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The Finance 202: Doug Jones victory will likely speed up Republican tax train

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with Paulina Firozi


Don’t look for the Alabama earthquake to knock the tax train off its tracks in Washington. Even as Democrat Doug Jones notched a once-unthinkable victory in the reddest of states Tuesday, Congressional Republicans continued to chug toward a breakthrough agreement on their sweeping rewrite of the tax code. 

They remain on pace to finish that work before the Christmas break. Jones’s win, meanwhile, won’t be certified by the Alabama Secretary of State until Dec. 26 at the earliest, meaning he probably won’t be sworn in until next year. Then, the Alabama Democrat will cut the Republican margin in the upper chamber to a single vote. But if the Republicans hew to their timetable, the ink of the president’s signature on a tax package will long since have dried. 

From The Post's Sean Sullivan: 

As they race to finish that work, Republicans are moving to tilt the package more heavily in favor of the wealthy. 

House and Senate negotiators are nearing agreement on an even deeper cut to the top marginal rate for individuals than either chamber’s version proposed. Their blended package — the contours of which began emerging Tuesday — would chop the rate for the highest earners from 39.6 percent to 37 percent (the House bill left the current top rate in place but bumped the income threshold for it from $470,700 to $1 million; the Senate bill scrapped that rate and replaced it with a 38.5 percent rate for income above $1 million). 

From The Post’s Erica Werner and Damian Paletta

"The move, which would still need to gain the support of enough Republican lawmakers in both the House and Senate, follows complaints from wealthy taxpayers in New York and elsewhere that their taxes could go up under the legislation because of other changes it makes to the code. It also follows pressure from conservative House Republicans who complained the tax plan did not do enough to bring down top rates.

Importantly, the changes would go far beyond addressing the complaints of wealthy New Yorkers and Californians and would lower taxes for top-earners across the country."

For what it's worth, Sen. John Thune (R-S.D.), a member of the conference committee, said Republicans aim to maintain the Senate bill's distribution of benefits across income brackets. Sens. Susan Collins (R-Maine) and Marco Rubio (R-Fla.) nevertheless are expressing resistance to lowering the top rate. 

The tax talks remain fluid, but the developing framework includes: 

  • Walking back the proposed cut to the corporate rate by one point, to 21 percent, saving $100 billion.
  • Capping the mortgage interest deduction at $750,000 for new home loans, splitting the difference between House and Senate approaches.
  • Giving owners of pass-through businesses with up to $500,000 in income a 23-percent deduction, per the Wall Street Journal

Other major differences — the treatment of corporate earnings abroad, the size of a child tax credit prioritized by Rubio, and limitation of write-offs for state and local taxes — must still be hashed out. But they are overshadowed by the agreements among Republicans: That the corporate rate should be deeply slashed, that it’s appropriate to put up to $1.5 trillion on the nation’s credit card to pay for the whole thing, and that speed is of the essence in getting it all done. 

Some context from a Boston Globe reporter on how Jones's win compares to the shockwaves sent by Republican Scott Brown's (Mass.) 2010 election to the Senate in the throes of the Affordable Care Act debate:

Indeed, while Democrats and progressive opponents of the tax agenda already are arguing Jones's win demands Republicans pause, the party's loss in Alabama will likely only stoke its sense of urgency. As Trump ally Ed Rollins told The Post's Bob Costa, “Everyone is going to start panicking.”

The job of dusting the party off falls in part to the president, who is scheduled to deliver a "closing argument" speech on his tax plan today (at 3 p.m., from the White House). Here's how he responded to the loss in a pair of tweets late last night and early this morning:

No surprise that Trump is absolving himself of responsibility. But it is remarkable that, as he notes, he managed to back two losing candidates in a single race — in a state he carried by 28 points just over a year ago.

His team wasn't all on hand to process the results, as The Post's Josh Dawsey and Ashley Parker report: "As the results rolled in, some aides worked to ready talking points. One White House aide suggested that the West Wing would try to immediately pivot to tax reform, arguing that with an even thinner majority in the Senate, every vote was even more critical. But many of Trump’s advisers who were skeptical of Moore were at Il Canale in Georgetown, attending a holiday party thrown by Gary Cohn, Trump’s chief economic adviser and a registered Democrat."


