently, Ron Holland offered the following:

Since the beginning of recorded history, the business of government has been wealth confiscation.

However, both these individuals were conservatives, and it would only be fair to ask for commentary from the liberal side. One such liberal political leader is none other than Vladimir Lenin, who stated,

The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.

Of course, the reader may wish to consider relocating to a jurisdiction where the taxation is far lower, but if he chooses to remain in the US, EU, Canada, or other jurisdiction where the tax level is already oppressive, his plans should include temporary taxes that are unlikely to end in his lifetime.

*  *  *

Few people realize this, but it is possible to escape the US government’s “power to destroy.” Find out how in The American Expatriation Guide: How to Divorce the US Government. Click here to download your free PDF copy now.

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.

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.

The Best Tax Incentive In The World

Authored by Simon Black via SovereignMan.com,

In a move almost destined to prove that laws and policies have absolutely zero meaning, the European Union released a list of “tax havens” last week… with a massive, giant, highly conspicuous omission.

The blacklist contains the names of the usual suspects– Panama, United Arab Emirates, etc., along with a few additions like Mongolia and Marshall Islands.

But, again, conspicuously missing from this list is far and away the biggest tax haven in the world– none other than the United States of America.

It’s hard for US taxpayers to imagine the Land of the Free being a tax haven.

Americans are taxed heavily on ALL of their income, no matter where in the world they live.

Americans are taxed when they earn, when they save, when they spend and when they die.

And yet, for non-Americans, the US is a treasure trove of tax-free anonymity.

Non-Americans can register completely anonymous corporations and LLCs in nearly every state in the US, with some of the stronger jurisdictions being Delaware, Nevada, Wyoming, New Mexico and South Dakota.

And their name need never appear, ever, on any of the documents.

They can establish bank accounts and brokerage accounts with those anonymous corporations. They can purchase real estate with those anonymous corporations.

Moreover, non-Americans can easily establish bank and brokerage accounts overseas, and use their anonymous US companies to engage in business all over the world.

And in many cases, non-Americans can generate unlimited capital gains on their stock and bond investments and pay absolutely zero tax to Uncle Sam.

It’s a hell of a deal, far better than what the countries on the EU blacklist offer.

The EU’s list is supposed to call out a handful of nations for refusing to comply with international tax reporting and information sharing agreements– most notably the worldwide “Common Reporting Standards” (CRS) that came into effect last year.

CRS is basically a worldwide information-sharing agreement about taxes, banking transactions, and business activity.

Dozens of countries have signed up for it.

What’s totally bizarre is that a number of jurisdictions on the EU’s blacklist are already reporting, or scheduled to begin reporting, in accordance with CRS.

Panama and Marshall Islands, for example, will begin reporting in 2018. South Korea, which also made the EU blacklist, has already started reporting.

The United States, on the other hand, is not signatory to CRS, and the US government has stated it has zero intention of joining CRS.

And yet South Korea is on the blacklist and the US is not.

These lists are completely meaningless… the whole exercise is a wasteful farce.

Even the premise is deeply flawed. These EU bureaucrats are so terrified that an individual somewhere in the world might actually be able to exercise some financial privacy.

But they can’t handle that. They turn apoplectic at the thought of not being able to know everything you’ve ever done with your money.

They’re also hell bent on taking as much of it for themselves as possible.

Rather than trying to attract talented entrepreneurs, investors, businesses, and workers with low taxes and friendly government regimes, they terrorize everyone with higher taxes and increasingly socialist policies.

It’s not working.

Nearly a decade after the financial crisis, Europe still has appallingly high youth unemployment rates (roughly 40% in Greece, Italy, Spain) and banking systems that teeter on failure.

But a clear track record of failure has never stopped self-aggrandizing politicians from trying the same thing and expecting different results.

The end game of this insanity is that the EU now blames other countries for the failures of its own idiotic policies.

It’s all quite pathetic.

The good news here is that very little will really change.

Some of the countries on the black list may modify their tax codes to appease EU bureaucrats.

