Over the next week or two, I’ll do a more thorough analysis of portions of Trump’s tax plan. Here it is in full, so that you don’t have to go searching for it:
The Trump Plan will revise and update both the individual and corporate tax codes:
Individual Income Tax
Tax rates
The Trump Plan will collapse the current seven tax brackets to three brackets. The rates and breakpoints are as shown below. Low-income Americans will have an effective income tax rate of 0. The tax brackets are similar to those in the House GOP tax blueprint.
Brackets & Rates for Married-Joint filers:
Less than $75,000: 12%
More than $75,000 but less than $225,000: 25%
More than $225,000: 33%
*Brackets for single filers are ½ of these amounts
The Trump Plan will retain the existing capital gains rate structure (maximum rate of 20 percent) with tax brackets shown above. Carried interest will be taxed as ordinary income.
The 3.8 percent Obamacare tax on investment income will be repealed, as will the alternative minimum tax.
Deductions
The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. The personal exemptions will be eliminated as will the head-of-household filing status.
In addition, the Trump Plan will cap itemized deductions at $200,000 for Married-Joint filers or $100,000 for Single filers.
Death Tax
The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
Childcare
Americans will be able to take an above-the-line deduction for children under age 13 that will be capped at state average for age of child, and for eldercare for a dependent. The exclusion will not be available to taxpayers with total income over $500,000 Married-Joint /$250,000 Single, and because of the cap on the size of the benefit, working and middle class families will see the largest percentage reduction in their taxable income.
The childcare exclusion would be provided to families who use stay-at-home parents or grandparents as well as those who use paid caregivers, and would be limited to 4 children per taxpayer. The eldercare exclusion would be capped at $5,000 per year. The cap would increase each year at the rate of inflation.
The Trump Plan would offer spending rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65 percent of remaining eligible childcare expenses, subject to a cap of half of the payroll taxes paid by the taxpayer (based on the lower-earning parent in a two-earner household).
This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less. Limitations on costs eligible for exclusion and the number of beneficiaries would be the same as for the basic exclusion. The ceiling would increase with inflation each year.
All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals, including unborn children. Total annual contributions to a DCSA are limited to $2,000 per year from all sources, which include the account owner (parent in the case of a minor or the person establishing elder care account), immediate family members of the account owner, and the employer of the account owner. When established for children, the funds remaining in the account when the child reaches 18 can be used for education expenses, but additional contributions could not be made.
To encourage lower-income families to establish DCSAs for their children, the government will provide a 50 percent match on parental contributions of up to $1,000 per year for these households. When parents fill out their taxes they can check a box to directly deposit any portion of their EITC into their Dependent Care Savings Account. All deposits and earnings thereon will be free from taxation, and unused balances can rollover from year to year.
Business Tax
The Trump Plan will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.
It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.
It eliminates most corporate tax expenditures except for the Research and Development credit.
Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense. An election once made can only be revoked within the first 3 years of election; if revoked, returns for prior years would need to be amended to show revised status. After 3 years, election is irrevocable.
The annual cap for the business tax credit for on-site childcare authorized by Sec. 205 of the Economic Growth and Tax Relief Reconciliation Act of 2001 would be increased to $500,000 per year (up from $150,000) and recapture period would be reduced to 5 years (down from 10 years).
Businesses that pay a portion of an employee’s childcare expenses can exclude those contributions from income. Employees who are recipients of direct employer subsidies would not be able to exclude those costs from the individual income tax and the costs of direct subsidies to employees could not be used as a cost eligible for the credit.
As a financial guy, I find that there are certain things that Trump is suggesting in his tax plan that are just flat out ridiculous. For instance, his childcare plans are ludicrous — because we simply cannot have things that add huge complexity to the code anymore. The idea is worth exploring, but his suggested implementation is atrocious. We can’t keep doing this. The tax code is already Byzantine enough for taxpayer and tax preparer.
A potential problem with his plan is in regard to his proposed 15% tax rate for corporate and individual businesses — again, it’s hugely complex. Furthermore, I think the 15% rate for business rate is too low, especially coming from the perspective of the current corporate tax rate; the change is rather drastic, and probably a little too low from a revenue perspective. 20% is a better rate and keeps us competitive in a global market.
There are some main things that his plan does that simplifies the code: for instance, he kicks out the Obamacare tax, kicks out Alternative Minimum Tax (AMT). These are both monstrously complex tax issues, and removing them is beneficial to the code.
Finally, as all the non-Trump supporters are talking about Trump’s plan and how it will bankrupt everything — they are assuming he’ll get everything! It’s really a non starter — you can modify his plan somewhat all over, here and there, and the growth it will give the economy will pay for itself. Couple it with cutting spending, and you really can have a much stronger economy, which will be good for both the debt and deficit.
“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.
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
“A growing number of people in Obamacare are finding out their health insurance plans will disappear from the program next year, forcing them to find new coverage even as options shrink and prices rise.
At least 1.4 million people in 32 states will lose the Obamacare plan they have now, according to state officials contacted by Bloomberg. That’s largely caused by Aetna Inc., UnitedHealth Group Inc. and some state or regional insurers quitting the law’s markets for individual coverage.
Sign-ups for Obamacare coverage begin next month. Fallout from the quitting insurers has emerged as the latest threat to the law, which is also a major focal point in the U.S. presidential election. While it’s not clear what all the consequences of the departing insurers will be, interviews with regulators and insurance customers suggest that plans will be fewer and more expensive, and may not include the same doctors and hospitals.
It may also mean that instead of growing in 2017, Obamacare could shrink. As of March 31, the law covered 11.1 million people; an Oct. 13 S&P Global Ratings report predicted that enrollment next year will range from an 8 percent decline to a 4 percent gain.”
To see Obamacare enrollment shrink this coming year would be another devastating blow to the already fiscally precarious situation. Enrollment is not nearly what was predicted in 2010 when the law passed — and the program needs — to stay afloat. Obamacare is certain to receive an overhaul next year, but what kind of reform will depend largely on who is in charge of the White House and Congress.
Nonfarm payrolls increased 156,000 for the month and the unemployment rate ticked up to 5 percent, the Bureau of Labor Statistics reported Friday. Economists surveyed by Reuters had expected 176,000 new jobs and the jobless rate to hold at 4.9 percent. The total was a decline from the upwardly revised 167,000 jobs in August (compared with the original number of 151,000).
A broad measure of unemployment and underemployment was 9.7% last month, holding steady from August and July but down from 10% a year earlier. The gauge known as the U-6 includes unemployed Americans, workers who are stuck in part-time jobs because they can’t find full-time work, and people who are marginally attached to the labor force.
The report is as expected: mediocre for Americans after more than eight years.
The New York Times has admitted the failures of Obamacare: loss of insurers in many marketplaces, high premium costs, the collapse of many co-ops, overreaching federal mandates, and more. The Times suggests that change is necessary in order to ensure Obamacare’s survival, but seems to endorse even more government participation, not less.
There is a renewed push for a public option. One of the more ridiculous justifications from the article comes from the charge that “private insurance companies could not be trusted to provide reliable coverage or control costs” and that “the shrinking number of health insurers is proof that these warnings were spot on.” To suggest that it is the collapse of many markets is the fault of the insurance companies themselves is absolutely ridiculous.
And another laughable observation on the structural and technical problems of Obamacare: “The subsidies were not generous enough. The penalties for not getting insurance were not stiff enough. And we don’t have enough young healthy people in the exchanges,” essentially blaming everyone else for the failures. The insurance companies didn’t offer cheaper enough plans. The taxpayer didn’t pay enough in penalties/fines/taxes. Too many sick people and too few healthy people enrolled. The solution: offer more government money, paid for by extracting more penalties/fines/taxes for those who chose not to purchase insurance, and spend more money trying to convince more healthy people to buy trust Obamacare and buy into the exchanges. You can’t make this up.
What’s more, many of the same champions of Obamacare are not calling for even more drastic, government-centered, expensive alternatives. “On Sept. 15, Senator Jeff Merkley, Democrat of Oregon, introduced a resolution calling for a public option. The measure now has 32 co-sponsors, including the top Senate Democrats: Harry Reid of Nevada, Chuck Schumer of New York and Richard J. Durbin of Illinois.”
The public option could take a couple of different forms. One would be a government sponsored health plan available as an option in every market. The other option would be that a single payer option, championed by Sanders, which would be essentially Medicare for all. Unfortunately, such ideas would only compound the problem, which, as its root, is money.
Any public option would drive up medical costs, and Obamacare now is financially unsustainable. A government sponsored plan “would have an unfair advantage if it both regulates and competes with private plans,” while a single-payer plan would be even more egregiously expensive as it would shoulder the costs for everything.
While completely repealing Obamacare is probably not a viable solution or possibility anymore, other changes such as making insurance portable across state lines, widening the use and availability of health savings account should also be explored, not shunned. Merely throwing more money after bad money will only worsen Obamacare for everyone.
Yet another insurance regulator — this time in Minnesota — is sounding the alarm on the insurance market in their state, specifically describing it as “an emergency situation” with regard to rate increases next year and availability of competitive companies offering plans.
“Department of Commerce Commissioner Mike Rothman said Friday that the five companies offering plans through the state’s exchange or directly to consumers were prepared to leave the market for 2017. He said big rate increases were the tradeoff to convince all but one company to remain for now. Rate increases finalized this week range from a 50 percent average hike for HealthPartners plans to a 67 percent jump on average on UCare.”
We’ve seen the same scenario playing out in many states across the country companies have withdrawn from the marketplace exchange or from the state all together, leaving many citizens with little to no insurance option from which to choose and purchase a plan. Obamacare continues to collapse, leaving everyday taxpayers to bear the burden and cost of the reckless policies that have hurt, rather than help, the American people.
The New York Post had an article the other day regarding the continuous stream of New Yorkers leaving the state. An analysis found that “in 2014, 126,000 tax filers moved out of New York,” more than any other state in the nation. Also significantly, “The Empire State also lost the most “high earners,” who reported making more than $200,000 a year.”
This particular phenomenon has been going on for years, as I have written about in previous articles. But it seems like some people are groups want to downplay the exodus. The executive director of the Fiscal Policy Institute, Ron Deutsch, was sure to point out “that those who earn at least $1 million per year are more likely to stay put.”
It was a curious observation from the The Fiscal Policy Institute (FPI), which purports to be “an independent, nonpartisan, nonprofit research and education organization committed to improving public policies and private practices to better the economic and social conditions of all New Yorkers.”
Now, let’s stop for a minute. Of course those who earn more than one million a year would be more likely to stay put. They are the ones who can afford to be abused by the government and put up with it because they don’t want to give up their luxuries — the theater, the restaurants, all that New York has to offer. They can afford to stay. That $200,000 threshold? It’s really New York’s middle class, the backbone of the city. Because of the extremely high cost of living, they can’t afford to stay and put up with abuse.
If Texas ever did to their oilmen what New York does to its taxpayers, they’d be run out on a rail.