Last week, Steven Mnuchin, Trump’s Treasury Secretary pick, announced that high earners won’t receive an “absolute tax cut” suggesting that any tax reductions would also be coupled with less deductions. Unfortunately, Mnuchin doesn’t know or pretends to ignore the fact that high income earner have faced brutal tax increases during the Obama Administration, and thus any decreases are really just a return to the more appropriate rates of the Bush years.
Obama raised the Bush tax rates on only the wealthiest earners from 36% – 39.6 % and then again raised the tax rates on only the same wealthiest by adding a Net Investment Income Tax (NIIT) of 3.8%, — otherwise known as the “Obamacare Tax” — which covered all investment income of individuals, estates, and trusts. What’s more, Obama also raised capital gains on the wealthiest earners from 15% – 20%, but when the NIIT 3.8% tax was added to it, it actually raised the capital gains rates on the highest earners from 15 – 23.8% — an effective increase of nearly 59%! Rolling back the marginal rates and eliminating the Obamacare tax are not tax reductions at all, so to suggest offsetting them with a change in tax deductions is terribly misguided.
The United States has far and away the most progressive income tax in the world. Simplifying the code, ending the war on the wealthy, and lowering corporate and individual taxes are the keys to jump-starting the economy and restoring economic growth and prosperity.
It gets really annoying when commentators blather on about Obamacare and the Republican’s plan to repeal and replace; they get called hypocrites and the commentators keep suggesting that there is no plan to replace Obamacare, because they are terrified that it actually might happen, striking at the heart of the pinnacle of liberal policies.
But it’s not true and we all know it. It’s like the same lie we keep here over and over from the Democrats that the Republicans are being obstructionist and have nothing to contribute. “Being obstructionist” for the left means that the Republicans aren’t interested in sacrificing core principles for some ridiculous leftist policy. Likewise, saying the Republicans have “nothing to contribute” simply means that the Republicans have nothing to contribute that would appeal to the leftists.
The lie gets repeated because the press is either too lazy or too in the bed with certain camps to actually report on facts. Paul Ryan and Congress have come up their “A Better Way” proposal and its like it doesn’t even exist among mainstream media, because it goes against the narrative that “Republican are bad” and “Democrats are good.” Unfortunately, that narrative got deflated on Election Day.
Until now, no one has bothered to vote on the “A Better Way’ plan, because everyone who pays attention knew that Obama would automatically veto it. Now that Obama will be gone, now is the time to do it. The question is, will the commentators finally admit that such a roadmap to recovery exists?
I’m sick and tired of reading over and over again in places, both liberal and conservative, that the Trump and GOP-proposed tax reforms are going to give the lion’s share of the cuts to the top 1%. The entire concept is utterly distorted, especially in light of the fact that nobody talked about the litany of tax increases that occurred when Obama and his Democrat cronies passed the Obama and Obamacare increases.
Obama raised the Bush tax rates on only the wealthiest earners from 36% – 39.6 % and then again raised the tax rates on only the same wealthiest by adding a Net Investment Income Tax (NIIT) of 3.8%, — otherwise known as the “Obamacare Tax” — which covered all investment income of individuals, estates, and trusts. What’s more, Obama also raised capital gains on the wealthiest earners from 15% – 20%, but when the NIIT 3.8% tax was added to it, it actually raised the capital gains rates on the highest earners from 15 – 23.8% — an effective increase of nearly 59%!
Those ludicrous tax increases that no one talks about were principally responsible — along with the hemorrhage of regulations coming out of the Obama administration — for the horrific economic performance we’ve experienced since Obama took office. The first step the new Trump administration should take would be to reverse those very tax increases that Obama inflicted, which went 100% to the higher income individuals, and 0% to the middle class and lower income earners. The reversal of those insane tax increases should in no way be considered a tax cut as part of any tax reform package. Such a change would be a mere restoration of more reasonable rates from what was in fact an insane toxin on our entire economy.
Let’s put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
>-The first four men (the poorest) would pay nothing
>-The fifth would pay $1
>-The sixth would pay $3
>-The seventh $7
>-The eighth $12
>-The ninth $18
>-The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.” So now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But, what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his “fair share?” The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being “paid” to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:
>-The fifth man, like the first four, now paid nothing (100% savings)
>-The sixth now paid $2 instead of $3 (33% savings)
>-The seventh now paid $5 instead of $7 (28% savings)
>-The eighth now paid $9 instead of $12 (25% savings)
>-The ninth now paid $14 instead of $18 (22% savings)
>-The tenth now paid $49 instead $59 (16% savings)
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth. “But he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”
“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes also get the most “benefit” from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.