Fed watchers see tax cuts and rate hikes. CNBC's Steve Liesman: "The new Federal Reserve boss will be the same as the old boss when it comes to monetary policy and ... Trump's tax cuts will pass and add half a point to growth. Those are among the findings of this month's CNBC Fed Survey, coming at a time of dramatic transition at the Federal Reserve and in fiscal policy in Washington. 'Huge regime change in tax, monetary, trade is underway; that makes forecasting very prone to large error terms,'' wrote David Kotok, chairman and chief investment officer at Cumberland Advisors, in response to the survey.

The 44 respondents, including money managers, strategists and economists are nearly unanimous in believing the Fed will hike interest rates at the end of its two-day meeting this Wednesday and 100 percent say the next move after Wednesday will be to raise rates. Two-thirds say that next hike will happen in March... The Fed is seen hiking 2.8 times, on average, next year (call it three), with the funds rate rising to just over 2 percent, and then increasing to 2.5 percent in 2019. The Fed is estimated to stop hiking in 2019 at a rate of 2.9 percent."

Fed 2018 Dots in Focus for Yellen Swan Song: Decision Day Guide (Bloomberg)

Stocks Bounce After Paring Gains, Dollar Advances: Markets Wrap (Bloomberg)



Ryan trusts Treasury. WSJ's Kristina Peterson: "House Speaker Paul Ryan [R-Wis.] defended the Treasury Department’s analysis that the administration’s policy agenda would pay for the GOP tax bill, though he did not specifically endorse the administration’s $1.8 trillion growth estimate. 'That estimate makes a lot of sense,” Mr. Ryan told reporters Tuesday. “You see a wide variety [of estimates], but I do think we’re going to have a big, positive, dynamic effect... Every administration does this, just so you know, that they put into their plans what their plans are... That’s all going to help grow the economy, so it’s perfectly appropriate that the administration looks at that when they make their assessments on economic growth.'"

More Ryan: "So close" on tax bill, via Washington Examiner:  "'Tax reform is what people need right now and I’m so thrilled that we are so close to the finish line... We are going to keep at it so that we deliver real tax relief before Christmas.”

— Sticking points. Business Insider's Bob Bryan: "The Republican members of the conference need to find common ground on a significant number of issues, said Greg Valliere, chief strategist at Horizon Investments. 'Conferees said yesterday that they haven't resolved any of the key issues — the effective date and the top rate for corporate taxes; the estate tax; a flaw in the treatment of long-term vs. short term capital gains; all the pass-through tax details; the state and local tax exemption; whether to kill the Alternative Minimum Tax, etc,' Valliere wrote in a note to clients on Tuesday. 'There are at least a dozen other major issues that also are unresolved.' Where exactly the conferees lands on each of these issues could invoke opposition from certain factions of Republican members of Congress and potentially throw a wrench into the [the tax bill's] projected impact on economic growth and the federal deficit."

Another poll, same result. The Hill's Max Greenwood: "A majority of Americans said in new poll that the Republicans' tax overhaul is likely to hurt them and their families, and that it will mostly help the wealthy. Fifty-two percent of respondents said that they expect the GOP's tax plan to hurt them and their families, according to the Marist poll, while 30 percent said they believe the proposal would ultimately help them. Asked whom the overhaul would help the most, 60 percent of respondents said they believe it would provide the most relief to the wealthy, while only 21 percent said they expect it to help the middle class the most. Only 4 percent believe the bill would provide the most help to the poor."

Your odds of a tax hike. CNBC assembled an interactive graphic that estimates how you fare under the tax bill based on your income and where you live. See it here.

Biggest changes could be to living standards. NYT's Eduardo Porter: "The evidence underscores a not-insignificant weakness in the Republicans’ longstanding economic platform: Tax cuts are not the secret sauce to power the American economy. They have, in fact, very little power to affect economic growth. However strenuously Republicans may argue that tax reform is about increasing economic efficiency, encouraging investment or promoting competitiveness, tax cuts are always primarily about redistribution. That’s because the main effect of tax cuts is in changing how the fruits of economic growth are distributed. This means that for policymakers interested in improving the welfare of the American people, the first and most important item to consider is whose welfare is most worth improving... 

Of the world’s seven richest large economies, the United States and Britain have experienced the highest growth in income per person since the mid-1990s. But the United States ranks second from the bottom in the income gains of the poorest fifth of households over the period. And it also fares poorly when it comes to incomes in the middle of the distribution. This lopsided distribution of riches imposes a question on Republicans perpetually pushing for tax cuts on corporations and high-income Americans: What understanding of national welfare justifies the upward redistribution they are proposing? Using growth as a justification seems like a ruse."

