Thursday’s news (9/28/2017) – Mixed verdict for tax plan outline

Trump and Republicans release tax framework

President Trump and Congressional Republicans released a tax reform outline that was superior to what had been expected from previous speeches and press reports but which still falls short of what tax reformers had hoped for. Our grades with comments follow below:

• The corporate tax rate will be cut from 35 to 20 percent. This will strongly promote new investments and growth and eliminate incentives for U.S. corporations to relocate to many countries whose corporate tax rates are lower. (A+)
• Business equipment and other short-lifetime investments will be able to be fully expensed in the year incurred, but not buildings and other long-lifetime investments, which must still be depreciated. The full expensing of short-term investments will expire after five years unless renewed by Congress. The measure will promote some new investment and simplify tax accounting for those investments. But full investment expensing should have been made permanent and have also included long-term investments. (B-)
• U.S. taxing of corporate profits earned and taxed abroad will be replaced by adherence to the territorial system used by the rest of the world. (A+) But there will be a lower, yet unspecified tax on repatriated already-accumulated profits of U.S. corporations now held abroad. These profits were already taxed abroad and thus should not be re-taxed. (C-)
• State and local tax (“SALT”) deductions on federal tax filings will be repealed. This will save the government considerable revenue loss and mainly hit wealthy individuals in overtaxed states like California, New York, New Jersey, and Illinois. (A+)
• The individual and corporate alternative minimum tax will be repealed. This hated tax wasn’t indexed for inflation, resulting in “bracket creep” to ever-increasing tax rates. It also made tax estimation and calculation much more complicated. (A+)
• The corporate deduction for interest expense will be reduced, amount unspecified. Full elimination of the deduction would have been better. Why should debt be favored over equity? That’s a recipe for increasing layoffs and bankruptcies in downturns. (C-)
• The federal estate (“death tax”) and generation-skipping taxes will be repealed. This has been a hated form of double or even triple taxing of income already earned and taxed. It also discourages investment and saving to pass on wealth to one’s children and grandchildren. (A+)
• The top rate for businesses that pass-through business earnings to individual tax forms will be reduced from from 40 to 25 percent, but service-oriented businesses (accountants, doctors, lawyers, etc.) will not be eligible. Why not 20%? Why have a different rate than the corporate rate, and why exclude service-oriented businesses? This will create opportunities for tax fraud, law suits, and intrusive IRS investigations and challenges. (C-)
• Individual tax rates will be simplified to 12, 25, and 35 percent, a slight decrease from the high rate of 39.6 rate, but President Trump has threatened a surcharge for the very wealthy that would negate the 35 percent rate. But a single flat tax at the 20% corporate rate would have simplified tax filing to postcard size for both individuals and businesses and reduced incentives for tax evasion and earnings avoidance so as to not be moved to a higher tax bracket. The high tax rate on the wealthy is also anti-growth, because the wealthy are the main source of business investment funds. President Reagan in 1986 got the highest tax rate down to 28 percent. Clearly President Trump and Congress have capitulated here to Democratic Party class-war partisans. And we don’t yet know at what income levels the three different tax rates will be triggered. (C-)
• The standard deduction will be increased to $12,000 for individuals and $24,000 for couples, but the $4,050 personal exemption is gone. This and an unspecified increase in the child tax credit will help some taxpayers financially — a political plus given promises for a middle-class tax cut — but won’t do much for economic growth. (B)
• Politically popular mortgage and charitable deductions will remain. The former should have been grandfathered or phased out for existing mortgaged homeowners depending on it; the charitable deduction, a tax benefit mainly for the wealthy, should have been eliminated outright. Charities will still thrive if economic growth and earnings increase. (D)
• Double-taxation of dividends and capital gains haven’t been eliminated. (F)

Despite the big disappointments noted above, the reduction in the corporate tax and the move to a territorial tax system are major pluses for growth in business investment and wage-earners’ income and employment prospects. We hope they will survive the Congressional sausage-making machine.

Puerto Rico, the Jones Act, and electoral issues

President Trump has temporarily suspended the protectionist Jones Act to allow non-U.S. ships to get needed supplies to Puerto Rico. The Cato Institute makes a strong case that the Jones Act should be repealed altogether. Meanwhile, Democrats are excited at the possibility that the post-hurricane flight of Puerto Ricans to Florida may tilt that important electoral swing state to solidly Democratic.

U.S. electoral expert Michael Barone has an important discussion of a Supreme Court case which involves Democratic Party attempts to change how electoral districts are drawn up and which would create even crazier gerrymanders than the ones that Republicans are blamed for.

The Court will also hear an important case on whether whether public-sector unions may require workers who are not members to help pay for collective bargaining.

Democrats are also launching lawsuits to transform the Electoral College in favor of allocating electors by proportional representation rather than winner-take-all.

Science: Gravity waves and Mars plans

PennState Science reports that “For the first time, three detectors have tracked the gravitational waves emitted by a merger of two black holes — a critical new capability that allows scientists to more closely locate a gravitational wave’s birthplace in space.”

SpaceX’s Elon Musk and Lockheed will be announcing their latest Mars plans at the 68th International Astronautical Congress (IAC) in Adelaide, Australia. Both presentations will be available for worldwide viewing.

Click here to go to the previous Founders Broadsheet (“Today’s news – 9/27/2017 – Republican establishment fearful after Alabama loss”)