But some of the best tax strategies in the world won’t change in the slightest.

Bear in mind, there’s absolutely nothing wrong with taking legal steps to reduce the amount of tax that you owe. On the contrary, it’s just good sense.

US judge and legal philosopher Billings Learned Hand summed it up best when he wrote,

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

And regardless of the EU’s temper tantrum, there are still countless ways for businesses in the 21st century to slash their tax bills.

One of them is Puerto Rico’s Export Services Act, also known as Act 20.

I’ve written about this a number of times – it’s an incredibly attractive law that allows all sorts of businesses to domicile in Puerto Rico with a corporate tax rate of just 4%.

This applies to industries ranging from various online businesses to consulting services, financial services, marketing services, and much more.

And ANYONE can realize these benefits, regardless of whether or not you’re a US citizen.

As a US territory, Puerto Rico isn’t on anyone’s blacklist.

And even despite all the misfortune the island has endured over the past year, the government there is doubling down on the tax incentives… and recently expanded a number of programs to make them even more attractive.

Puerto Rico may prove to be a fantastic option for your existing or prospective business; I’ve even structured one of my businesses there, and we’re looking at setting up another one there too.

These tax incentives are real… and could legally save you tens of thousands… hundreds of thousands… even millions per year.

That level of savings can have an enormous impact on your life, and it’s worth considering.

If you’re interested in learning more about it, we’ve created a report that explains the tax incentives in greater detail and tells you how to get started reducing taxes in Puerto Rico.

House, Senate Republicans Reach Tax Deal: Here Are The Initial Details

One day after we reported that "Congressional Republicans reached a tentative tax agreement", the news of which sparked another risk surge into the close of trading, moments ago we got the second tax deal in 24 hours - if only for algo consumption - when the AP reported that House and Senate GOP leaders have reached a "tentative deal" on tax overhaul "in principle."

The AP quoted a "person familiar with the conversations who asked not to be named because the discussions are private" and who is certainly long stocks, as the replica headline was enough to send the S&P to new all time highs. 

The agreement "in principle" paves the way for final votes next week to slash taxes for businesses and give most people tax cuts starting next year. Top GOP aides say the deal was reached on Wednesday. They spoke on condition of anonymity because they were not authorized to speak publicly about the deal. Details still need to be drafted and assessed by congressional scorekeepers but the final House-Senate compromise is on track to be unveiled this week. 

The details, virtually identical to what we reported yesterday: the top individual tax rate would be lowered to 37% as and set the corporate tax rate at 21%, slightly higher than the 20% initially favored by President Trump. The mortgage interest deduction would be capped at $750,000, a mid-point compromise between the Senate and House bills.

The deduction for pass-through companies will be set at 20 percent, somewhat lower than the 23 percent included in the Senate-passed bill. That will be offset by lowering the top individual income rate to 37%. It is now 39.6%.

* * *

Still, lawmakers will need to get a cost analysis of their agreement, so it’s not yet definite, "the person" said, who clearly gets around and was this time quoted by Bloomberg.

And since lawmakers still need to get a cost analysis of their agreement, not only is today"s "tentative deal" not yet definite, but it will almost surely be unwound when someone actually brings a calculator into the room.

Curiously, after jumping higher, stocks have since faded the kneejerk reaction higher, perhaps realizing that the more fiscal stimulus that is injected, the more tightening the Fed will have to unleash in the coming months as inflation become red hot.

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.

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.

Here Are The Negatives In The Republican Tax Plan, According To Wall Street

Judging by the market"s euphoric reaction this morning, the Senate"s passage of the tax bill on Saturday is nothing but good news for stocks (well, maybe not the Nasdaq). And indeed, banks - whose effective tax rate is around 30% - and other tax-sensitive companies are surging, with banks are outperforming and  sending the KBW bank index up as much as 2.8% to a fresh decade-high (BofA up as much as 3.9% to the highest since Oct. 2008; JPM up as much as 3.4% to record high; Citigroup up as much as 2.7% to highest since Dec. 2008). Even so, as Bloomberg reports, some analysts are sounding a few warnings. Their concerns include: a delay in potential benefits; the need to make fixes in a highly partisan environment; and curbing R&D credits.

