The Washington PostDemocracy Dies in Darkness

The Finance 202: Wall Street got almost everything it wanted in tax package

with Paulina Firozi


Giant banks narrowly averted a disaster in the Senate tax bill that passed over the weekend. 

A provision in the package aimed at discouraging companies from minimizing their tax burden by shipping income abroad also roped in derivative payments, several industry sources working on the issue said. The financial contracts make up a multitrillion-dollar daily global market, and multinational companies use them to hedge against risks from, say, currency fluctuations. The bill slapped a 10 percent levy on them — prompting banks to howl that the payments don't deserve to be taxed, since they don't function as a tax dodge. 

Industry leaders pressed the case to Senate Finance Committee members last month, noting in a letter to Chairman Orrin Hatch (R-Utah) and ranking Democrat Ron Wyden (Ore.) that a single bank can have several hundred thousand such transactions going at once, with their total value reaching “into the trillions of dollars, a significant portion of which would likely be subject to this punitive tax.”

Committee Republicans added a carve-out for derivatives to their package late last week, sources working on the matter said. “It certainly was not our intent to sweep in trillions of dollars in transactions that net each other out,” one GOP aide said.  

The change was one of several that financial services interests from Wall Street and beyond managed to secure in the Senate proposal, industry sources said. And more than anything, banks stand to benefit from the slashing of the corporate rate from 35 percent to 20 percent, considering the high effective rate they pay under the current code. Investors noticed: Big bank stocks surged Monday on enthusiasm for the bill.

Financial interests didn’t get everything they wanted from the tax rewrites. Both bills place new limits on the deductibility of interest payments on debt, a key break for the industry; banks failed to zero out the federal income tax exemption enjoyed by credit unions; and they lost their write-off for insurance premiums they pay the FDIC. 

Still, the news was mostly positive. Although the derivatives carve-out aimed at heading off a disruption that the bill’s framers never intentioned, other protections shielded financiers from tougher treatment they expected to face under a rewritten code. 

Take the windfall that investment fund managers reap on successful bets. It’s taxed at the 20 percent rate for capital gains, plus a 3.8 percent Obamacare surcharge, meaning those ultrawealthy investors pay only a fraction of what they would owe if earnings were treated as ordinary income. President Trump promised on the campaign trail to end the break. Neither of the bills produced by the House or Senate does. 

Here’s National Journal’s Casey Wooten

The Senate bill, like its House counterpart passed earlier this month, contains a provision that would extend the holding period for investments to qualify for the carried-interest tax break, a move some analysts say would be ineffective and a far cry from the administration’s calls to fully eliminate the break ...

The change in the tax bills would require that any asset be held for three years or longer before a taxpayer could claim the carried-interest provision. The current holding period is one year. House Ways and Means Committee Chairman Kevin Brady said earlier this month that the provision would ensure that hedge funds don’t benefit from the break, leaving it only to long-term real estate partnerships.

But some analysts say the provision won’t have much of an impact on those using the break. ‘That’s not going to have any effect on carried interest,’ said Robert Willens, a New York-based tax expert whose clients include hedge funds and private-equity firms. ‘The private-equity partners who benefit most from carried interest are not going to be penalized on account of that increase in the holding period because they inevitably hold their investment for longer than three years already.’

Financial services interests benefit from other gifts of omission in the tax bills. The big banks were on guard against the revival of a major tax that then-House Ways and Means Committee Chairman Dave Camp (R-Mich.) proposed in his 2014 proposal for overhauling the code. It would have raised an estimated $86 billion over a decade by levying a tax on the consolidated assets of those firms with more than $500 billion. But it was never seriously discussed this year. 

And mortgage servicers scored a win thanks to Sen. Mike Rounds (R-S.D.). The Wall Street Journal’s Kate Davidson and Joshua Jamerson report

An amendment from Sen. Mike Rounds (R., S.D.) would exempt mortgage servicers from a potentially costly provision in the bill that would have them pay taxes upfront on projected income they receive over the life of a mortgage. Current law says lenders can pay taxes as cash comes in — that is, as people make their monthly mortgage payments.

The Mortgage Bankers Association, whose members include JPMorgan Chase and Quicken Loans but also smaller lenders, fought for keeping the status quo. It was a win for an industry that saw big losses from other provisions, including changes to mortgage-interest deduction rules and the standard deduction that filers take.