Tension over the corporate rate. WSJ's Theo Francis: "Two percentage points are generating a big tussle in the debate over the right corporate tax rate. As House and Senate lawmakers continue hashing out differences between their tax-overhaul bills, the prospect lingers that they could push the new corporate tax rate to 22%.

Both chambers passed bills that would have cut it to 20%, down from 35% today, as part of a broader package of tax-law changes, and lawmakers are eager to keep it there. Still... Trump has raised the possibility of such a change, and pressure is growing in some quarters to find money for a variety of interests, from lower-income workers to small grocers...

Moody’s Corp., the bond-rating giant, offered a glimpse of that contrast in a presentation to investors and analysts last week. The company’s effective tax rate under current law is about 30%, Chief Financial Officer Linda Huber said. Each percentage-point reduction in that figure would increase earnings by 7 cents to 8 cents a share. So cutting the firm’s effective tax rate to 20% would raise earnings by 70 to 80 cents a share, Ms. Huber said, or between $134 million and $153 million using the company’s Sept. 30 share count. She suggested the difference between that and a 22% rate would mean giving up between 14 cents and 16 cents of that benefit."

Fox Business News's Trish Regan thinks the bill is too generous to corporations: 

Junk rated companies suffer. WSJ's Ben Eisen: "More than a quarter of junk-rated companies would fare worse under tax plans passed by Congress, according to an analysis published by the ratings firm Moody’s Investors Service on Tuesday. Most companies would benefit from a plan to cut the corporate tax rate to 20% from 35% and speed up the deduction of capital expenditures. But companies that already have large amounts of debt, which typically have bottom-of-the-barrel credit ratings, would be hit by new limitations that will put a cap on how much interest they can deduct.

The Moody’s analysis, which looks at just those three parts of the bill, found that 26% of junk-rated companies will be worse off under the plan advanced by the House of Representatives and 36% would be worse off under the Senate plan. The interest deductability limit could also hamper the private-equity business model, which typically involves debt-heavy purchases of companies, Moody’s said."

— What we could be spending it on. The NYT's Kai Schultz: "Struggling to pay its debt to Chinese firms, the nation of Sri Lanka formally handed over the strategic port of Hambantota to China on a 99-year lease last week, in a deal that government critics have said threatens the country’s sovereignty. In recent years, China has shored up its presence in the Indian Ocean, investing billions of dollars to build port facilities and plan maritime trade routes as part of its 'One Belt, One Road' initiative to help increase its market reach. Along the way, smaller countries like Sri Lanka have found themselves owing debts they cannot pay. Sri Lanka owes more than $8 billion to state-controlled Chinese firms, officials say. Sri Lankan politicians said the Hambantota deal, valued at $1.1 billion, was necessary to chip away at the debt, but analysts warned of the consequences of signing away too much control to China."

McConnell: No shutdown. Reuters: "McConnell said on Monday he was confident the U.S. Congress would be able to reach an agreement to fund the government when the current spending bill ends on Dec. 22 and that there would be no forced government shutdown. 'There isn’t any chance we are going to shut the government down. We’re in discussions, not only on a cap deal, but also on the way forward on appropriations,' McConnell told reporters. 'The American people need not worry that there is going to be any kind of government shutdown.' But ... Senate Democratic leader Chuck Schumer said a full-year defense funding bill with short-term money for other programs would fail in the Senate. 'Democrats will oppose any budget deal that would allow defense spending to increase while holding down domestic priorities,' he said to reporters.

House approves mortgage lending bill.'s Mark Weiner: "Rep. Claudia Tenney [R-N.Y.]'s bill to ease mortgage rules for community banks passed the House... [The bill rolls] back regulations enacted after the financial crisis that required banks to set up escrow accounts for riskier borrowers. The accounts ensure that homeowners will have money set aside for expenses such as taxes and insurance. But Tenney said the rule from the Consumer Financial Protection Bureau has been too costly for small, community banks, which have been closing at an average of one per day. Tenney's bill exempts small banks from the escrow requirement if a loan is held by a creditor with assets of $10 billion or less, requires banks to hold the loan on their balance sheets for at least three years, and requires loan servicing exemptions for banks with fewer than 20,000 mortgage loans."



