Tax Sausage Making Begins, But Will Republicans Be Happy With the Result?

The Trump administration announced the nine-page outline of a set of tax “reform” proposals yesterday. Bloomberg’s editorial board grumbled that the plan was far too sketchy, but that misses the point. Tax bills don’t just originate in the House of Representatives but its staff also drafts the language. Even though various Administrations devise and promote various changes in tax laws, this is very much Congress’ sandbox. For instance, the reason the border adjustment tax proposal failed wan’t just that a whole bunch of companies, starting with WalMart, screamed bloody murder about it. It was the Administration had presented a tightly-woven bill that needed to be implemented in full for it to work. That isn’t how things get done on tax bills.

Thus the sketchiness of Trump’s tax plan isn’t in theory that big a deal. But in practice it will be. It is another reminder of how thinly staffed the Administration is and how it doesn’t seem to be sufficiently in tune with or concerned about how things are normally done in DC. This is a town run by lawyers, used to at least the appearance of being buttoned up, and not businessmen with short attention spans who’ve been fed a steady diet of PowerPoint.

Making Congress fill out more details than usual, or having it push back on the Administration and demand more specifics, can have some perverse effects as far as Republicans are concerned. First, assuming Congress takes up at least some of the slack, is that filling in the blanks will put various factions at odds with each other even more so than usual. If one group took loses in an initial draft, it would be faced with the prospect of justifying its case and clawing ground back. The vagueness increases the odds of infighting. The failure of Obamacare reform has increased divisions in the party, so it’s not as if Republican Congresscritters have either a font of good feelings for each other or even recent success in finding compromises on supposedly critical initiatives.

A second negative is that the Republicans are already behind their own timetable for getting a tax bill done. They wanted it in committees for mark-up in September. Treasury Secretary Mnuchin is trying to pretend that Congress can pass a bill by year end. Conventional wisdom is that it is hard to get anything important done in an election year, so the longer this goes into 2018, the more the odds increase that a tax bill will be tinkering as opposed to the grand “reform” that had been promised. And again, giving Congress less rather than more to start isn’t consistent with the perceived urgency.

But don’t let the thinness of the plan lead you to think that they Republicans won’t get some sort of tax bill done. Republicans love tax cuts, plus they desperately need to be able to claim some sort of accomplishment before the 2018 midterms.

And there are some features that you can tell now will get done, and others that will obviously change, and are likely to change in a way that will fall so short of expectations as to disappoint Republican voters who are on the tax reform bandwagon.

Keep your eye on the ball on the corporate side. Even though the press will be sure to spill a lot of ink on changes to individual taxes, the real action will be on business taxes.

The no-brainer tax “reform” event is deemed repatriation of deferred foreign earnings at a low rate. Corporate American wants that, since as they did in the last tax holiday, in 2004, they will use the extra reported profits as an excuse to pay higher dividends and/or executive comp. And the government will get tax revenues from this, which will allow them to make some of their much-loved cuts elsewhere.

This was intended to be lead to implementing a quasi-territorial system, meaning US companies would not be taxed on foreign business profits ….but that is super contentious and no one has figured out how that would work, so don’t expect anything on that front.

The big reason the rest of the tax reform bill is likely to disappoint many Republicans is that they not only won’t get anything resembling real cuts, or to use their misleading formulation, “tax stimulus” but that progress on their biggest goal, cutting the statutory corporate tax rate, currently 35%, is likely to be modest.

And here is where Republicans are hoist on their own petard. One of the mechanisms that Republicans have used to weaken government and make it incompetent and unpopular is via deficit scaremongering (mind you, they have plenty of fellow travelers among Democrats). They’ve also incorporated deficit fetishism in Congressional budget rules. Mind you, the appearance of making the number add up is a headfake, since the ginormous military black budget isn’t counted, plus how big the deficit winds up being is due to factors largely outside Congress’ control, meaning how much tax actually gets collected (a function of growth, wages, and employment) and spent (which again varies with the state of the economy).

But on paper, any tax cuts, and a big cut in the statutory tax rate represents a tax cut, have to be matched either by spending cuts or by closing loopholes. With Federal spending at roughly 20% of GDP, the US already spends vastly less than other advanced economies, so there’s not much that could be cut. And on the loophole side, as we’ve discussed, every one has a constituency, so getting rid of some for the supposedly noble purposes of tax simplification and rate reductions will still lead to howling from those whose particular oxen are being gored.