Not bad for an industry both major party candidates used as a bogeyman in last year’s presidential election.

And indeed, Democrats are rallying to make the case that the bill exemplifies the hollowness of Trump’s populist campaign pledges. As Sen. Sherrod Brown (D-Ohio) told my colleagues over the weekend, “The public by Election Day will see how this Republican majority is wholly owned by Wall Street on every issue and the administration increasingly resembles a retreat for Goldman Sachs executives.”


Senate panel expected to approve Powell. CNN Money's Donna Borak: "The Senate Banking Committee is expected to vote Tuesday on whether to advance the nomination of Jerome Powell, President Trump's pick to lead the Federal Reserve. If Powell is confirmed by the Senate panel, his nomination will advance to the Senate for a full vote. It's unclear when that vote would be scheduled...

A Fed governor since 2012 and a former Treasury official under the George W. Bush administration, Powell is seen as a non-controversial pick for the role and is widely expected to secure the job. 'We expect an uncomplicated committee vote, despite some Democratic opposition,' Ian Katz, an analyst at policy research firm Capital Alpha Partners wrote in a note to clients. 'Full Senate approval by early February, when Janet Yellen's term ends, appears likely at this point.'"

Dow rises to record but rest of market rolls over on tech woes (CNBC)

Fed rate expectations on the rise before tax cuts passed Senate: Reuters poll (Reuters)

Brexit deal falls through over Irish border dispute (Financial Times)



Brady to lead hurry-up conference. Reuters: "The Republican-controlled [House] voted on Monday to go to conference on tax legislation with the Senate, moving Congress another step closer to a final bill.The House voted 222-192 to go to conference with the Senate, setting up formal negotiations on the legislation that could take weeks to complete. Seven Republicans voted 'no.'"

House Speaker Paul Ryan (R-Wis.) tweeted the list of Republican conferees:

Not so fast. Politico: "House conservatives threatened to derail a key tax vote on Monday in an attempt to win more influence over the GOP's spending strategy, just four days before the deadline to fund the government. In a dramatic political stunt, more than a dozen members of the House Freedom Caucus withheld their support for a crucial procedural vote on the GOP’s tax bill, threatening an embarrassing blow to GOP leadership. The conservatives eventually relented, approving what had been thought to be a formality — a motion to appoint negotiators to hammer out a final tax bill with the Senate."

Via GOP strategist Liam Donovan:

Companies target AMT. WSJ's Theo Francis and Richard Rubin: "Technology, banking and other industries mounted a new round of lobbying Monday to save a wide range of tax breaks following the last-minute switch in the federal tax overhaul by the U.S. Senate. The Senate on Saturday decided to keep a corporate alternative minimum tax, or AMT, a move that gave the senators $40 billion over a decade to use on other priorities, according to the official estimate. The move blindsided CEOs and business groups, who acted quickly on Monday to try to persuade legislators to kill or modify the provision, arguing that keeping it would undercut several goals of the legislation, including fostering investment in the U.S.

The corporate AMT is a parallel system with low rates and fewer breaks that kicks in if a variety of tax breaks bring a firm’s regular tax bill too low. Currently, the corporate AMT of 20% rarely applies, since most corporations face a higher 35% tax rate and benefit from breaks eligible under both systems. With a proposed 20% corporate rate, many companies could end up in the AMT—and lose some of their tax breaks in the process. Business lobbyists argue that keeping the corporate AMT would make it harder for tech companies to claim tax credits for research and development spending and for banks to claim credits for investing in troubled U.S. areas."

GOP undercut independent analyses. NYT's Jim Tankersley: "A Republican requirement that Congress consider the full cost of major legislation threatened to derail the party’s $1.5 trillion tax rewrite last week. So lawmakers went on the offensive to discredit the agency performing the analysis. In 2015, Republicans changed the budget rules in Congress so that official scorekeepers would be required to analyze the potential economic impact of major legislation when determining how it would affect federal revenues.

But on Thursday, hours before they were set to vote on the largest tax cut Congress has considered in years, Senate Republicans opened an assault on that scorekeeper, the Joint Committee on Taxation, and its analysis, which showed the Senate plan would not, as lawmakers contended, pay for itself but would add $1 trillion to the federal budget deficit. Public statements and messaging documents obtained by The New York Times show a concerted push by Republican lawmakers to discredit a nonpartisan agency they had long praised."

Economists expect modest boost. AP: "Economists expect a tax overhaul to provide a modest boost to the U.S. economy but are increasingly worried that a rewrite of the North American Free Trade Agreement will take a toll on growth.

The National Association of Business Economics survey found that forecasters expect tax law changes to add 0.2 percentage points of growth to the U.S. economy, down slightly from what they expected in the previous NABE survey in September... Forty-six percent of 51 panelists believe the renegotiation of NAFTA will do at least some damage to the American economy, up from 27 percent in September... The NABE economists expect the U.S. economy to expand 2.2 percent this year and 2.5 percent in 2018. They expect unemployment to match October’s 4.1 percent throughout the first half of 2018, and then slip to 4 percent in the second half."

Private schools benefit, public schools suffer. NYT's Erica Green: "As Friday night turned into Saturday morning, Vice President Mike Pence cast a tiebreaking vote in the Senate to extend a tax benefit available for higher education to families paying tuition for private elementary and secondary education — or even homeschooling their children.

The vote on the amendment by Senator Ted Cruz, Republican of Texas, was emblematic of the sweeping tax bills entering final negotiations between House and Senate Republicans. Provisions in both measures could change families’ approach to elementary and secondary education, and every type of school stands to benefit except those attended by 90 percent of the nation’s students — public schools.

Under the House and Senate bills, families who can afford to put money away for private or sectarian schools each month would be able to watch their savings earn interest and capital gains free of taxation. In the Senate bill, even home schoolers could withdraw up to $10,000 a year for school expenses in their own living room — from tax-favored savings accounts. By contrast, the drastic curtailing of state and local tax deductions in both bills could hamstring local governments’ efforts to finance their public schools."

Grassley: I was taken out of context. The Iowa Republican has been slammed by criticism since appearing to argue over the weekend that the 99.8 percent of Americans who don’t face the estate tax “are just spending every darn penny they have, whether it’s on booze or women or movies.” He was on cleanup duty Monday, releasing this statement: “My point regarding the estate tax, which has been taken out of context, is that the government shouldn’t seize the fruits of someone’s lifetime of labor after they die. The question is one of basic fairness, and working to create a tax code that doesn’t penalize frugality, saving and investment.” Democrats assembling their sound bite file for the midterms won’t humor Grassley’s attempt at a do-over. 

Summers: 10k will die. CNBC's Jeff Cox: "About 10,000 Americans will die every year from lack of health coverage if the tax reform bill goes through as proposed, Larry Summers, former Treasury secretary under Bill Clinton and White House economic advisor under Barack Obama, said Monday. Citing studies on what happens to people who go from being insured to uninsured, Summers said the estimate is likely conservative. 'I think this bill is very dangerous,' he said on CNBC's 'Squawk Box' program. 'When people lose health insurance, they're less likely to get preventive care, they're more likely to defer health care they need, and ultimately they're more likely to die.'"

A post-Christmas spending showdown? The Post's Ed O'Keefe, Mike DeBonis​ and Erica Werner: "Attempts to avert a government shutdown hit a snag late Monday as a bloc of conservative lawmakers pressured top GOP leaders to set a new spending deadline for just after Christmas — instead of just before — in a bid to maintain the party’s leverage in talks with Democrats over spending levels and other year-end concerns.

Government funding is set to expire Friday, giving Republicans who control Congress just a few days to shore up support. President Trump and top congressional leaders agreed to meet Thursday afternoon to discuss details of a new year-end spending agreement — just hours before spending runs out. Over the weekend, Republican leaders unveiled a bill to keep the government operating through Dec. 22, giving bipartisan negotiators more time to reach an agreement.

But in a sign of trouble, members of the House Freedom Caucus on Monday night briefly withheld support for a bill to formally launch negotiations with the Senate on a GOP tax restructuring plan — not over issues with the Senate legislation, but as a way to extract concessions from Republican leaders on the spending measure. Freedom Caucus members ultimately helped Republicans approve the launch of formal tax negotiations, but leaders of the bloc said that House GOP leaders had agreed to keep talking about possibly setting the next deadline on Dec. 30."



