Want to understand the tax overhaul debate? Here's your handy daily guide.
Republicans are aiming this week to take a significant stride toward their goal of a tax code rewrite. But that goal is both shrinking and moving away from them.
Despite the slimmest of margins, made narrower by the absence of an ailing Sen. Thad Cochran (R-Miss.), Senate Republicans will try this week to adopt a budget that allows the party to cut taxes by $1.5 trillion. Their success isn't assured, since Sens. Rand Paul (R-Ky.) and John McCain (R-Ariz.) have yet to commit to the plan. Securing the votes — assuming House Republicans then follow suit and accept the Senate version — makes it more likely that Republicans won’t be heading home empty-handed from the tax project. The budget will give them enough leash at least to slash individual rates temporarily, as they did in with the 2001 and 2003 Bush tax cuts.
Yet Republicans want much more from the exercise. They continue to set their sights on repeating the feat policymakers last pulled off in 1986 by fundamentally remaking the tax system — including a permanent reduction in business tax rates. On that score, a dim outlook is only growing dimmer.
That’s because Republicans need to raise an enormous amount of revenue to pay for those lowered rates, and they don’t have anything approaching a consensus about how to do that. Indeed, over the past few days, it’s become clearer that the options they have named are repulsing rather than attracting support from their own ranks.
That was one takeaway from a retreat that the National Republican Senatorial Committee hosted for top donors over the weekend in Sea Island, Ga. Seven Republican senators attended, too — Shelley Moore Capito (W.Va), Cory Gardner (Colo.), John Kennedy (La.), Rand Paul (Ky.), David Perdue (Ga.), Tim Scott (S.C.) and Thom Tillis (N.C.). The group left attendees with the impression that they’re opposed to tapping either of the richest veins of new revenue that tax-writers have identified: Repealing the deductions for state and local taxes, and interest paid on business debt. “This is one of those deals where everyone wants to go to heaven but nobody wants to die,” one source in attendance told me.
National Economic Council Director Gary Cohn channeled the sentiment on Monday, telling the annual meeting of American Bankers Association in Chicago that tax-writers are considering limiting a repeal of the interest deduction to corporations. That would mean businesses organized on the individual side of the code, including real estate partnerships such as the Trump Organization, could still claim the break. It isn’t immediately clear how much revenue that change would trim from a full repeal.
Tax-writers originally envisioned a full repeal generating some $1.5 trillion in revenue to help fund lower rates and immediate expensing of capital investments. But the proposed rollback of the tax code’s preference for debt financing has already sprung a number of leaks — with lawmakers talking up the possibility of carve-outs for farmers and ranchers, electric utilities, land purchases and others.
Likewise, the push by Republican leaders to scrap the deduction for state and local taxes is taking on water. Republicans in high-tax states, including New York, New Jersey, Pennsylvania and Illinois, have called the proposal a nonstarter. So, the GOP brass is hoping to limit the break for top earners, although how to define that group isn’t obvious.
And as the pools of money to pay for a tax package dry up, the deadline for completing the project is also receding. On Monday, President Trump and Mitch McConnell — at a kabuki kumbaya press conference in the Rose Garden — acknowledged they may not finish the work until next year. “The goal is to get it done this calendar year,” the Senate majority leader said. “But it is important to remember that Obama signed Obamacare in March of Year Two. Obama signed Dodd-Frank in July of Year Two.” Said Trump, "We could have a long way to go but that’s okay."
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— WH: Corporate cut = middle-class benefit. The Trump administration is asserting that slashing the corporate tax rate by 15 points would boost average family income by $4,000. A lot of economists disagree. The Wall Street Journal's Richard Rubin: "The study, which comes as the tax-policy debate heats up in Congress, stakes its argument on the idea that corporate taxes hurt workers by inhibiting capital investment, hiring and wage growth. 'There’s lots of evidence that wages respond to changes in corporate taxes,' Kevin Hassett, chairman of the White House Council of Economic Advisers, told reporters Sunday. Many economists, however, say a corporate-tax cut would mostly benefit shareholders, not workers...
The administration is essentially arguing that cutting the corporate-tax rate is so powerful that the wage gains could be larger than any forgone tax revenue, though the outcome would depend on other factors. This suggests that most gains to workers come through a larger economy. The report doesn’t address possible countervailing forces, such as whether financing a tax cut with budget deficits would crowd out private investment and drive up interest rates."