For instance, even some top tax experts had assumed that one of the measures that the Administration has proposed earlier to simplify individual taxes, that of getting rid of the deduction for state and local taxes, would go through because it would hurt blue states and districts. I was skeptical because affluent Republicans in high tax districts (remember, nice homes often come with high property tax bills) would be up in arms. And that backlash has started. From the lead story in the Wall Street Journal, Republican Tax Plan Quickly Hits First Hurdle:

A day after announcing their ambitious tax plan, Republicans debated scaling back one of their largest and most controversial proposals to pay for lower tax rates: repeal of the individual deduction for state and local taxes.

Faced with the potential for defections by House Republicans from high-tax states such as New York and New Jersey, Republicans are exploring ways to satisfy those lawmakers without backing off the lower tax rates they promised….

The fight over the state and local deduction, with more than $1 trillion at stake over a decade, is an early signal of the bruising battle ahead for Republicans trying to pass a tax bill that hasn’t garnered Democratic support and that faces narrow GOP margins in the House and Senate. It is the most obvious case of a bloc of pivotal lawmakers holding a specific concern, but it won’t be the only one.

“The notion that you fix this and then it’s smooth sailing?” Mr. [Representative Peter] Roskam said. “How naive.”

And on cue, the deficit scolds started finger wagging:

Most Economists Agree: Trump Tax Plan Will Widen Budget Deficit Bloomberg

Trump proposes US tax overhaul, stirs concerns on deficit Reuters

Donald Trump Criticized National Debt but His New Tax Cut Plan Would Increase It Newsweek

The preoccupation with the deficit plus the size of the constituencies for many of the current tax breaks is what will make any reform underwhelming. For instance, one of the big corporate giveaways is allowing companies to expense capital investments immediately. That would replace depreciation and would be a very costly item in the current budgetary framework. Including that is at odds with the level of rate reduction that the Administration wants.

Trump repeatedly touted a statutory tax rate of 15%. The “framework” presented yesterday promised a reduction to 20% for corporate income and 25% for passthrough entities. We’ve been saying virtually from the outset that was not going to happen, based on tax maven Lee Sheppard’s call that the final rate was going to be more like 29%. MarketWatch chimed in:

In short, even under the most optimistic assumptions about repealing existing tax preferences, Congress is likely to cut the corporate tax rate to 25%, rather than the proposed 20%, in order to meet the terms of the budget resolution.

Yet we have more Administration bluster, as Reuters tells us: Treasury’s Mnuchin: Trump’s proposed corporate tax rate ‘not negotiable’:

U.S. Treasury Secretary Steven Mnuchin said on Thursday that President Donald Trump’s proposal for a cut in the corporate income tax rate to 20 percent was “not negotiable.”

Come on, does anyone believe that? If a bill arrives on Trump’s desk with some sort of headline rate cut and simplification, he’s gonna sign it.

And we have Trumpian mixed signals on other fronts. The president had earlier promised to eliminate the carried interest loophole, which would be a non-concession if hedgies and private equity barons instead could use a 15% passthrough tax rate. Then Treasury Secretary Steve Mnuchin curiously mentioned only getting rid of it only for hedge funds….which don’t use it much since most of their profits are too short-term in nature for them to make use of that tax gimmick. Yesterday, there was nary a mention of the carried interest loophole, leading DealBreaker and others to take notice of the absence. Today, the story was the carried interest loophole was a goner for hedgies and private equity types both. From the Financial Times:

Gary Cohn, head of the White House economic council, said on Thursday that Mr Trump had not wavered in his determination to close a “loophole” that is worth billions of dollars to Wall Street money managers.

It’s easy to make that concession because these money managers will wind up in more or less the same spot with a 25% passthrough rate. Again from the pink paper:

Len Burman, co-founder of the Tax Policy Center think-tank, said the biggest boon for hedge fund and private equity managers would be a proposed reduction in the rate they pay as members of legal partnerships, falling from almost 40 per cent to 25 per cent….

The carried interest break lets hedge fund, venture capital and private equity managers pay a 23.8 per cent capital gains tax rate on earnings they receive as a cut of long-term investment gains.

Critics say there is no justification for it, arguing that the managers’ earnings are essentially the same as a salary and should be taxed at the top personal tax rate, which is now 39.6 per cent.