Mueller subpoenas Deutsche Bank records. Bloomberg's Steven Arons: "Special prosecutor Robert Mueller zeroed in on President Donald Trump’s business dealings with Deutsche Bank AG as his investigation into alleged Russian meddling in U.S. elections widens. Mueller issued a subpoena to Germany’s largest lender several weeks ago, forcing the bank to submit documents on its relationship with Trump and his family, according to a person briefed on the matter, who asked not to be identified because the action has not been announced.

'Deutsche Bank always cooperates with investigating authorities in all countries,' the lender said in a statement to Bloomberg Tuesday, declining to provide additional information. Deutsche Bank for months has rebuffed calls by Democratic lawmakers to provide more transparency over the roughly $300 million Trump owed to the bank for his real estate dealings prior to becoming president... [Rep.] Maxine Waters of California and other Democrats have asked whether the bank’s loans to Trump, made years before he ran for president, were in any way connected to Russia. The bank previously rejected those demands, saying sharing client data would be illegal unless it received a formal request to do so. Trump has denied any wrongdoing."

Trump's new legal defense. The Post's Sari Horwitz and Philip Rucker: "The brazen assertion Monday by one of President Trump’s lawyers that a president cannot be found guilty of obstruction of justice signaled a controversial defense strategy in the wide-ranging Russia probe, as Trump’s political advisers are increasingly concerned about the legal advice he is receiving.

Trump tweeted over the weekend that he knew then-national security adviser Michael Flynn lied to the FBI about his contacts with the Russian ambassador before firing him in February — and before FBI Director James B. Comey said Trump asked him to be lenient while investigating Flynn. Experts said the president’s admission increased his legal exposure to obstruction-of-justice charges, one of the core crimes under investigation by special counsel Robert S. Mueller III.

But Trump’s personal lawyer John Dowd sought to excuse the president’s tweet in part by telling Axios and NBC News on Monday that the 'president cannot obstruct justice because he is the chief law enforcement officer under [the Constitution’s Article II] and has every right to express his view of any case.' ... Inside the White House, some senior officials were baffled that Dowd publicly offered this interpretation of the law, which has been advanced since the summer by constitutional scholar Alan Dershowitz in defense of Trump but flatly dismissed by many other legal scholars."

Also Trump's legal team: collusion isn't illegal. The New Yorker's Jeffrey Toobin: "With regard to Mueller’s broader investigation, the White House lawyers’ position continues to be that President Trump didn’t commit a crime because no one did—or could—because there is no federal crime called “collusion,” and Rosenstein’s order did not refer to any criminal statutes that may have been violated. In several conversations with me, Sekulow emphasized that collusion between the Trump campaign and Russia, even if it did take place, wouldn’t be illegal. 'For something to be a crime, there has to be a statute that you claim is being violated,' Sekulow told me. 'There is not a statute that refers to criminal collusion. There is no crime of collusion.'"

McFarland testimony questioned. NYT's Michael Schmidt and Sharon LaFraniere: "A leading Democrat on the Senate Foreign Relations Committee questioned on Monday whether a high-ranking official in Donald J. Trump’s transition team had been deceptive over the summer about her knowledge of discussions between Michael T. Flynn...

K.T. McFarland served on the presidential transition team before becoming the White House deputy national security adviser. In July, she was questioned in writing by Senator Cory Booker, Democrat of New Jersey, on whether she had ever spoken to Mr. Flynn about his contacts with Sergey I. Kislyak, who was then the Russian ambassador to Washington, before Mr. Trump took office. 'I am not aware of any of the issues or events described above,' Ms. McFarland wrote in response, sidestepping a direct answer to the question.

An email exchange obtained by The New York Times indicates that Ms. McFarland was aware at the time of a crucial Dec. 29 phone call between Mr. Flynn and Mr. Kislyak that was intercepted by American intelligence. During that call, Mr. Flynn urged Moscow to respond cautiously to sanctions just imposed by the Obama administration for Russia’s interference in the presidential election."

