Trump’s Corporate Tax Rewrite Faces Major Obstacle: Its Cost
President Donald Trump offered corporate America a sweeping tax vision whose ultimate promise of lower rates and more global competitiveness depends on one thing: longevity. Given the plan’s uncertain costs, longevity may be one thing the proposal can’t deliver.
The tax plan released Wednesday by top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin provided much for multinational corporations to rejoice over — it calls for slashing the corporate income tax rate to 15 percent from 35 percent and applying a one-time, low rate to an estimated $2.6 trillion in offshore profits that have so far avoided U.S. taxes.
The plan also calls for shifting to a territorial system for corporate taxes in which, going forward, most foreign profits would be exempt from U.S. levies. Currently, the U.S. taxes corporate income no matter where it’s earned.
But it’s unclear whether or how the corporate tax proposals would be paid for; Mnuchin has said economic growth resulting from tax cuts would cover much of the cost, but economists question that assertion. The issue is more than just academic: In order to clear the Senate without any Democratic votes, any tax plan can’t add to the deficit outside a 10-year budget window. So if the legislation isn’t revenue neutral in the long run, its tax cuts would have to be temporary — set to expire at least within a decade, and perhaps sooner. Go to Bloomberg to read more.
Warren Buffet says economy is softer than people think
Economist Kyle Pomerleau of the conservative Tax Foundation said in a Twitter message Wednesday that there wasn’t enough detail to provide a cost estimate for Trump’s tax plan, while the nonpartisan Center for a Responsible Federal Budget released a rough estimate that it could cost $3 trillion to $7 trillion over the next decade — potentially “harming economic growth instead of boosting it.”
Moving to a territorial system would put the U.S. on even footing with other developed nations, which don’t tax corporate income offshore. It would also end the so-called “lockout” effect, under which companies hold billions of dollars in earnings abroad to avoid U.S. taxes. Currently, companies can defer taxes on their offshore earnings until they bring them to the U.S. And when they do “repatriate” their foreign income, they can claim credits against their U.S. tax bills for any foreign taxes they’ve already paid.
Under the deferral system, U.S. companies have stockpiled an estimated $2.6 trillion offshore to avoid paying U.S. taxes on it — though Trump has said repeatedly that he thinks the amount is higher. The outline that the administration released Wednesday didn’t specify a tax rate that would be applied to those offshore earnings but called it a one-time rate that Mnuchin said would be “very competitive.”
During the campaign, Trump had proposed a 10 percent tax. At that rate, a repatriation tax would raise about $147.8 billion over a decade — assuming that companies were allowed to pay over time — according to an estimate made by the Urban-Brookings Tax Policy Center, a Washington policy group.
Business Insider reports that it raises the obvious concern that the White House is simply planning a massive, backdoor tax cut for the rich. The current top individual income tax rate is 39.6 percent. Trump would bump it down to 35 percent. Letting law-firm and private-equity partners pay a 15 percent rate on their profits, which often make up the vast majority of their pay, would significantly lower their IRS bills.
Trump’s team insists that this won’t happen; today, Mnuchin said Wednesday that the new 15 percent rate will be limited to small and medium-sized businesses. It’s not clear, however, what would count as “medium,” or how Washington would enforce the rule.
The bigger potential problem with slashing taxes on pass-throughs is that many highly paid Americans will probably try to cut their tax bills by pretending to be small business owners.
The prosed “tax reform” comes together with the news that the U.S. economy expanded at the slowest pace in three years as weak auto sales and lower home-heating bills dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling.
Gross domestic product, the value of all goods and services produced, rose at a 0.7 percent annualized rate after advancing 2.1 percent in the prior quarter, Commerce Department data showed Friday in Washington. The median forecast of economists surveyed by Bloomberg called for a 1 percent gain. Consumer spending, the biggest part of the economy, rose 0.3 percent, the worst performance since 2009.
The GDP slowdown owes partly to transitory forces such as warm weather and volatility in inventories, which supports forecasts for a rebound as high confidence among companies and consumers and a solid job market underpin growth. Even so, the weakness at car dealers could weigh on expansion, and further gains in business investment could depend on the extent of policy support such as tax cuts.
The data are unlikely to dissuade Federal Reserve policy makers from raising interest rates in the coming months. Economists were largely expecting a weak growth figure, calling it a blip and not a sign of stagnation.