But what happens if Lee Sheppard is right and all the Republicans can get to is a 29% rate? Will the carried interest loophole be saved despite all the promises to scrap it?

Thanks to the Administration’s refusal or inability to provide Congress with what it expects in the way of a starting point, the wrangling is going to be even messier than usual. Pass the popcorn.

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  1. Frenchguy

    On the deferred foreign earnings issue, Apple & co have already issued a bunch of debt backed by their cash abroad to fund buybacks and whatnot. There are no piles of cash waiting to be invested, just a convenient talking point to push for less corporate taxes…

    1. Yves Smith Post author

      We’ve debunked the “piles of cash” repeatedly, but the Financial Times harps on that canard every time it can. The funds are in the US, managed as an internal hedge fund out of Nevada. This hand-wringing is about tax reporting, not the use or even location of actual money.

  2. Northeaster

    Neither Party has been concerned about deficits since mid 1980’s when Tip O’Neil made the broken promise to Regan.

    1. Yves Smith Post author

      Huh? Where were you during the Obama era budget fights?

      The US has a debt ceiling, and has had shutdowns when Congress has been unable to raise it. Did you manage to miss that Trump’s been unable to get the money for his wall, and hasn’t gotten anywhere with his infrastructure spending, even though it would be hugely popular and economically productive, because the deficit scolds won’t back any new large scale spending program? Trump’s team was earlier going to use equity tax credits, which is such a small market as to be effectively useless.

      The Clintons were proud of their destructive surpluses in the 1990s (which led to the big runup in household debt since another sector needed to net spend to make up for the government saving).

  3. Expat

    This is all very complicated stuff. The US tax code is an abomination. I have not paid US taxes in ten years but every year I still sweat out a few days of filling in forms, occasionally screwing things up and getting nasty letters from the IRS. And I have a masters in economics!

    I tend to underestimate the level of people’s stupidity so I remain astonished that Americans believe that tax cuts for the rich are good for them. Do Americans still believe in the American dream? Do they believe that cutting taxes on the 1% will get them great jobs and carefree lifestyle of retro 60’s Coke ads? I suppose they must.

    Something will pass. I wouldn’t mind if they at least eliminated AMT for expats. But expats like me can’t vote so who cares, right?

    1. funemployed

      Most people in the US actually feel strongly that the rich should be taxed more heavily when asked directly. They just look at their paychecks, and get angry that they’re not larger. Then they watch TV, and vote for the people who promise them more money. Then they get madder when they notice that infrastructure, schools, etc. are getting crapified, and the TV tells them it’s because the gov’t is incompetent and wastes all their tax money. Then they get their next paycheck, and are even madder. We’re not the cleverest lot.

      1. John Wright

        The same applies to the USA Estate Tax. Very few American families pay any estate tax, but still seem to believe that some rich relative (that they don’t know about?) will die and leave them a lot of money.

        As a consequence, I suspect, there is little public outcry about the estate tax policies.

        The Republicans talk the estate tax as a “Death Tax” to further the image of a government unfairly “taking” of a dead person’s wealth.

        I remember talking with a young black woman about her landlady who inherited the property.

        She commented that seeing the landlady’s behavior decreased her support for low inheritance taxes.

        I found that surprising that she would have ANY support for low inheritance taxes.

        But I suspect the “inherit a lot of money” dream lives on for many.

          1. Vatch

            True. It also benefits the families of Education Secretary DeVos, Commerce Secretary Ross, Treasury Secretary Mnuchin, Secretary of State Tillerson, Representative Gianforte, Representative Issa, and many other senior government officials. According to the site, currently only the largest 0.2% of estates in the United States will have to pay any estate tax. The Trump administration and the Congress are top heavy with people in the top 0.2% wealth bracket.

    2. rd

      My income is pretty much just salary, so my taxes are relatively simple despite claiming mortgage interest rate and state and local tax deductions.

      However, when my kids were going through college, their taxes were a nightmare with their tax returns thicker than mine despite their income being less than 5% of mine. They would have regular jobs with W-2s at a restaurant but they would also have an internship or part-time job (say $2,000) that was reported on a 1099 or something which would then turn them into independent contractors with Schedule C etc. so that they would have to pay the self-employed tax. So for $5k in annual income you would end up with this stack of forms that you would need to fill out with taxes being owed because of the self-employment tax that wasn’t deducted at source by the employer.

      Somehow, I don’t think this tax reform for the middle class is going to do anything about this.

