What is Washington doing on tax reform? Everything you need to know here.
And now, for a tax overhaul: The Price Tag Cometh.
House Republicans approved a budget Thursday that frees the party to cut taxes by $1.5 trillion over a decade, provided leaders in both chambers can keep their members marching in lockstep. But the razor-thin margin (roll call vote here) — the tally was 216 to 212, with 20 Republicans opposing the spending blueprint — points to the difficulty ahead as the GOP hunts for revenue to pay for a sweeping rewrite of the tax code.
In recent days, Republican agita over the tax rewrite has sprung from proposed tweaks to the personal side of the code. Specifically, the rank and file is sweating the implications for voters back home of the capping of tax-free contributions to retirement accounts and the write-off for state and local taxes. Both of those changes will draw pushback from business groups: The retirement account proposal is stirring worry among financial services interests; the National Association of Realtors, a political powerhouse, opposes repealing the break for state and local taxes.
Yet the real big-money battle is just days ahead. House Republicans plan to unveil their first draft of a bill next Wednesday — and with it, changes to the corporate side of the code that will finally allow business interests of every size and stripe to determine whether they stand to win or lose. And then armies of lobbyists will pile into the breach to try to reshape the outcome. “When the details come, that is when you’re going to see K Street coming to Congress,” House Speaker Paul Ryan (R-Wis.) said at a Reuters event Tuesday. “And that’s why this hasn’t been done for 31 years.”
For now, the prevailing mood downtown tips more toward dread than excitement. A majority of respondents to a survey of tax professionals by Deloitte this week indicated they were more nervous about their companies being targeted for new revenue than enthusiastic about the prospects of a lower overall corporate tax rate, said Jon Traub, who leads the firm’s tax policy practice. “It’s fair to say a lot of people are holding their breath right now, waiting to see what’s in the bill,” Traub said.
With a wish list of cuts topping $5 trillion, tax writers will be looking everywhere but the couch cushions for sources of funding.
Among the potential pay-fors:
— Repealing the write-off for interest paid on business debt. Beneficiaries — including banks, private equity investors, electric utilities, real estate developers and farmers — say the break, worth about $1.5 trillion, simply offers a deduction for a standard business expense. Critics say it distorts economic activity by subsidizing debt financing, encouraging dangerously high amounts of leverage. House Ways and Means Committee Chairman Kevin Brady (R-Tex.) has pushed for its elimination, the richest remaining vein of new money to fund the overhaul. But sectors that rely on the break are already rallying for carve-outs that promise to whittle down its value.
— A global minimum tax. Those close to the process expect House Republicans to seek to impose a new levy on what major American corporations earn abroad. The proposal could prove particularly painful for big tech and pharmaceutical companies using sophisticated strategies to shuttle their intellectual property around the globe to minimize their tax burden. Versions of that idea floated a few years ago both by President Obama and then-Ways and Means Committee Chairman Dave Camp (R-Mich.), went nowhere. But cracking down on international tax dodgers remains a top priority for Republicans, and a minimum tax is likely to be one of many proposals addressing the issue.
Scrapping the deduction for advertising expenses. Camp included this proposal, estimated to raise $169 billion over a decade, in a 2014 tax rewrite summarily dismissed at the time. Since, though, tax writers have been picking back through the plan for potential sources of revenue. Media companies that rely on advertising revenue would feel the pinch — and object.
Ending the break for research and experimentation expenses. Another Camp oldie-but-goodie, worth an estimated $193 billion. It included software development costs, so among others, tech companies would fight it.
Accounting tweaks. One perennial pay-for calls for ending the “last in, first out” (LIFO) method of accounting for inventory, prized by manufacturers, wholesalers and retailers. It could raise tens of billions of dollars but would invite opposition from a powerful array of interests, including the National Federation of Independent Business, the small-business lobby, which has mobilized to thwart past attempts to do away with the strategy.
And there will be many more, because of the staggering dollar amounts that tax-writers need to find to get anywhere close to their goal. Or, as Chris Krueger of Cowen Washington Research Group writes in a note to clients this morning, "The subtraction that is finally unveiled next week is going to be UGLY. Tax policy is zero-sum. Someone has to pay the cost of rate reductions... Next week, we will see who is on the initial kill list...and expect them to push back as if this was a life-or-death struggle because for many, it is. Welcome to the corporate hunger games."
Republican leaders have talked up the goal of delivering the package by the end of the year, though considering the scale of the work ahead, that seems far-fetched. "What I tell my clients is this is the start of a process,” said Cathy Koch, Americas Tax Policy leader at EY. “There’s a lot of distance between Nov. 1 and final passage. And all that distance is going to entail modifications. Now’s the time to get involved and speak up."
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— Down to Powell or Taylor. The Post's Damian Paletta and Bob Costa report that Trump has "largely settled on nominating either former investment banker Jerome 'Jay' Powell or Stanford University economist John Taylor to be chairman of the Federal Reserve, three people briefed on the process said, setting the stage for what could be one of the most consequential economic decisions of his administration... The three people confirming that Powell and Taylor are now the front-runners spoke on the condition of anonymity because they were not authorized to discuss the internal deliberations publicly. Trump is well-known, though, for changing his mind on nominations late in the process, and several people warned that a final decision had not yet been made."
— Taylor echoes Trump. Bloomberg's Christopher Condon: "John Taylor, the Stanford professor who is among the finalists that President Donald Trump is considering to lead the Federal Reserve, argued Thursday that faster U.S. economic growth is possible if policy makers focus on reforms that encourage investment and hiring. 'I would go back to the basic principles, that incentives matter, that tax rates matter, and apply those principles,' Taylor told an audience at the University of Wisconsin in Madison. 'You want to have the supply of the economy increasing more rapidly and you can do that with new policies.' Taylor’s remarks were likely to find an approving audience in the White House. Trump took office in January with a promise to stoke the economy’s growth rate, which has hovered a bit above 2 percent since 2010."
— Yellen worries about Fed cred. Bloomberg's Rich Miller: "Federal Reserve Chair Janet Yellen has begun to openly acknowledge the possibility that the credibility of the central bank’s 2 percent inflation goal may have weakened somewhat -- a surprising admission in what could be the final months of her tenure... Yellen said it was an 'open question' whether inflation expectations in major economies had edged lower. If they have, that could pose difficulties for whoever heads the Fed next year."
— Three anti-Yellen House Rs weigh in. CNBC's Jeff Cox: "Some House Republicans are calling on President Donald Trump not to reappoint Janet Yellen as Fed chair when her term expires in February. In a letter sent to the president, the legislators tell Trump that "new leadership" is needed at the central bank to push the economy forward. 'As general mistrust of government and public institutions continues to rise, we believe that new leadership at the Federal Reserve will help restore its reputation as a forward-thinking monetary institution instead of a slow growth regulator,' said the letter, authored by Reps. Warren Davidson, Ted Budd and Alex Mooney."
— Corker stays uncorked. Sen. Bob Corker (R-Tenn.) teed off on the direction of the tax overhaul in a CNBC appearance: "Some of the items in the GOP tax reform discussion are just 'buying off' special interests and serve no other purpose, [Corker] told CNBC on Thursday. 'Some of the things we're doing, I'm sorry, are ridiculous," [he] told 'Squawk Box,' though he did not mention any specifics.
'I'm sorry, but we live in a political world,' said Corker, a member on the Senate Budget and Banking committees. Those things are 'not going to drive 1 ounce of economic growth. But it's what you have to do to pass a tax bill.'
Corker described some efforts to pass tax reform as 'unfortunate.' 'It's buying off of people to pass tax reform,' Corker said. 'We could take a lot of this off in the trash can and make it easier and actually do something that grows our economy and increases our wages,' he said."
But he also said he's "all in" on the tax overhaul and won't let his opinion of Trump shape his approach.
— Taxing interest. Axios's Dan Primack has details of a scaled-back plan Republicans are considering for repealing the business interest deduction. "The current talk is to reduce the current 100% deduction down to 70%, with an expectation that the extra 30% would be taxed at the new statutory corporate rate. There is an expectation that existing debt would be grandfathered in, and transition rules may include grandfathering for debt that is in process as of the Nov. 1 roll-out (if that last part proves out, expect a massive surge in leveraged loan soft launches).
Caveat: Interest deductibility is viewed by the GOP as one of its few remaining ways to pay for tax cuts, and the 70/30 plan was devised in concert with 401(k) caps. If the 401(k) plan gets scrapped over Trump's tweet threats, then it's possible the deductibility limit could climb."
— Nov. 6 markup. Brady announced the plan Thursday after House Republicans approved the budget.
