Tax Reform: Perfecto?

by Andrew Stuttaford

Ramesh writes:

Many Republicans, including Senate majority leader Mitch McConnell and Senator Susan Collins, have suggested that the tax cut will do so much to expand the economy that the new tax code will raise more revenue than the old one. This result is theoretically possible, but it is highly unlikely.

It’s hard to disagree. If they wanted to invest (or pay their workers) more, companies already have plenty in the till with which to do so. What’s more, the recovery has already run a long way, and the direction of interest rates is, however gently, upwards, a process that may be accelerated if the Fed thinks that the (supposed) boost generated by the tax package risks overheating an economy which is already growing at a decent pace. On the other hand, there is also the danger of a reverse wealth effect (depressing demand), if, as some claim, the sharp reduction in the state and local tax (SALT) deduction hits house prices. There is also the question of what that reduction will do to demand in the more affluent blue states. Keep an eye too on the fact that under the Senate plan, interest on home equity loans will no longer be tax deductible. What will that do to consumer demand? 

No less importantly, if the tax cut is to boost corporations’ investment plans, companies must believe that the cuts are sustainable beyond (at the very least) 2020, and that’s not exactly what the polls are telling them. The Republicans have reason enough to worry about 2018 and 2020, and this tax reform might even make things worse. 

Business Insider:

A Gallup poll found that 29% of people surveyed approved of the GOP tax bill, the Tax Cuts and Jobs Act (TCJA), while 56% disapproved. Seventy percent of Republicans approved, while just 7% of Democrats were in favor. Independents joined Democrats in relative distaste, with 25% of those polled approving of the legislation and 56% disapproving.

Another poll from  Quinnipiac University also found that 29% of those surveyed approved of the TCJA, while 53% disapproved.

These data were released on Tuesday, after the Senate vote early on December 2, but the Gallup survey was compiled December 1-2, and Quinnipiac’s November 29-December 4.

One major criticism of the tax package is the pace at which it is being pushed through, a risky approach in the case of a wide-ranging overhaul of something as complex as the tax system. There will be unintended consequences.

One of those quickly became visible, not least to the stock market, when investors realized what the (unwise) retention of corporate Alternative Minimum Tax (AMT) would mean.

Bloomberg:

One of the last-minute, late-night changes Senate Republicans made to their tax-overhaul plan may mean higher taxes for corporations, including technology firms, than the bill’s drafters intended, experts say. As amended, the Senate tax bill would preserve the existing 20 percent corporate alternative minimum tax, a levy designed to stymie companies’ tax avoidance that applies to fewer than 1 percent of U.S. companies under current law.

But under the Senate plan, retaining the AMT could prevent companies from making use of planned tax breaks related to intellectual property, to spending on new equipment and to research and development. The AMT may fall hardest on technology and utilities companies — though the snag would apply broadly, experts say.

“The fact is, almost everyone who’s a corporate taxpayer is going to be an AMT taxpayer” under the bill, said Bret Wells, a tax law professor at the University of Houston.

Shares of technology companies dropped Monday. An index of technology companies on the S&P 500 fell around 2 percent. The Nasdaq 100 Tech Index fell 1.8 percent. Already, the U.S. Chamber of Commerce is seeking the AMT’s repeal — as the Senate bill would have done before Saturday’s changes. Seeing the provision retained in the legislation was “a very unpleasant surprise,” wrote Caroline L. Harris, the organization’s chief tax counsel.

There were other reasons for that sell-off too, but it was a reminder of the need to go carefully, a reminder, reinforced, doubtless, by lobbying, that, in the case of the corporate AMT looks likely to be listened to.

Bloomberg:

Two influential GOP senators — Senator Rob Portman of Ohio, one of the chamber’s main tax writers, along with Senator Orrin Hatch, chairman of the tax-writing Senate Finance Committee — said their preference is to repeal the corporate AMT.

That would be the corporate AMT they had just agreed to retain.

Some of this toing and froing is, of course, part of the normal course of events as a conference committee gets underway, and the President seems sanguine.

Bloomberg:

President Donald Trump endorsed the work of the conference committee early Tuesday afternoon, calling the panel a “mixer,” where lawmakers will pick the good things and get rid of the things they don’t like.

The result will be “something that is perfecto,” Trump said.

Meanwhile, I noted this in MarketWatch:

The tax legislation currently under discussion in Congress is almost certain to have one big unintended, and uncomfortable, consequence.

Fannie Mae and Freddie Mac, the two giant mortgage financiers, hold billions of dollars of “deferred tax assets” on their balance sheets. These assets include items like credits that can be used to defray tax bills in future years. But if the corporate tax rate is reduced, the value of those assets would tumble. Mark Zandi, chief economist for Moody’s Analytics, estimates that the hit to the assets, which are currently worth about $45 billion, would be about $20 billion, assuming the corporate rate is cut to 20% from 35%.

Losses of tens of billions would be tough for any corporation to withstand. But Fannie and Freddie will have it especially hard. Under the terms of a 2012 directive from Congress, the two are required to send their quarterly profits to the Treasury, thereby reducing their capital buffers to zero by 2018.

That means a quarterly loss could force either or both to draw money from Treasury — in effect, taking a taxpayer bailout.

Food for thought.

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