      1. AngryUndrgrad

        I’m a student with two part time jobs and what you’re describing is the norm for me and most of my peers. Employers know that they can exploit an employee’s lack of tax knowledge in order to pass the bulk of the tax burden even further down the chain. Regulatory class warfare.

    3. Louis Fyne

      —I tend to underestimate the level of people’s stupidity so I remain astonished that Americans believe that tax cuts for the rich are good for them.—

      I’d dare say that even amongst the Right, there is much less dogmatic support for corporate tax cuts. Especially among the Bannon populists wing.

      Follow, much of its coverage/support of Trump is more nuanced than CBNNMSNABC gives it credit.

    4. Procopius

      Minor quibble. I don’t know your situation or why you can’t vote, but expats like me can vote, and I do. Now, a admit it doesn’t amount to much, but at least I know I registered my choice. If they counted it, that is.

  4. JimTan

    I agree that repatriating profits is the low hanging fruit and will probably be enacted in some form over the next year.

    That said, I get a little nervous about the possible public reaction to repatriating profits at a discounted tax rate when I think about how this will work in practice. Our last tax holiday (the American Jobs Creation Act of 2004) passed the U.S. Senate in July 2004, followed by Microsoft announcing a special $32 billion dividend to shareholders in that same month (before Bush signed it into law that October). Press accounts of Microsoft’s special dividend announcement were keen to specify the companies largest individual shareholders, Bill Gates and Steve Ballmer, were allocated $3.3 billion and $1.2 billion respectively.

    This was a time when the amount of untaxed profits were 20% of what they are today, and more importantly the ownership of companies that benefit from these tax strategies is more concentrated than ever before. If U.S. companies rush to announce special dividends with the passage of a 2017 or 2018 tax holiday, we will likely get a situation where the press will report 100 or so special dividends announced in the same week that result in multi billion dollar paydays for some of the wealthiest people in the country. This means mutilple press reports a day for a week of how special dividends allocate one time multi billion dollar payments to names including Bezos, Gates, Ballmer, Allen, Page, Brin, Schmidt, Zuckerberg, Cook, Ellison, Walton, Knight, Murdoch, Buffet. Public perception that congress saw this outcome as a priority, and gave companies a tax break to accomplish it, will probably not be good.

    1. John Wright

      One could make the case that some overseas profits are acquired because the world wide presence of the US military makes business profits in overseas ventures less risky.

      Perhaps some of the business profit arises directly from USA military expenditures overseas?

      Then there is the enforcement of USA IP laws that also helps decrease the risk in overseas multinational operations and profits.

      Why not justify a high tax rate on foreign profits due to the 600 billion defense budget, the state department budget and IP law enforcement, all that benefit multinationals in their foreign operations?

      But the Dems/Republicans will both be reluctant to suggest the military budget, State Department, IP law enforcement all do anything other than “further Democracy” and “keep America safe”.

    2. Allegorio

      @Jim Tan “This means mutilple press reports a day for a week of how special dividends allocate one time multi billion dollar payments to names including Bezos, Gates, Ballmer, Allen, Page, Brin, Schmidt, Zuckerberg, Cook, Ellison, Walton, Knight, Murdoch, Buffet.”

      Don’t count on it. The press is completely in the service of the plutocrats and will suppress any information that will impact public opinion against them. If the information is released, it will be during the Superbowl or Xmas weekend.

      The media establishment’s response to the leftward drift of the electorate is to put out a new version of “Dallas”. Making the world safe for billionaires one celebrity worshiping voter at a time.

    3. Yves Smith Post author

      I’m not saying this is a good idea. This is so inevitable that I don’t think it’s worth my using NC’s soapbox (which has zero clout in the tax arena) to make noise about how terrible it is. These companies have managed to sell the canard that the cash is offshore when it its. We’ve debunked that repeatedly. We’ve also pointed out repeatedly, and more or less said here, that the companies don’t invest, they use the reported income to pay dividends and pay execs. The record on this is very clear.

  5. L

    This may just be more armchair psychoanalyzing but isn’t this what property developers do? That is, build hype for a project by releasing glitzy promises and setting hard targets but leaving it to actually be designed by someone else once all of the investors are on board?

    On one level that is a crazypants way to make legislation but it feels more and more, at least to me, like Trump is at least adhering to his promise to run things like he ran his business. Problem is, legislation is not his business.