— The Big Six and a Half. "White House Office of Management and Budget Director Mick Mulvaney discussed President Trump's tax-reform plan Wednesday, describing it as 45 percent National Economic Council Director Gary Cohn, 45 percent Treasury Secretary Steven Mnuchin and 10 percent himself," The Hill's Isaiah Seibert writes.
— Gilded Age. Something to keep in mind as congressional Republicans prepare to release a tax plan that early analyses suggested would concentrate its benefits among the rich, via The Guardian's Rupert Neate: "The world’s super-rich hold the greatest concentration of wealth since the US Gilded Age at the turn of the 20th century, when families like the Carnegies, Rockefellers and Vanderbilts controlled vast fortunes.
Billionaires increased their combined global wealth by almost a fifth last year to a record $6 trillion – more than twice the GDP of the UK. There are now 1,542 dollar billionaires across the world, after 145 multi-millionaires saw their wealth tick over into nine-zero fortunes last year, according to the UBS / PwC Billionaires report. Josef Stadler, the lead author of the report and UBS’s head of global ultra high net worth, said his billionaire clients were concerned that growing inequality between rich and poor could lead to a 'strike back'."
House Minority Leader Nancy Pelosi (D-Calif.) called the Republicans' budget "an assault, a ripoff, a shakedown, a looting of the middle class:"
— No NAFTA concessions. Axios' sJonathan Swan: "A top Trump administration official made the US pro-trade community despair — again. Commerce Secretary Wilbur Ross declared that President Trump had no interest in giving a single meaningful concession in the NAFTA talks with Canada and Mexico. 'We're asking two countries to give up some privileges that they have enjoyed for 22 years,' Ross told CNBC's Becky Quick on Wednesday. 'And we are not in a position to offer anything in return.'... The NAFTA talks are frozen and the deal's future looks very dicey."
Could Congress block Trump from ripping up the pact? Vox says yes, maybe: "The answer is that no one knows for sure — but many think Congress could use its powers to prevent a total withdrawal from NAFTA. Under NAFTA rules, Trump can unilaterally withdraw from the agreement by giving Mexico and Canada six months’ notice. But Congress also has a say, since it ratified and implemented the agreement through legislation. Congress can fight to keep that legislation — the rules governing the way that the US trades with Mexico and Canada under NAFTA — intact. It can also pass new laws designed to boost its own authority over trade agreements. It may even be able to pass a law that preemptively eliminates Trump’s ability to unilaterally give Canada and Mexico notice of withdrawal."
— Gassed up. "The White House is revisiting an increase in the federal gas tax to pay for infrastructure improvements President Trump promised to deliver on the campaign trail," The Post's Ashley Halsey III reports. "That news was conveyed to House members Wednesday in a meeting by Trump’s chief economic adviser, Gary Cohn... After campaigning on a promise he would lure private capital to invest in infrastructure, Trump in late April said he would be open to bumping up the federal gas tax, which has not seen an increase since 1993. Some Democrats, notable among them Rep. Peter A. DeFazio (Ore.), ranking Democrat of the House Transportation Committee, have fought an upstream battle to increase the tax."
— Hill probes winding down? Politico's Kyle Cheney and Elana Scor: "Republican lawmakers say they’re approaching the end of their investigations into Russian interference in the 2016 presidential election even though the most politically explosive issue — whether associates of President Donald Trump colluded with the Kremlin — remains unresolved. That will present Democrats who have spent a year amplifying suspicions about Trump’s own ties to Russia with a wrenching choice: to join Republicans and set aside the most momentous aspect of their probes — or to break from the GOP and end any chance of presenting a united front against a continuing Russian threat.
Senate Intelligence Committee Chairman Richard Burr (R-N.C.) has suggested his panel’s investigation will end early next year, emphasizing that he wants to wrap up by February, ahead of the first 2018 primary elections. His panel still has a long list of witnesses to interview, but Burr described the timeline as a 'mathematical equation,' one pitting the ability of the committee to schedule meetings against the calendar. And he’s hinted it’s possible the report will find no evidence of collusion between Trump allies and Moscow."