Analysts have pointed to issues with the Commerce Department’s seasonal adjustment of growth data: Since 2000, expansion in the first quarter of each year has averaged 1 percent, compared with 2.2 percent for the rest of each year, according to Wells Fargo Securities.
Though the first-quarter figure isn’t a verdict on President Donald Trump’s policies, economists are generally skeptical that growth will reach his goal of 3 percent to 4 percent on a sustained basis. Analysts’ estimates indicate just 2.2 percent to 2.3 percent annual growth through 2019, a tad above the average pace during the almost eight-year expansion.
During the first quarter, a chief driver of growth was private, fixed nonresidential investment, which contributed 1.12 percentage point to expansion, led by a record increase in mining exploration, shafts, and wells, a category that includes oil structures. Residential investment added 0.5 points to growth.
The change in inventories, one of the most volatile parts of the GDP calculation, subtracted 0.93 percentage point from growth, following a 1.01 percent gain. Trade, also volatile from quarter to quarter, contributed 0.07 point after a 1.82 point drag in the previous period.
Economists’ forecasts for overall growth ranged from zero to 2.2 percent. The GDP estimate is the first of three for the quarter, with the other releases scheduled for May and June when more information becomes available.
The 0.3 percent growth in household consumption, which accounts for about 70 percent of the economy, followed a 3.5 percent jump from October to December. The median forecast in the Bloomberg survey called for 0.9 percent, and purchases added 0.23 percentage point to first-quarter growth.
While some of the slowdowns may be temporary, inflation is eating into consumers’ wallets. Real disposable personal income rose at a 1 percent pace in the period, the weakest since the fourth quarter of 2013.
Trump floats the possibility of a ‘major, major’ conflict with North Korea
President Donald Trump said on Thursday a major conflict with North Korea is possible in the standoff over its nuclear and missile programs, but he would prefer a diplomatic outcome to the dispute.
“There is a chance that we could end up having a major, major conflict with North Korea. Absolutely,” Trump told Reuters in an Oval Office interview ahead of his 100th day in office on Saturday.
Nonetheless, Trump said he wanted to peacefully resolve a crisis that has bedeviled multiple US presidents, a path that he and his administration are emphasizing by preparing a variety of new economic sanctions while not taking the military option off the table.
“We’d love to solve things diplomatically but it’s very difficult,” he said.
Trump lavished praise on Chinese President Xi Jinping for Chinese assistance in trying to rein in North Korea. The two leaders met in Florida earlier this month.
“I believe he is trying very hard. He certainly doesn’t want to see turmoil and death. He doesn’t want to see it. He is a good man. He is a very good man and I got to know him very well.
“With that being said, he loves China and he loves the people of China. I know he would like to be able to do something, perhaps it’s possible that he can’t,” Trump said.
Trump spoke just a day after he and his top national security advisers briefed US lawmakers on the North Korean threat and one day before Secretary of State Rex Tillerson will press the United Nations Security Council on sanctions to further isolate Pyongyang over its nuclear and missile programs.
The Trump administration on Wednesday declared North Korea “an urgent national security threat and top foreign policy priority.” It said it was focusing on economic and diplomatic pressure, including Chinese cooperation in containing its defiant neighbor and ally, and remained open to negotiations.
US officials said military strikes remained an option but played down the prospect, though the administration has sent an aircraft carrier and a nuclear-powered submarine to the region in a show of force.
What is remarkable is that “one-page tax reform”, bad news that the U.S. economy is slowing down and shocking announcement that the U.S. may opt for a nuclear standoff happened at the same time when there is little room left to believe that Michel Flynn is innocent.
Rep. Elijah Cummings called for a press conference where he expressed deep disappointment that the White House refuses to pass any documents on Flynn’s “resignation”. In fact, he said that despite numerous requests, the administration does not want to help. According to Elijah Cummings’ statement, it appears that the White House is covering up Michael Flynn.
It is really difficult to say what Trump will end up doing. However, what is clear is that earlier expressed fear that he will push the country and the world towards a catastrophe is quickly shaping up into reality.
The economy is sending very strong signals that dark days are ahead. It is important to keep in mind that with interest rates hike, the closed-end fund would start dumping commodity stocks and look for higher yields. Since the latest numbers are lower than what was reported in 2013, it is possible that we shall expect a decline in demand. Considering the weak financial position of oil and gas companies, this is indeed a disturbing news.