Author Unknown
Competitive Enterprise Institute (CEI) won a major court victory last week in a lawsuit against New York Attorney General Schneiderman. They demanded he disclose documents under New York’s Freedom of Information Law that outlines agreements he made with other attorneys general and allied non-profits regarding Attorneys General United for Clean Power – the coalition which subpoenaed CEI about our climate and energy work.
CEI’s General Counsel, Sam Kazman noted: “CEI’s court victory is a blow to the anti-free speech campaign led by New York Attorney General Eric Schneiderman. While the campaign by him and his cohorts that began in March continues against those who disagree with him on global warming, we are glad to see that it is being held subject to the basic laws of the land. By requiring Schneiderman to fully comply with our freedom of information request, the court is ensuring that agencies cannot use shortcuts as a means of skirting New York’s Freedom of Information law.”
While the litigation victory gained attention across several media platforms, my favorite headline came from The New York Post editorial yesterday, “The disclosure that could end Eric Schneiderman’s career.” Read the full editorial below:
State Attorney General Eric Schneiderman’s witch hunt against supposed “climate-science deniers” became an even more embarrassing debacle late last month — and just might wind up ending his career.
A state judge ruled in favor of the Competitive Enterprise Institute, a think tank whose Freedom of Information request the AG had denied. That gave Schneiderman 30 days to cough up documents concerning his agreements with other states’ AGs, and with a group of green activists, about their joint persecution of ExxonMobile and other entities for supposed “climate fraud.”
CEI had been targeted by one of Schneiderman’s co-conspirators, the Virgin Islands AG, with legal demands that plainly aimed at suppressing free speech and scientific inquiry that the nonprofit sponsors.
The think tank’s lawyers believe the documents could show improper conduct by the AGs. If they do, Schneiderman faces serious trouble.
Oh, and New York taxpayers are out some more cash over the AG’s bid to dodge the Freedom of Information Law: The court ordered Schneiderman to cover CEI’s court costs, because his defense of his denial of the FOIL request was so transparently lame. (His brief merely quoted New York law, without even making any argument as to why it applied in this case.)
It all began in March, at a press conference where Schneiderman and 16 other AGs seemed to join Al Gore to announce joint operations against Exxon. In fact, more of the AGs were never on board — they’d shown up for a far less ambitious announcement.
And both of the two AGs who did mean to work with Schneiderman have now backed out, with the Virgin Islands AG completely abandoning his suits and the Massachusetts AG “suspending” her work until further notice.
Schneiderman, meanwhile, has dropped his initial claims that Exxon covered up scientific findings. He had to: The evidence is clear that for decades the company’s been publishing scientific results that fit neatly into the mainstream.
Instead, the AG is now (supposedly) chasing a legal case based on the company’s failure to report the value of its oil reserves in the way he thinks it should.
(Seriously: The charge is that Exxon is overvaluing its oil reserves, because it doesn’t note the risk that anti-warming laws might make the petroleum worthless. Hmm: How is that going to fly with “climate science skeptic” Donald Trump sitting in the White House?)
Schneiderman maintains he shouldn’t have to come clean because he signed confidentiality agreements with the other AGs. But his office won’t say whether it’s going to appeal the FOIL ruling or obey the judge’s order.
If he does keep refusing to comply with the Freedom of Information Law, you have to think he’s worried about what those documents will reveal.
Nick Timiraos’ recent article in the Wall Street Journal ( Donald Trump’s Spending Push Rankles Fiscal Conservatives, 11/28/16) , is rather disingenuous with his so-called analysis of Trump’s fiscal roadmap. He clearly aims to torpedo Trump’s plan to cut taxes by tying the discussion to deficits — though correlation, of course, does not necessarily mean causation. Timiraos’ analysis is full of half-truths, but it is not entirely certain if that is willfully written or just plain economic ignorance.
First, Timiraos suggests that budget deficits “fell from 2010” but “are on track to climb in the next decade,” yet doesn’t even give any hard data to back that up — because their really isn’t any. A deficit is still a deficit. Going from a $1.4 trillion budget deficit, as Obama had in 2009, down to a $600 billion deficit in 2016, is still a massive deficit. And of course, Timiraos also doesn’t even mention that the “the total national debt nearly doubled to $19.3 trillion from $10.6 trillion when Obama took office.” Those two data points indicate an enormous spending problem on the part of Obama, something Timiraos totally ignores.