— Google lays low. Axios' David McCabe: "Facebook and Google both have a Russia problem. But while Facebook has mounted a very public response to charges of election meddling on its platform, Google has kept its head down. At least so far, Google has managed to avoid the scale of criticism that has hit Facebook and Twitter as a result of Congress' investigation into Russia's actions and the platforms' role in allowing them, which is good news for a company that is frequently at the center of tech policy battles. Still, it will get intense questioning when its general counsel testifies on Capitol Hill next week."
— Your dossier guide. The now near-mythic dossier alleging deep Trump-Russia connections is back in the news. What you need to know about it — what's been reported, Trump's reaction, the key players, and how it fits into the Mueller probe — here.
— GOP targets Mueller's budget. Politico's Darren Samuelsohn: "Republicans trying to hobble Robert Mueller’s sprawling probe into President Donald Trump and Russia matters are about to get a new weapon: the special counsel’s budget. Lawmakers haven’t yet seen the Russia investigator’s first spending report, which must go through a Justice Department review before being made public. But they’re already setting up a fight over how much the probe is costing taxpayers — and the fact that there’s no end in sight...
As a practical matter, Congress can’t go after Mueller’s day-to-day spending directly. His budget is being drawn out of a permanent Treasury Department account that is not subject to the annual appropriations process, and the DOJ regulations used to appoint Mueller state he “shall be provided all appropriate resources” to do his work. Mueller is subject to some oversight. He had to produce a budget proposal to DOJ earlier this summer for the next fiscal year. And an internal DOJ audit office must review the first 4½ months of his spending receipts."
— Rosenstein: Americans "too savvy" for Russian ads to work. The Post's Aaron Blake: "Deputy Attorney General Rod J. Rosenstein is in charge of overseeing special counsel Robert S. Mueller III's investigation into Russian interference in the 2016 election. The U.S. intelligence community has said explicitly that it has no opinion on whether Russian interference affected the election. But Rosenstein does — at least when it comes to the ads for which Russia paid. Appearing on the “Target USA” podcast from Washington's WTOP radio station, Rosenstein said he thought American voters were too “savvy” to be influenced by such ads." He flatters us.
— Treasury: Scale back rules for asset managers. WSJ's Ryan Tracy and Dave Michaels: "Investment funds would see strict post-crisis rules scaled back or delayed under recommendations laid out Thursday by the Treasury Department its latest report outlining the Trump administration’s deregulatory agenda. The report on the asset-management and insurance industries was the third issued in response to a February executive order from President Donald Trump directing the Treasury to re-evaluate U.S. financial regulations.
The Treasury recommended scaling back a Securities and Exchange Commission rule for mutual and exchange-traded funds meant to reduce the risks of an investor exodus during a panic, particularly one provision that would require funds to estimate and disclose the liquidity of their holdings. The SEC, an independent federal agency, would need to act on the Treasury’s recommendations for them to go into effect.
The report also said that designating large insurers and asset managers for stricter federal rules is 'not the best approach for mitigating risks,' and regulators should focus instead on risky activities. That will be music to the ears of the largest companies in those industries, which under the Obama administration feared the federal regulation that comes with being labeled 'systemically important.'"
CapAlpha's Ian Katz weighs in, via a note to clients this morning: "Broadly speaking, the report is positive for investors in asset managers and insurers. If Treasury’s recommendations are implemented, many companies will be able to reduce some regulation-related costs and enjoy a bit more flexibility in the marketplace. One thing that stands out is how little Treasury asks of Congress. The vast majority of the recommendations can be completed by regulators. Many of those will likely be done, but we caution that making and changing regulations takes time, sometimes years. And the lower-priority recommendations might never be completed because agencies such as the SEC simply aren’t built to churn out regs."
If you're a woman working in the United States, you started working for free yesterday.
"The median salary for a full-time working woman is about 80 percent of a man’s. That gap, put in other terms, means women are working for free 10 weeks a year," writes Xaquin G.V. for The Washington Post.
- Heritage Foundation holds an event on “The Role of Investor-State Dispute Settlement Provisions in NAFTA.”
From The Post's Tom Toles: "The Republicans begin their debate for these high stakes."
House Speaker Paul Ryan (R-Wis.) said the FBI agreed to provide House lawmakers with documents regarding a dossier containing allegations against President Trump:
President Trump tells the story of his brother's struggle with addiction:
Secretary of State Rex Tillerson was caught on mic while looking at a statue saying: "Some days I feel like I need to do that. Curl up in a ball:"
Watch Stephen Colbert's fake interview of Lou Dobb's interview of President Trump: