A new Fed statement confirming a cost-of-money hike in December, a new Fed chair, smoking-hot economic data, 459 pages of new tax law, and interest rates...
Went down. Slightly. The definitive 10-year T-note has been stuck astride 2.40% for three weeks, mortgages similarly near 4.00%.
The twin ISM indices are rocking: the September surveys have manufacturing at 58.7 and the service sector (70%+ of the economy) at 60.1% -- both about as high as they get. September payrolls were no doubt hurricane-distorted upward and unemployment downward, but the wage component is true value -- and down to 2.4% annualized. Capped wages and inflation are the only things holding the Fed back from more aggressive action.
Then, tax “reform” and cuts....
When I was a teenager, our family physician was Raymond Meddler. I mentioned to my dad one day the unfortunate connotations. He replied, “Could have been named ‘Fiddler.’” Then we had a faux-serious debate about which would create more unease among patients.
This tax proposal is one or the other.
In detail, this draft is a large and randomly selected flock of turkeys tossed into a skeet shoot. Turkeys have beaks. If the president wants a bill by Thanksgiving (this or next), the White House had better serve goose.
True tax reform broadens the base of taxation, and helps taxpayers (individual and business) to focus on productive work, not gaming the tax code.
Consider two aspects of the new proposal. I can’t find the beginning date, but for at least the last 70 years the tax code has treated the two basic types of businesses the same way: “C” corporations pay tax on their profits, but are also double-taxed. Salaries are also taxed, as are dividends paid, and the capital gains of owners who sell stock. These double-tax rates are lower than rates on ordinary income, but higher in the aggregate, favoring only stockholders.
Type-two business is pass-through, by far the most common structure for small business and simple. Whether “S” corp, LLC, partnership, or schedule “C” sole proprietorship, profits or wages paid to owners “pass through” the corporate device and are taxed at ordinary income rates, like any wage-earner. These businesses can deduct some expenses which wage-earners cannot, but also face double-hit FICA and Medicare. Under the tax code for decades there have been no games to play.
A legitimate problem: any attempt to cut C corp taxes for reasons of global competition or greed would drop their total tax below pass-through rates and create huge opportunity for gaming. This week’s turkey-flock would cut C rates to half (20%) of the top pass-through rate (39.6%). To solve that problem, the proposal offers this solution (Bloomberg):
“The top tax rate for pass-through businesses would be reduced to 25 percent from the current 39.6 percent, while limiting the kinds of income that would qualify. Among those who wouldn’t automatically qualify are lawyers, accountants, consultants, engineers, financial services workers, and performance artists. Qualified pass-through business owners can choose to count 70 percent of their income as wages -- subject to their individual tax rate -- and 30 percent as business income, taxable at the 25 percent rate. Or, they can set the ratio of their wage income to business income based on their capital investment.”
Uh-huh. Right. To those idiots proudly holding up simple tax-return postcards: phooey.
More. In the eternal search for honeypots, this proposal calls for taxing mythic, accounting-fiction “overseas profits:” multinational companies’ accumulated offshore earnings would be taxed as high as 12 percent. Good luck defining that. Multi-nationals would face a tax on any overseas cash balance. Spouses who die with more than $11 million would pay no estate tax at all. The Alternative Minimum Tax would be repealed; it is complicated, but has been law for 30 years and its worthwhile purpose is anti-tax-shelter -- everyone with substantial income should pay something.
Private university endowment income would be taxed at 1.4 percent. Strike a blow for ignorance. Get even with those smarty-pants who read tax bills. Infrastructure? Muni bonds to fund stadiums, private roads, and airports would be banned.
This proposal is the work of people who locked themselves for too long in their “No Girlz” clubhouse. The tax cut aspects might have some economic stimulus, perhaps the doubling in the basic deduction from $12,000 to $24,000 -- if you make that much money, which disturbingly few Americans do. (The earned-income tax credit helps those people, but Republicans hate the EITC.)
Now be balanced and positive. Our desperate need for constantly rising revenue is driven by entitlement promises made and re-made as late as the 1990s, which were predicated on economic growth which has not happened and will not. As a result both political parties are caught in the past, the Democrats defending indefensible promises, and Republicans trying to unravel the social safety net. (Note that we are not alone: Xi Jinping is installing government appropriate to 1500 CE or BCE, enhanced by the best thought-control concepts from the 20th Century.)
One tax idea would begin to get us out of the box: tax consumption, like the rest of the world. Enact a federal sales tax at an exceedingly low rate to begin with, maybe 0.25% or 0.10%, its proceeds used entirely to reduce FICA and Medicare payroll extractions. Trade one regressive tax for another, but raise take-home pay and make it cheaper to hire.
Then haul those IT mega-companies in for another chat. What are we going to do to raise the economic prospects of the American countryside, presently so poor that it is being evacuated, the remnants jaded and angry and with good reason? In the 1930s we embarked on Rural Electrification (an unfair tax burden on city dwellers, yadda, yadda, did it anyway). Can the same IT wave making cities flourish today be decentralized? If not what are we going to do to ease the IT dislocation damage and provide hope to the marooned?
The US 10-year T-note, one year back. As my friend and inspired trader Dave Shirmeyer patiently explained to me this week, the longer we hover near 2.40%, the more likely it becomes a floor in a new range. We made it down to 2.34% today, but I suspect we’ve got to break below 2.30% for 2.40% to remain a protective top:
The US 2-year T-note is the Fed telltale, now just beginning to build-in the next hike after December:
The Atlanta Fed GDP tracker has rolled into Q4 estimation. Healthy and above trend:
The ECRI confirms: