tax reform Trump

Your Complete (Updated) Guide To Tax Reform That Will Never Pass

That may indeed be "the plan" but you know what they say about the "best laid plans" - something about how they often go awry as soon as a sitting President calls a Senator from his own party 'Liddle Bob on Twitter.

That may indeed be "the plan" but you know what they say about the "best laid plans" - something about how they often go awry as soon as a sitting President calls a Senator from his own party 'Liddle Bob on Twitter.
This content has been archived. Log in or Subscribe for full access to thousands of archived articles.

2 comments on “Your Complete (Updated) Guide To Tax Reform That Will Never Pass

  1. There are many different ways to categorize households as between those that are middle class and those that are rich. Likewise, there are a number of ways to measure how a change in the tax code impacts various sectors in the economy. There are also different methodologies used to calculated what percentage of federal taxes are paid by middle class households as compared to the rich. However, by an conceivable way of delineating the middle class from the rich, and measuring the impact of changes in the tax code, any tax bill enacted this year or next will be the most massive shift in the tax burden away from the rich and thus onto the middle class.

    We have seen this story before. It is not just a coincidence that tax cuts for the rich have preceded both the 1929 depression and the 2007 financial crisis. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increases in savings and investment. However, overinvestment (by 1929 there were over 600 automobile manufacturing companies in America) caused the depression that made the rich, and most everyone else, ultimately much poorer.
    The quandary for investors can be described as someone who has seen the first and last page of a book, but does not know either how long the book is or what happened between the first and last pages. We know that a massive transfer to the rich will happen. We know that the middle class has a much higher marginal propensity to consume than the rich. We know that initially the rich, or if you rather the job creators, use their additional after-tax income to invest. This extra investment initially boosts securities prices. The higher prices for securities enables investments to occur that might have otherwise been undertaken. These can range from factories, shopping centers and housing. What we don’t know is the path that equity prices and interest rates will take between the enactment of the tax shift and the eventual financial crisis or any other event occurs. At that point in time, the massive excess of supply of loanable funds as compared to demand for loans will push risk-free short-term interest rates down to near the lower bound, as was the case during the 1930s in Japan for decades and in America since 2008.

    The length, path and magnitude of a tax-shift induced cycle is particularly important to investors in leveraged instruments, such as high yield 2X leveraged ETNs. No two overinvestment cycles are identical. This time the picture is cloudier since most of the shift from in the tax burden from the wealthy to the middle class will be via reductions in business taxes. Reducing taxes on corporations would not increase economic activity. A profit-maximizing corporation will make decisions relating to the level of production, wages and prices that maximize after-tax profit. Since corporate income taxes are a percentage of pre-tax profits, the level of output, wages and prices that maximize pre-tax profits are also the same levels that maximize after-tax profits. This was explained in: Get 16.8% Dividend Yield, And Diversify Some ETN Interest Risk. However, that does not mean that changing corporate taxes, other than the rate, cannot impact economic activity.
    Allowing immediate expensing of capital expenditures or even just allowing vastly increased accelerated depreciation could bring forward capital expenditures that would have otherwise have taken place in the future. This would be particularly powerful if the immediate expensing or extra accelerated depreciation was set to only last for a specified period. Allowing immediate expensing of capital expenditures could even cause projects that would otherwise be not accepted on a net-present value analysis, be undertaken as a result of now having expected internal rates of return exceeding the hurdle rate.

    There is also a “geographical Laffer Curve effect” when different taxing jurisdictions cause activity to shift from higher tax jurisdictions to those with lower taxes. Generally, this is more pronounced the closer the different jurisdictions are. People driving from New York to New Jersey to pay less sales taxes when they shop are an example. Lower corporate taxes in the U.S. could shift some activity from other countries. Allowing repatriation of corporate profits now nominally held in other countries or just eliminating taxes on foreign earnings could boost the value of shares in multinational corporations. These would include Apple (AAPL) and possibly even General Motors (GM). Most major profitable multinationals have ample access to capital regardless of where their cash is located. Thus, very few multinational corporations are not undertaking any projects because of where their cash is located.
    In terms of reallocating the shares of the tax burden between the middle class and wealthy, the share paid by the rich would decline, although not as sharply, even in the unlikely event that Trump circumvents the Republican leaders and makes a deal with the Democrats. This might occur if the Republicans are unable to enact tax legislation, as was the case with repeal of Obamacare. In passing the debt ceiling and government funding legislation, Trump did work with the Democrat leaders, much to the consternation of the Republican leaders. As was described in How A Trump-Schumer Tax Deal Could Impact Financial Markets:n https://seekingalpha.com/article/4113472

    Totally eliminating the estate tax and the deductions of state and local taxes would probably be a non-starter for Democratic leaders Chuck Schumer and Nancy Pelosi. However, many Democrats and some Republicans would be willing to go with a compromise that might increase the threshold below which no estate taxes are paid to $25 million. Likewise, Democrats and some Republicans might support keeping the deductions for state and local taxes, but limiting the amount that any individual filer could deduct to say $100,000. Compromise on estate tax and the deductions of state and local taxes could be viewed favorably by Trump. This would remove those topics that are now albatrosses around Trump’s neck, since they are the clearest evidence that directly refutes Trump’s promises that all middle-class taxpayers would benefit from the tax reform plan and that the very wealthy such as himself would not.

    The area where common ground could be found between Trump and the Democrats is corporate taxation. The falsehood that corporations do not pay income taxes, but rather their customers and employees do, has been repeated many times by those who do not understand economics and by some who epitomize Upton Sinclair’s famous statement that “it is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

    Many, possibly including Chuck Schumer and Nancy Pelosi, do not know that the incidence of a corporate income tax falls entirely on the shareholders of the corporation. Even more, probably do not understand why that is case, nor could they explain it.

    Even if was widely understood that the incidence of a corporate income tax falls entirely on the shareholders, not all shareholders are in the top 1% or even wealthy. That could make it easier for Democrats to accept lower corporate taxes as compared repeal of the estate tax, which only benefits the extremely wealthy. To the extent that poor and middle class people are owners of shares the corporations, the incidence falls on them too. However, the reduction in corporate income tax receipts as a percentage of GDP has been the primary cause of the shift of the tax burden to the middle class from the rich. Corporate income tax receipts were 4% of GDP in 1969 and were 1.77% in 2016. During that same period, payroll tax rates as a percent of GDP have increased dramatically from 3.27% in 1966 to 5.95% in 2016…”
    https://seekingalpha.com/article/4120502

  2. Tom Swift Jr.

    Man plans, god laughs.

Leave a Reply to Tom Swift Jr. Cancel reply

Skip to toolbar