  6. Alex

    After Reagan, Bush 1, Clinton, Bush 2, Obama, and now Trump, are voters even qualified to vote? We’ve seen this before. Now, Trump wants $2.2 trillion ( ).

    Americans certainly qualify as the most stupid people ever on the planet. And unfortunately, I keep paying for their screwups.

    Last count, since 2001, the US has spent +/- $38 trillion for defense (military, intelligence, etc) and +/- $38 trillion for tax breaks, subsidies, etc.

    I’m thinking all the people that fled the US over Vietnam were the smart ones.

      1. Vatch

        Of course the money spent on defense, “defense”, and “intelligence” in the U.S. is outrageous, but I’m sure it hasn’t been $38 trillion since 2001. I’m not going to look for all 17 years, but here’s a sample:

        2002: $349 billion.

        2004: $455 billion.

        2005: $495 billion.

        2008: $482 billion.

        2009: $516 billion.

        2010: $664 billion. Hmm. That’s a big jump. They may have included something that wasn’t included in the previous years’ Wikipedia articles.

        2012: $689 billion.

        2015: $621 billion.

        There are inconsistencies, and we don’t know the full amount that is spent for “intelligence”. There’s also the Veterans’ Department budget. If we say that $750 billion has been spent on “defense” each year for the past 17 years, we’re probably exaggerating somewhat, and that sum is $12.75 trillion. That’s a lot of money, but it’s far less than $38 trillion.

        1. Alex

          I broke it down by:

          1. spending for US involvement in 16 countries



          4. NATO BUDGET

          Note: annual budgets include Defense budget, Black budget, Intelligence budget, National Intelligence budget, Foreign Aid, NATO

          TOTAL MILITARY SPENDING: $38,655,190,993,638 $38.65 trillion

          1. Alex

            The sixteen countries the US spends military money are:

            1. Afghanistan
            2. Cameroon (Boko Haram)
            3. Chad
            4. Iraq
            5. Israel
            7. Korea
            8. Libya
            9. Mali
            10. Pakistan
            11. Somalia
            12. Strait of Hormuz
            13. Syria (ISIL / ISIS)
            14. Turkey
            16. Yeman

      2. cj51

        Alex may possibly be referring to Total Federal Spending, but I’m not sure.
        Total Federal Spending was 3.8 trillion in 2015.
        Someone could go back and add up Total Federal Spending for 2001 – 2016.
        It might come out to something like 38 trillion but that sounds high.
        Maybe if you add in estimated future liabilities, for things like health care for injured veterans who fought in the wars from 2000-present, you would get to 38 trillion.

        1. nonclassical

          …he may be counting Q.E. and other “AAA” rated Wall Street “control accounting fraud” buybacks…such number has been quoted.

’s Wall Street “derivatives” since 2001; (who are now bank holding co.) defined under FDIC auspices, here:

          “JPM is the world’s largest purveyor of derivatives. Its total contracts have a notional value of $72 trillion—and 99 percent of them are booked at its FDIC-insured bank. In the event of failure, sorting out the claims and counterclaims will be a costly nightmare for the FDIC.

          Citigroup has nearly all of its $53 trillion in derivatives in its FDIC-insured bank; Goldman Sachs has $44 trillion parked at an FDIC-backed institution. After Bank of America purchased Merrill Lynch, BofA began transferring the securities firm’s derivatives to the FDIC-insured bank, which now holds $47 trillion in contracts. When Senators Sherrod Brown and Carl Levin, among others, complained that regulators’ acquiescence in these transfers contradicted Congressional instructions in the 2010 Dodd-Frank reform law, the Federal Reserve, the FDIC and the Treasury Department’s Office of the Comptroller of the Currency refused to answer their objections. This matter involves “confidential supervisory” and “proprietary business information,” the three agencies responded in unison.”

          …pertinent question appears be difference between Wall Street derivatives 2001, and today…?

      3. Alex

        Sources were HuffPo article and Good Jobs First Subsidy Tracker.

        Article was written July 2016; needs to be updated. Some data has changed since then. No 4 has changed; used to be complete of all recipients, now they just list top 10 (still looking into it).