Timiraos then has the audacity to try to link rising deficits to tax cuts by Republicans. Timiraos writes, “the last two times Republicans reclaimed the White House from Democrats—in 1981 and 2001—they also successfully pushed for large tax cuts. Deficits nonetheless rose during their administrations.” Again, another instance of Timiraos telling only part of the story. Both tax cuts resulted in huge revenue increases, but it was even greater spending that created larger deficits. The tax cuts were not the problem; the deficits were not caused by a lack of revenue. Even Republicans can overspend.
Once more, near the end of the article, Timiraos tries again to make Obama’s economics to be the pinnacle of fiscal responsibility, when he writes, “Concerns about deficits over the past few years have faded because economic growth remains disappointing and because Washington took several steps to cut spending and increase taxes after deficits jumped in 2009. Deficits have also fallen below projections in recent years due to a surprising decline in the growth rate of health care spending and because interest rates have been lower than projected.” Only the Democrats are unconcerned about deficits — because their deficit spending is so astronomical, it’s better not to talk about it at all! Suggesting that Obama “cut spending and increased taxes” and that “Deficits have also fallen below projections in recent years” again ignores Obama still spent $600 billion – $1.4 trillion more than his revenue receipts were. When deficits are projected to be $1 trillion, and the actual deficit comes in a bit lower than that (but still in the hundreds of billions), you still have a deficit problem! Timiraos also ignores the fact that Obama regularly had record tax receipts each month (noted on this blog numerous times), and yet Obama still could not control his overspending.
To ignore this economic reality of the past eight years, and the simultaneously try to suggest that a tax plan with tax cuts will alarmingly increase the deficit is reckless. Timiraos ought to be ashamed at such blatant hypocrisy.
“Obamacare is working as designed” — except for the part about “individuals free-riding the system,” according to Jonathan Gruber, one of the chief architects of Obamacare. His assertion is that Obamacare doesn’t need any kind of overhaul; the people are the problem. They aren’t doing what they are supposed to in order to make Obamacare work.
“We have individuals who are essentially free-riding on the system, they’re essentially waiting until they get sick and then getting health insurance. The whole idea of this plan, which was pioneered in Massachusetts, was that the individual mandate penalty would bring those people into the system and have them participate. The penalty right now is probably too low and I think that’s something that ideally we would fix.”
Not enough people want to participate in the government run healthcare system, so the solution is to punish them more by levying a greater tax/penalty/fee to pay for the spiraling costs.
For tax year 2016, the penalty will rise to 2.5% of your total household adjusted gross income, or $695 per adult and $347.50 per child, to a maximum of $2,085. For tax year 2017 and beyond, the percentage option will remain at 2.5%, but the flat fee will be adjusted for inflation.
So, people aren’t using Obamacare because it’s expensive — premiums this year are rising at an average of 25%. So they choose to forgo insurance and pay a penalty, and then it’s their fault for not paying into the system, so we need to raise the penalty rates higher to force them to choose between insurance with high premiums or no insurance with high penalties. This doesn’t sound like it’s about healthcare. It sounds like it’s about more money for a healthcare system that is hemorrhaging funds at an alarming pace.
I’ve written about disparate impact numerous time over the years, warning that this tactic would begin to be seen more frequently beyond the business world, such as in housing and labor. Thomas Perez and Loretta Lynch are two of its fiercest advocates, and a recent story in the Wall Street Journal suggests that my prediction is coming true.
The idea of “disparate impact” holds that a defendant can be held liable for discrimination for a race-neutral policy that statistically disadvantages a specific minority group even if that negative “impact” was neither foreseen nor intended. The Department of Labor has leveled that charge at a Silicon Valley software firm, Palantir Technologies.
According to the Wall Street Journal, five years ago, the Department of Labor accused Palantir of racial discrimination against Asian-Americans on three occasions, saying “the racial composition of Palantir’s hires for three positions—out of 44 job titles—in 2010 and 2011 didn’t mirror its applicant pool. Palantir hired one Asian and six non-Asian applicants for a quantitative-analysis position out of a pool of 730 “qualified applicants,” 77% of whom were Asian. For a software-engineer position, the company hired 14 non-Asian and 11 Asian applicants out of 1,160 applicants (85% of whom were Asian). The complaint says the odds of this occurring “by chance” are one in 3.4 million.”
But here’s the problem. The Department of Labor, by looking at everything entirely by race, completely ignores (excludes?) the idea that a company hire employees based on skill. Palantir argued this point in response: that the Department of Labor’s “analysis assumes incorrectly that anyone having any ‘domestic education,’ any ‘internship,’ any ‘prior experience,’ and ‘Java skills’ should be considered ‘equally or more qualified’ for the positions.” It adds that the department is “essentially advocating” an “illegal quota system.”
“Palantir notes that a quarter of its workforce and 37% of its product engineering team are of Asian descent. Of the 33 hired by Palantir during 2010 and 2011, 36% were Asian. Two of the four members of Palantir’s senior leadership identify as Asians. And more than half of the managers who oversaw the hiring process are Asian.
If Palantir had selected employees at random, 80% would be Asian. Then Labor might have said it is guilty of discriminating against Latinos and blacks.”
As if the charges weren’t bad enough, the Department of Labor decided to take it further this month after Palantir fought back with its responses. Labor has requested a “an administrative-law judge to cancel Palantir’s federal contracts and force the company to compensate the alleged victims of its discrimination.” Of course, since Palantir did not actually discriminate against anyone, no one has requested compensation. Only in the world of disparate impact analysis did Palantir do anything wrong, and since the Department of Labor does not disclose its methodology of determining disparate impact violations (except for broad statistics), no company can actually know if they are violating this kind of bogus “policy” of the Department of Labor.
It’s this kind of egregious action by the Department of Labor that makes being a business owner in the current climate a very difficult thing.
Ambrose Evans-Pritchard suggests that a recession might be on the horizon again and Fed decisions are critical: “The risk of a US recession next year is rising fast. The Federal Reserve has no margin for error.
Liquidity is suddenly drying up. Early warning indicators from US ‘flow of funds’ data point to an incipent squeeze, the long-feared capitulation after five successive quarters of declining corporate profits.
Yet the Fed is methodically draining money through ‘reverse repos’ regardless. It has set the course for a rise in interest rates in December and seems to be on automatic pilot.
“We are seeing a serious deterioration on a monthly basis,” said Michael Howell from CrossBorder Capital, specialists in global liquidity. The signals lead the economic cycle by six to nine months.
“We think the US is heading for recession by the Spring of 2017. It is absolutely bonkers for the Fed to even think about raising rates right now,” he said.
The growth rate of nominal GDP – a pure measure of the economy – has been in an unbroken fall since the start of the year, falling from 4.2pc to 2.5pc. It is close to stall speed, flirting with levels that have invariably led to recessions in the post-War era.
“It is a little scary. When nominal GDP slows like that, you can be sure that financial stress will follow. Monetary policy is too tight and the slightest shock will tip the US into recession,” said Lars Christensen, from Markets and Money Advisory.
If allowed to happen, it will be a deeply frightening experience, rocking the global system to its foundations. The Bank for International Settlements estimates that 60pc of the world economy is locked into the US currency system, and that debts denominated in dollars outside US jurisdiction have ballooned to $9.8 trillion.
The world has never before been so leveraged to dollar borrowing costs. BIS data show that debt ratios in both rich countries and emerging markets are roughly 35 percentage points of GDP higher than they were at the onset of the Lehman crisis.
This time China cannot come to the rescue. Beijing has already pushed credit beyond safe limits to almost $30 trillion. Fitch Ratings suspects that bad loans in the Chinese banking system are ten times the official claim.
The current arguments over Brexit would seem irrelevant in such circumstances, both because the City would be drawn into the flames and because the eurozone would face its own a shattering ordeal. Even a hint of coming trauma would detonate a crisis in Italy.
To be clear, the eight-year old US cycle has not yet rolled over definitively. The picture remains fluid, hard to read in a world where key signals have been distorted by central bank repression. The third quarter will almost certainly look a little better.
“We are getting closer and closer to a recession, but we are not quite there yet, looking at our forward-indicators,” said Lakshman Achuthan from the Economic Cycle Research Institute in New York.
“I can understand why people are getting worried. We have been seeing a ‘growth-rate’ cyclical downturn for the last two years. The longer this goes on, the less wiggle room there is,” he said.
“We are sure there will be no recession this year or into the first two months of 2017, but beyond that there are worrying signs. The deterioration of our leading labour market index is very clear,” he said.
Mr Achuthan thinks it is still possible that US growth will pick up again for another short burst – lifted by a global industrial rebound of sorts – before the storm finally hits.
That was broadly my view earlier this year as the global money supply surged and a string of governments seized on Brexit to crank up stimulus, but what is striking is how little traction it has achieved.
The velocity of M1 money in the US has continued to slow, hitting 40-year low of 5.75 over the summer, and markets are only just awakening to the unsettling thought that China’s latest boomlet has already topped out. Beijing is having to hit the brakes again.
Crossborder said new rules for money market funds that came into force this month have complicated the picture, causing the stock of US commercial paper to shrivel by $200bn. Yet there are ways to filter out some of these effects.
The plain fact is that 3-month lending rates in the off-shore ‘eurodollar’ markets in London have tripled since July to 0.93pc, sharply tightening conditions for global finance. Investors may have been too complacent in discounting these gyrations as part of a regulatory hiccup when something more sinister is emerging.
CrossBorder’s liquidity measure for the US is now at levels comparable to the inflection point a few months before the US recessions of 1990 and 2001, and before the recession starting in November 2007 – and a whole year before Lehman Bank collapsed, nota bene.
Albert Edwards from Societe Generale says gross domestic income (GDI) was the most accurate gauge of the economy as the pre-Lehman crisis unfolded, and this measure has been flat for the last two quarters.
“The pronounced weakness of GDI relative to GDP might be an ominous omen, for it may well be indicating that a US recession is already underway – just as it was in 2007,” he said.
It is certainly odd that the Fed should tighten into these conditions. The unemployment rate has risen to 5pc after bottoming at 4.7pc in May, and small business (NFIB) hiring plans have been flashing soft warnings for months.
“The Fed wants to get ahead of the recovery, and unless this is checked, it will lead to recession,” said David Beckworth, a monetary economist at George Mason University.
Prof Beckwith said the US economy is still reeling from the shock of a 20pc rise in dollar’s trade-weighted index since mid-2014. This in turn is squeezing the world’s ‘shadow-dollar’ nexus.
The Fed faces horrible choices, of course. The longer it delays rate rises, the longer it perpetuates the deformed asset-bubble economy that so disfigures modern polities, and the louder the rebukes from Congress.
Critics are quick to note that price pressures are building, or at least appear to be. The Atlanta Fed’s index of 12-month ‘sticky price‘ inflation has reached 2.6pc, higher than nominal GDP growth itself. Call it ‘stagflation’ or the misery mix.
Yet you can pick your inflation measure to tell any story. The Dallas Fed’s trimmed-mean PCE – supposed to eliminate noise – actually peaked in June and has since been slowing on a six-month basis.
And it is – or should be – a cardinal rule of central banking that you never raise rates in response to rising energy costs. Oil spikes are not in themselves inflationary. They are neutral.
The truth is that nobody knows whether this is the start of a sustained reflation cycle, or just the last feeble flicker before America, Europe, and East Asia are swallowed into a deflationary vortex, the frozen circle from which there is no easy exit – ‘lasciate ogni speranza, voi ch’entrate’.
What we do know is that the Fed cannot afford to get this wrong, as it did with such calamitous consequences from March to August 2008, when it talked tough on an inflationary danger that had already peaked and passed, tightening policy into the hurricane.
As we now know – and some warned at the time – the US economy had already buckled. The result of Fed sabre-rattling in those crucial months was the collapse of Fannie Mae, Freddie, Lehman, and the Western banking system.
Stanley Fischer, the Fed’s vice-chairman, conceded in a grim speech this week that the Fed has now run out of ammunition and that this “could therefore lead to longer and deeper recessions when the economy is hit by negative shocks.”
His prescription is to try sneak in a few rate hikes while it is still possible to create a buffer. Market monetarists say this is profoundly ill-advised, and may instead bring about exactly what he fears.
A President Hillary Clinton could and certainly would flood the economy with fiscal stimulus if need be. Yet this takes time. There are few ‘shovel-ready’ projects, and Washington is a fractious place. She may face a hostile House. The monetary crunch would have crystallized long before anything fiscal could be done.
The world will not end if premature tightening pushes the US into recession next year. But why court fate?
The fiscal year for 2016 ran from October 1, 2015 – September 30, 2016. According to the Treasury Department statement of receipts and outlays, the government had:
Receipts came from several sources:
Individual Income Taxes: $1.546 trillion
Social Security and Other Payroll Taxes: $1.115 trillion
Other Taxes and Duties: $306 Billion
Corporate Income Taxes:$300 Billion
Outlays were comprised of several groups:
Social Security $916 Billion
Defense: $595 Billion
Medicare: $595 Billion
Interest on Debt: $241 Billion
Other: $1,507 Billion
You can view the entire report here