— Trump courts Dems. "President Trump plans to intensify his outreach to Senate Democrats this week as he tries to broaden support for massive tax cuts, but the administration’s prior overtures have left key lawmakers wondering whether the president is willing to negotiate with Democrats or solely seeking to use them as political props," The Post's Damian Paletta and Ed O'Keefe write. "Trump on Wednesday will meet with Democrats and Republicans on the Senate Finance Committee, the panel that writes tax law, as part of an effort to curry congressional favor for his proposal, which is still in outline form, to cut tax rates for corporations and individuals."
But in his Monday news conference and on Twitter, Trump slammed Democrats as obstructionists:
The Democrats only want to increase taxes and obstruct. That's all they are good at!— Donald J. Trump (@realDonaldTrump) October 16, 2017
— Mortgage break made moot? "So far the deduction is one of the few being kept alive in the framework put forward by President Donald Trump and fellow GOP leaders in Congress this month," The Wall Street Journal's Laura Kusisto writes. "While the mortgage deduction is kept in place, it might face irrelevance. That is because the tax plan also would almost double the standard deduction for individuals and couples, meaning only the highest earners would continue to itemize their deductions, and only a few of them would take the mortgage break. For most taxpayers, the standard deduction is likely to be the better option."
— Dinner at Javanka's. Jared and Ivanka on Monday hosted a dinner for Senate Democrats to discuss a tax overhaul. On the guest list, per Politico's Burgess Everett and Annie Karni, are three red-state Democrats up for reelection next year: Joe Manchin (D-W.Va.), Heidi Heitkamp (D-N.D.) and Claire McCaskill (D-Mo.).
— Tax reform to protect Picassos. "Permanent estate tax repeal would allow private art collectors to hold onto their artwork longer, giving them more time to reap its full value, attorneys told Bloomberg BNA. "Art is an illiquid asset. When a person dies with a substantial collection, his or her estate may have to sell the artwork quickly in an estate sale to raise cash to pay the current 40 percent estate tax... If families could keep the art in their collections longer, they would have more time to enhance the art’s value and get a larger return."
— Trump to interview Yellen. The Fed chair will meet with the president on Thursday to discuss staying on the job.
— Taylor impressed Trump. Stanford economist John Taylor is seeing his star rise in the Fed chair sweepstakes after impressing the president in an hour-long meeting at the White House last week, Bloomberg reports: "Former Fed board governor Kevin Warsh has meanwhile seen his star fade within the White House, three of the people said. They would not say why but Warsh’s academic credentials are not as strong as other candidates, and his tenure on the Fed board has been criticized by a diverse group of economists ranging from Scott Sumner to Nobel laureate Paul Krugman. Trump gushed about Taylor after his interview, one of the people said. The president has always been prone to hiring people with whom he has a good relationship."
Trump, meanwhile, continued to tout the results from his favorite scoreboard:
Since Election Day on November 8, the Stock Market is up more than 25%, unemployment is at a 17 year low & companies are coming back to U.S.— Donald J. Trump (@realDonaldTrump) October 16, 2017
The U.S. has gained more than 5.2 trillion dollars in Stock Market Value since Election Day! Also, record business enthusiasm.— Donald J. Trump (@realDonaldTrump) October 16, 2017
— Trump versus Trump. Inside of a few hours on Monday, the president endorsed his former chief strategist Steve Bannon's war on the Republican establishment, then met behind closed doors with that establishment's most important leader to discuss their shared agenda on taxes and more, then made a public appearance with the leader in which he said he'd try to talk his strategist out of waging the war. Because consistency is the hobgoblin of little minds, or something. First, at a cabinet meeting, Trump told reporters that he "can understand fully how Steve Bannon feels.” He went on, “We're not getting the job done, but I'm not going to blame myself. They are not getting the job done.”
Then, standing next to McConnell after their meeting, Trump reversed course, talking up his "fantastic" relationships with senators and indicating he'll lean on Bannon to back off: "Some of the people that he may be looking at, I'm going to see if we talk him out of that, because, frankly, they're great people." He also said he and McConnell are now "closer than ever before." And if you believe that, there's a real estate training program I'd like to sell you. The "galaxy brain" theory of Trump suggests he's deliberately seeking to preserve maximum negotiating leverage for a tax overhaul and more. But it's tough to watch a performance like yesterday's and not conclude he's just making it up as he goes along, minute by minute.