Manafort colleague has ties to Russian intel. The Post's Rosalind Helderman and Spencer Hsu: "Federal prosecutors asserted Monday that a longtime associate of Paul Manafort, the former chairman of President Trump’s campaign, has been “assessed to have ties” to Russian intelligence — the first time the special counsel has alleged a Trump official had such contacts. The statement came as prosecutors working for special counsel Robert S. Mueller III withdrew their support for a joint bail deal filed last week that would have released Manafort from home detention and GPS monitoring while he awaits trial on charges including money laundering and fraud.

Manafort, 68, and his longtime deputy, Rick Gates, 45, have both pleaded not guilty to charges filed Oct. 30. In the four-page filing Monday, prosecutor Andrew Weissmann urged the judge to reject the bail deal, arguing that Manafort and a Russian colleague have been secretly ghostwriting an English-language editorial that appeared to defend Manafort’s work advising a ­Russia-friendly political party in Ukraine."

Don Jr., Felix Sater to House Intel. Reuters's Patricia Zengerle: "President Donald Trump’s eldest son and a former business associate of the president are due to testify to the U.S. House of Representatives Intelligence Committee, as it continues its investigation of possible Russian involvement in the 2016 election, sources familiar with the schedule said. Donald Trump Jr. will appear before the committee on Wednesday and Felix Sater, a Russian-American who was a former Trump business associate who claimed deep ties to Moscow, as soon as Thursday, the sources said. Neither session will be public."


Will BlackRock and Vanguard Own Everything by 2028? (Bloomberg)

Bitcoin Is Now Bigger Than Buffett, Boeing and New Zealand (Bloomberg)

How Dollar General Became Rural America’s Store of Choice (WSJ)


Van Hollen backs off amendment. Reuters's Olivia Oran: "A Democratic U.S. senator is backing away from a proposed legislative tweak that would have helped big banks lessen their capital burden, according to a statement provided to Reuters on Monday. Senator Christopher Van Hollen, of Maryland, had submitted an amendment to a financial regulatory reform bill that would give banks a partial reprieve from a rule known as the supplemental leverage ratio, according to the document Reuters reported on earlier on Monday. However, Van Hollen is against the changes and is not offering the amendment to the Senate Banking Committee as written, his spokeswoman Bridgett Frey told Reuters. She attributed the difference to an error in drafting the amendment, whose changes consisted of two paragraphs."

SEC Chairman Clayton Says Agency Is Not Done in Addressing Uses of Bitcoin (WSJ)

Consumer Bureau Lifts Freeze on Payments to Crime Victims (NYT)

Mick Mulvaney says he plans to run CFPB for 5 to 7 months, won't fire Leandra English (Washington Examiner)


From The Post's Andrew Van Dam: "Is the GOP tax plan an unprecedented windfall for the wealthy? We look at 50 years of data to find out:"



  • The Senate Committee on Banking, Housing, and Urban Affairs holds an executive session to consider the nomination of Jerome H. Powell to serve as the chairman of the Federal Reserve System as well as the Economic Growth, Regulatory Relief and Consumer Protection Act.

Coming Up

  • The Information Technology and Innovation Foundation will hold an event on National Competitiveness in the Global Economy on Wednesday.
  • The Senate Special Committee on Aging holds a hearing on “America’s Aging Workforce” on Wednesday. 



What would a government shutdown mean?

If Congress doesn't reach agreement on crucial immigration issues and pass a spending bill, the costly consequence would be another government shutdown. (Video: Joyce Koh, Peter Stevenson/The Washington Post)

Here are five tax issues Republicans need to resolve in conference:

Now that the Senate and the House have passed two tax bills, there are some crucial differences they need to resolve in conference. (Video: Jenny Starrs/The Washington Post, Photo: Melina Mara/The Washington Post)

"Last Week Tonight" host John Oliver grilled actor Dustin Hoffman at a Tribeca Film panel about sexual harassment allegations made against him:

"Last Week Tonight" host John Oliver questioned actor Dustin Hoffman at a Tribeca Film panel on Dec. 4 about sexual harassment allegations made against him. (Video: The Washington Post)

Here are four takeaways from Billy Bush’s interview with Stephen Colbert:

Billy Bush made his first late-night appearance since his lewd conversation with Donald Trump was released more than a year ago. (Video: Amber Ferguson/The Washington Post)