        1. Corporate Tax Breaks (annual)
        $180,000,000,000 $180 billion

        2. Corporate Tax Breaks (annual) x 16 years
        $2,880,000,000,000 $2.8 trillion

        3. Federal Grants & Allocated Tax Cuts
        $71,191,562,223 $71.19 billion
        Updated to: $130,749,417,188

        4. Federal Loans, Loan Guarantees, Bailout Assistance
        $18,073,840,039,282 $18.07 trillion

        5.Top Federal Grant/Allocated Tax Credit Programs
        $71,191,562,223 $71.19 billion
        Updated to: $72,300,011,686

        6. Top Federal Loan/Loan Guarantee/Bailout Programs
        $18,665,822,106,633 $18.66 trillion
        Updated to: $18,697,802,240,736

        Total: $39,762,045,270,361 $39.76 trillion

        1. Vatch

          That’s not the Defense/Intelligence/Foreign Aid spending. I doubt that Defense/Intelligence/Foreign Aid comes close to $38 trillion. With foreign aid, it is probably a little more than my estimate of $12.75 trillion for 17 years, but not by much. Many Americans heavily overestimate the amount of foreign aid.

          And a lot of what you listed is not federal spending at all. Some of it is loans, some is guarantees, and some is tax breaks. The loans aren’t spending unless the loan defaults (which can happen). The guarantees are definitely not spending, unless something bad happens, and the government needs to pay the guarantee (which can happen). And tax breaks are never spending. They are a serious problem in many cases, but they can’t be included on a list of federal spending.

          1. Alex

            I respectfully disagree. We can argue numbers all you want.

            For example, the BLS says we’re at full employment (official numbers); no one buys that. It’s all how it’s counted.

            There is on-the-books (budget) and off-the-books, and that goes back decades.

            Foreign Aid:
            1. The Pentagon’s secret foreign aid budget

            2. U.S. Overseas Loans and Grants (Greenbook)

            For each county I listed, there is a credible source (WashPo, UK Guardian, PBS, CNN, Mother Jones, Time, Reuters, etc) where the numbers came from.

            The recurring theme is the official numbers, which you quote, don’t match up with the spending.

            The best thing to do is gather all your data and put it out there for people to debate.

  7. allan

    And we’re off to the races:

    U.S. Senate panel proposes $1.5 trln 10-year revenue cut for tax plan

    The Republican-controlled Senate Budget Committee, in a crucial step forward for tax reform legislation, released a fiscal year 2018 budget resolution on Friday that would allow tax cuts to lose up to $1.5 trillion in revenue over the next decade.

    The measure, which could be marked up for a full Senate vote next week, is vital to Republican plans to move tax reform legislation through the Senate via a special parliamentary process that would allow Republicans to pass legislation without a customary 60-vote margin. …

    This won’t stop centrist Dems from running in 2018 and 2020 on platforms of fiscal rectitude.
    But our message did so well in focus groups at Committee for a Responsible Federal Budget and Third Way.
    What happened?™

  8. Jim Haygood

    ‘Mind you, the appearance of making the [deficit] number add up is a headfake’ — YS

    Indeed it is. Cash budgeting is ridiculous for an entity [US gov] which has long-dated liabilities such as bonds and pensions. In fact, cash-based reporting is flat-out illegal for corporations with long-dated liabilities. But Kongress Klowns love it, because it underestimates the deficit.

    As a confirmed deficit fetishist [you should have seen our freaky costumes at the party ‘celebrating’ $20 trillion in federal debt], I consult the Financial Report of the United States Government. It properly uses accrual accounting, but — incredibly and tellingly — treats Social Security, Medicare and Medicaid as off budget (i.e., not Uncle Sam’s obligation, unless he’s feeling magnanimous toward the serfs).

    In the most recent report released in Jan 2017, the accrual-based deficit (called “net operating cost’) was $1.047 trillion, $460 billion higher than the cash-basis deficit of $587 trillion.

    With Social Security only 20% funded, headed to zero percent funded by 2035, this accrual-based accounting that Kongress and the press studiously ignore is gonna BITE HARD one day. Can’t pay, won’t pay.

    1. Ian Ollmann

      I’ve always seen Social Security and Medicare/Medicaid as de facto pay-go systems, since IOU’s to self are not worth much. To the extent that that is true, then keeping them off budget doesn’t bother me much.

      So yes, can’t pay. Won’t pay. Should anyone be surprised?

      I mean, the alternative to funding a underfunded social program would be additional taxes on the people who have money. What are the odds of that?

  9. JTMcPhee

    Is what “the world’s greatest legislative body” is about to do more analogous to “sausage making,” which in the real world can at least produce something that tastes tasty to most people? Or to the activities in the ego-plagued, storm-rent darkness of the chambers of one Dr. Victor Frankenstein, assembling ‘life” out of assorted semi-rotted parts, a creature that was not so kind to the community, or its creator?

    Or maybe it’s more like unto the Golem of Jewish lore — — a bit of mythology appropriated by Tech, in this form: (Does the Techrabbi who raised up the netgolem know how to erase the power words from its forehead?)

  10. Ep3

    I didn’t check comments thoroughly. But to expense fixed assets fully in the first year is more of a tax shift than a tax cut. Not sure if anyone else has explained this yet.
    Here’s the example. If you have 1,000 in sales, and you fully expense an asset that is 200, you have 800 in net income in the first year (tax rate 25%, tax of 200). Then in the second year, your sales are 1,000, but no depreciation expense. Your net income is 1,000. But if you depreciate that asset over 5 years, that’s 40 of expense each year. Your net income then is 960, with tax expense of 240. You are spreading that tax benefit over the 5 years (in my simple but accurate example). You would have to spend money every year on fixed assets (which some companies do) to save on taxes. But there, is it wise for a company to spend 200 on a new asset just to save 40 (first year tax benefit)? The company is out 160.
    And it should be mentioned, there are already two lines of tax code that allow for this accelerated tax depreciation; 168 and 179. 168 limits the expense up to 50 percent of the cost of the asset. While 179 has a $2,000,000 total limit of depreciable assets.

    Second, from what I read, the tax deduction to be eliminated only related to state and local income taxes, not the property tax deduction. But as the author says, none of what was proposed really matters because the Congress critters will change all that.

    1. Ep3

      One thing I failed to mention was a reason that this accelerated depreciation would be beneficial to a company. If a company were anticipating lower future tax rates, then accelerated depreciation would make sense. You would lower your expense in the current year, Congress lowers rates for the following year, thus the company realizes savings over the given life of the assets.

  11. Scott Frasier

    This round of Republican tax cuts/“reform” is going to be much more painful than previous ones. In the past, the tax changes were simple and almost everyone got some money back. What’s not to like, even for Democrats?

    The new tax/budget calculus is complicated by some Republicans who seem to care about deficits, certainly not a majority. That means that tax changes are now a zero-sum game, more or less. Those corporate, estate, and high bracket tax cuts must be offset at least in part by the so-called pay-fors. The biggest pay-fors now fall squarely on the budgets of suburban and urban homeowners in prosperous districts.

    State and local taxes fall unevenly across the landscape and provide professionals some relief from the high personal tax rates that don’t apply to those billionaires. Republicans, who used to argue that $400K made you middle class, now have decided that maybe it is more like $75K. The state and local tax deduction and personal exemption elimination falls hard on upper middle class voters and their largely 25% rate is not slated to fall one bit. It is not just a blue state issue, although they will take a big hit. Urban/suburban districts across all states will take a hit.

    Republican have now arrived where Democrats in the 70’s arrived. Providing benefits to one group is going to cost another group. Tax cuts are no longer a freebie. Someone who votes for you will have to pony up.

  12. Sound of the Suburbs

    Look at the maths of today’s world to understand why the young don’t like it.

    The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

    Disposable income = wages – (taxes + the cost of living)

    What is the other variable in the brackets with taxes?

    Neoclassical economics is old; it was last used in the 1920s when the faith in markets evaporated after 1929. They had to wait a while before they could start promoting a market driven economy again.

    It came into existence to hide the discoveries of the Classical Economists and the difference between “wealth creation” (earned income) and “wealth extraction” (unearned income).

    The aristocracy were economic parasites living off “unearned” income; they couldn’t miss it as it was a fundamental problem in the early days of capitalism. These parasites were always extracting rents from the productive capitalists and their workers, and the worker’s rents had to be covered in wages. The capitalist’s profits were being taken by these parasitic rentiers.

    To hide rentier activity they needed to move the focus away from the cost of living.

    Didn’t they do a good job?

    The cost of living should be the same in West and East to allow a level playing field in a globalised world with free trade and the free movement of capital.

    They haven’t worked it out yet.

    Now you’ve got the maths Mr. Trump.

    What is going wrong?

    The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

    Disposable income = wages – (taxes + the cost of living)

    Min wage is set when disposable income = zero

    It’s easy and everyone is going to carry on off-shoring until you get it sorted.

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