— Trade showdown. "Canadian jet-maker Bombardier announced Monday that it is selling a controlling stake in its 100- to 150-seat C-series jetliner to European manufacturer Airbus, just weeks after the Commerce Department moved to impose 300 percent tariffs on the plane," The Post's Aaron Gregg writes. "The companies also said they will expand the plane’s production to a new facility in Mobile, Ala., a move that could help it avoid the import duty... The deal included no upfront cash payment, a possible reflection of the plane’s enormous production costs. When the deal closes, Airbus will own just over half of the C-series plane, Bombardier will own 31 percent and a Canadian state investment agency will own the remaining 19 percent. The combination significantly complicates what had been a three-way trade dispute between the United States, Canada and Britain. With Airbus’s ownership of the C-series aircraft, the dispute now touches France, Germany and Spain, where Airbus has a significant presence."
— NAFTA battleground in remote Canada. The New York Times's Ana Swanson, reporting from Digby Neck, Nova Scotia: "This far-flung peninsula in the North Atlantic seems an unlikely place for an international trade dispute. But an American company’s scuttled plans to build a quarry here have turned these quiet fishing grounds into a case study of the kind of thorny disputes that threaten to derail the North American Free Trade Agreement...
The project was killed by the Canadian government after a yearslong review concluded that it would damage the environment. But Bilcon, which had invested significant sums trying to get the project underway, seized on an obscure Nafta provision allowing foreign companies to sue governments for unfair treatment. Bilcon sued Canada — and won. The company is seeking as much as $443 million, plus costs. While the Canadian government can fight to lower that sum, Nafta provides no appeal mechanism to reverse the underlying legal decision... The ability of foreign companies to sue governments is one of the most contentious issues in the clash among the United States, Mexico and Canada over how to rework Nafta."
— Wilbur's missing billions. Forbes's Dan Alexander: "Between the November election and January inauguration, [Commerce Secretary Wilbur Ross] had quietly moved a chunk of assets into trusts for his family members, leaving more than $2 billion off of his financial disclosure report—and therefore out of the public eye. Ross revealed the existence of those assets, and the timing of the transfer, when Forbes asked why his financial disclosure form listed fewer assets than he had previously told the magazine he owned. The hidden assets raise questions about whether the Secretary of Commerce violated federal rules and whether his family owns billions in holdings that could create the appearance of conflicts of interest.
After the publication of this article, the Department of Commerce issued a statement that read, in part, “Contrary to the report in Forbes, there was no major asset transfer to a trust in the period between the election and Secretary Ross’s confirmation. There must have been a miscommunication between Secretary Ross and the Forbes reporter. That is unfortunate, and we apologize for any confusion.”
— Cohn: Bank deregulation imminent. Trump's economic advisor told the ABA conference that there is broad agreement on lifting the threshold for extra regulatory scrutiny to banks bigger than $200 billion. Reuters's Pete Schroeder: "Cohn said there is 'an enormous amount of traction' in raising the $50 billion threshold that defines a bank as a “systemically important financial institution,” subjecting it to stricter oversight by the Federal Reserve... However, whether Congress can enact such a change remains unclear. Legislation passed in the U.S. House would eliminate regulators’ ability to subject systemic firms to tougher rules, but that bill is not expected to garner sufficient support in the Senate.
The House is also considered another bill that would replace the $50 billion threshold with one aimed at monitoring bank activity rather than asset size. Meanwhile, bipartisan leaders of the Senate Banking Committee continue to engage in private talks over a more modest set of reforms to banking rules, aimed primarily at relieving smaller banks but that could include raising or altering that threshold."
- Bloomberg Government holds an event on the future of multifamily housing.
- The Senate Banking, Housing and Urban Affairs Committee holds a hearing on “Consumer Data security and the Credit Bureaus.”
- Georgetown Law hosts the 1st Annual FinTech Week starting on Wednesday.
- The Brookings Institution holds an event on Trump’s deregulatory agenda on Friday.
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