Here are the negatives in the Republican tax plan, according to Wall Street:

WELLS FARGO (Christopher Harvey)

• Sees difference between House, Senate timing of corporate tax cut (2018 vs 2019) as significant, with Senate’s 2019 likely to prevail; that means tax overhaul’s potential direct impact to 2018 corporate earnings is likely to be zero


• Feels "great rotation" (out of tech, and into tax-sensitive issues such as banks, small-caps, value-oriented stocks) will need to pause


• Senate’s depreciation policy may counterbalance timing of the corporate tax cut to a degree; notes Senate allows for full expensing of capital investments starting in 2018; in a higher tax environment (no change until 2019), that may pull some spending forward, aiding 2018 growth; also sees strong 1H M&A

COMPASS POINT (Isaac Boltansky)

• A "concerning theme" is emerging: the likely need for fixes next year, while "it isn’t exactly clear how those changes will be made"


• Structural defects in final bill are probable, given it’s being drafted at "warp speed," and most pieces of sweeping legislation require technical corrections; recently, however, lawmakers have been unable to reopen primarily partisan bills (like Dodd Frank, ACA)


• Sees conference committee process as potentially volatile, but expects quick movement, with Trump signing a bill this year

BLOOMBERG INTELLIGENCE (Andrew Silverman)

• Downsides include AMT inclusion, which haircuts or prevents some businesses from being able to take deductions and depreciation (including the R&D credit, which GOP had said they wanted to preserve)


• Also notes slashing state and local tax (SALT) deduction; higher-than-est. repatriation rates (bad for tech, pharma cos.); haircut on taking net operating losses


• Senate bill changes how non-profits and pensions are taxed, likely increases taxes substantially on "unrelated business taxable income"

HORIZON INVESTMENTS (Greg Valliere)

• House/Senate conferees, who will start work on Monday, have "enormous number" of issues to resolve, including whether individual provisions are permanent, whether mortgage deduction will get haircut, when corporate rate cuts begin (2018 or 2019?)


• Veteran tax lobbyists were "incredulous" this weekend over Senate-passed tax bill, which was "hastily patched together with enormous unintended consequences," including retaining corporate AMT, which effectively would kill the R&D tax credit


• Adds bill is still being written and corrected; numbers don’t add up; Republican leaders, led by Paul Ryan, "have made no secret about their next goal," which is major overhaul of the welfare state, including curb growth of Social Security, Medicare, Medicaid as deficits rise; "Democrats, eyeing the next two elections, are salivating"

MOODY’S (Nick Samuels)

• Senate’s overhaul is negative for state and local government finances (most sharply in high-tax states like Calif., N.Y., N.J.)


• Change to SALT deduction would reduce disposable income for many taxpayers, likely outweighing positive effect of lower federal rates on consumption


• SALT change would also hurt financial flexibility by increasing political resistance to tax increases at state, local level

MOODY’S (Christina Padgett)

• Diminished interest deductibility, which is more punitive to highly-leveraged companies, is likely to have negative implications for low-rated speculative grade cos., may outweigh benefits of lower corporate tax rate


• Spec-grade companies pay relatively little in taxes in part due to tax shield from interest deduction


• Leveraged buyouts and industry sectors with highest leverage, weakest coverage of interest expense are among most vulnerable

HEIGHT SECURITIES (Ed Groshans)

• Senate-passed bill amends tax law covering interest deductions on home equity indebtedness


• This "seemingly innocuous" amendment would prevent homeowners from deducting interest on mortgages that are refinanced


• Would likely reduce refinancings for borrowers who’d prefer to maintain mortgage interest deduction for tax purposes

MELIUS (Carter Copeland)

• While tax overhaul may bring some extra profits to defense co. bottom lines and cash flow to shareholders, it may also make the future budget situation much tighter for the Department of Defense by removing "wiggle room in the annual fight for funding"

Source: Bloomberg

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.

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...