Trump's lawyer: Investigate the investigators. The Post's Phil Rucker: "One of President Trump's personal lawyers called Tuesday for a special counsel to investigate alleged corruption at the FBI and Justice Department. Jay Sekulow, a member of the legal team counseling Trump on special counsel Robert S. Mueller III's wide-ranging Russia probe, said Tuesday that a second special counsel should be appointed to focus on FBI and Justice Department investigators. Sekulow's call for a second special counsel was first reported Tuesday morning by Axios. Sekulow did not allege wrongdoing on the part of Mueller or his team, telling The Washington Post that his call for a second special counsel has 'nothing to do with Bob Mueller.' But Sekulow argued that alleged conflicts of interest among FBI and Justice Department officials demand a full investigation by a special counsel."

Another Trump lawyer: Mueller done with WH interviews. Politico's Darren Samuelsohn: "Special counsel Robert Mueller on Tuesday completed interviews with the last in a slate of about two dozen current and former White House witnesses he’s initially requested as part of the investigation into Russia's actions in the presidential election, White House attorney Ty Cobb said. It’s unclear if Mueller will seek follow-up interviews or seek to question additional people beyond the initial batch of witnesses, but the completion of this round of questioning tracks with the goal Cobb has long stated publicly that President Donald Trump’s White House was cooperating with the Russia investigators in search of a speedy resolution to the probe."

Trump has unprecedented power to remake the world’s most powerful economic body (Andrew Van Dam)

Trump Tweets Consumer Confidence Is at Record High, But It's Not (Bloomberg)

More incredibly embarrassing, possibly criminal, news about our Commerce Secretary (Business Insider)



The cryptocurrency hit another all-time peak on Tuesday as the $20,000 mark now looks within reach, Reuters reports... Wonkblog's Matt O'Brien writes that it's "the most perfect bubble possible": "What else would you call something that, as of Tuesday morning, has gone up 47 percent the past week, 181 percent the past month, and 2,119 percent the past year? Not to mention the most remarkable part of this all: It has happened for no discernible reason."... BlackRock agrees, calling its valuation "extreme," per Bloomberg. The firm's head of active investments for Asia-Pacific said "this isn’t a financial asset like we would trade in terms of equities and fixed-income instruments.”...  As do 80 percent of Wall Street economists and analysts, according to a new CNBC survey: "Only 2 percent of respondents said the valuation is based on fundamentals, and 17 percent responded that they don't know or are unsure."

Here's a roundup of what the world's central banks are saying, via Bloomberg. And the Wall Street Journal looks at how Asian investors are helping fuel bitcoin's rise. 

Federal report finds regression for black managers in financial services industry (Joe Davidson | Columnist)

UPS and others warn that holiday deliveries are already falling behind (Abha Bhattarai)


Corporate Tax Rates at 21 Percent? (Ramesh Ponnuru, via National Review)



  • The House Ways and Means Oversight Subcommittee holds a hearing on IRS reform.
  • The Bipartisan Policy Center holds an event on low-income tax credit and health.

Coming Up

  • The House Financial Services Committee holds a hearing on “"Examining the Operations of the Committee on Foreign Investment in the United States” on Thursday.

Watch Doug Jones’s victory speech, in three minutes:

Democrat Doug Jones on Dec. 12 defeated Republican Roy Moore in Alabama’s U.S. Senate special election. Here are the highlights from Jones’s victory speech. (Video: Bastien Inzaurralde/The Washington Post)

"It's not over": Republican Roy Moore raises possibility of recount:

Republican U.S. Senate candidate Roy Moore did not concede and raised the possibility of a recount after Democrat Doug Jones appeared to win the election. (Video: The Washington Post)

CNN's Jake Tapper explains to Roy Moore's campaign spokesman that elected officials don't have to be sworn in on the Bible:

Members of the Democratic Working Women's Group are calling for the Government Oversight Committee to investigate President Trump's sexual misconduct accusations:

Democratic women in Congress call on the Government Oversight Committee to investigate Trump's sexual assault accusations. (Video: Reuters)

The "Star Wars: The Last Jedi" cast and crew discuss the loss of Carrie Fisher and what the future holds for her character, Leia:

The "Star Wars: The Last Jedi" cast and crew discuss the loss of Carrie Fisher and what the future holds for her character, Leia. (Video: Reuters)

Watch Stephen Colbert on the horse Roy Moore rode in on to vote: