My Facebook friends are predicting doom and gloom as a result of the new tax rates that Congress recently passed:
- The deep problems with the tax bill seem obvious to me and (most of) my FB friends.
- Traitors. History will judge them harshly.
- I saw an article the other day (can’t remember which paper, NY Times?) which pointed out a loophole in this tax bill where companies would actually benefit by moving abroad.
- This abomination of a tax bill also eliminated the alternative minimum tax for businesses. It might drive up the deficits $100-$200 billion in year one alone.
- Heartbroken
- Helping these people [photos of undocumented immigrants] should be more important than a tax cut for the rich.
The smartest minds of the media are even more down on the legislation:
- The G.O.P. Tax Bill Is Unworkable (New Yorker)
- The Most Frightening Aspect of Trump’s Tax Triumph (New Yorker): “The lies told by powerful men—and the thanks heaped on the most powerful man of all—are the language of a dictatorship.”
The $20 trillion in debt previously accumulated was just fine, but the predicted deficits due to these changes in tax rates will kill the United States economically. That’s a shame, but of course the U.S. is only a small portion of the world. Currently concerned citizens can plan a personal exit strategy, no? In fact, shouldn’t they be able to exit rich if they know about an impending collapse that other investors are ignorant of?
Let’s assume that the U.S. government is in fact starved for revenue as a result of having a corporate tax rate similar to the UK’s plus a whole bunch of crazy deductions, e.g., the R&D tax credit, that have built up over the years. That will lead to a larger deficit, right? And the larger deficit will mean the U.S. has to borrow and/or print money. So the dollar should go down and interest rates on Treasury bonds should go up? The above doomsayers express 100 percent confidence in their predictions. Can they become rich by shorting the dollar and shorting Treasuries? If so, what’s the best way for them to make crazy upside without having a big downside exposure? (i.e., what are the most efficient option-style instruments that are sensitive to big drops in the dollar and big rises in interest rates?)
[A money-expert friend suggests options on the TLT ETF for anyone certain of a collapse in Treasury bonds. He also noted that there are currency ETFs, such as UDN (option chain for this USD index).]
I know it’s the Times but there could be some truth in the argument put forth here:
https://www.nytimes.com/2017/12/20/opinion/republican-tax-bill-senate-house.html
Basically, the deficits will trigger massive, near automatic cuts in various entitlements due to a law passed back in 2010 and the writer makes the case this was intended as a feature and not a bug.
I suppose that if you think America is going down the drain because of this tax legislation because of future out of control inflation you should be taking a short position in US debt because as interest rates go up the value of the debt will do down. But that is not the way the bond markets have reacted, and the people trading government debt are a lot smarter than the people who predict the future in the pages of the NYT or the New Yorker (PhDs from e.g. MIT end up trading government debt not writing for the New Yorker) so that is not a bet I would make.
Jack: are those the same people who were trading RMBS, CDO, and CDS back in the early 2000’s?
I don’t see a doom and gloom economy resulting from the tax bill. What I do see is a giant step toward creating an American aristocracy. But, as we all can see from the lack of protest (columnists aside), the common man doesn’t care. Bread and circuses and all that. It’s hard to shed a tear for the masses who can’t be bothered to read a newspaper or go to the polls.
It will be an interesting ride.
I don’t think that betting on massive interest rate increases is a sure thing. Fifteen years ago, I would have thought so, but now I know that the Fed can easily buy $1.5 trillion of government debt without batting an eye and without raising interest rates. As a matter of fact, the Fed can buy $3 trillion of bonds and keep short term interest rates near zero for as long as it likes.
I imagine that manufacturers of general aviation aircraft have popped a cork or two.The new aristocrats may not pump much of their capital back into the economy (it will trickle down . . . to their heirs) but having an extra million bucks here and there sure makes that turboprop more appealing. Particularly if you can 179 the entire thing.
Raleigh: I don’t think the new tax laws are necessarily good for manufacturers of new airplanes. For one thing, the 1031 exchange option has been eliminated except for real estate. So selling the old Gulfstream and buying the new Gulfstream could result in a big recapture whereas today the depreciation on the old Gulfstream would be rolled into the new one via https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031
Another issue is that companies have less incentive to buy stuff in order to avoid paying a 40 percent tax. In the old days, a profitable company could buy a Gulfstream and 40 percent of the cost was paid by taxpayers (since the tax bill, over time at least, was reduced by 40 percent of the cost of the plane). With tax rates being cut back to about 25 percent (federal plus state), the subsidy from other taxpayers isn’t quite as large so a company might simply (gasp!) return the profits to shareholders via dividends or stock buy-backs.
With high tax rates businesspeople develop a “spend it or lose it” mentality (where “spend it” means “spend it on something deductible”). Some of that might go away with lower rates.
Raleigh: On the third hand, maybe you are right. It looks like the new tax rules will allow expensing of new capital equipment (including aircraft), but not of anything used. (And then, to further complicate matters, the law is scheduled to change after five years to go back to the current depreciation regime that nobody can understand.) So the sale of the old Gulfstream would result in a big recapture, but then that would be wiped out by the expensing of a purchase of a factory-new Gulfstream. See http://www.heritage.org/taxes/report/analysis-the-2017-tax-cuts-and-jobs-act
Maybe this is Hillary’s chance to upgrade from the G450 to the new G600!
It gets us closer to 17 years ago but nowhere near the way it was. The standard deduction merely keeps up with the increase in Calif* tax & inflation since then. The progressive tax cut is a revival of what we got 17 years ago but far behind the increases in social security tax. The biggest impact is 2 years from now, not being required to buy 5 figures of health insurance the moment you lose your job. Digging through the weeds of the tax code & incorporating yourself is ever more important. Calif* already preempted the rollback by raising vehicle & gas taxes over the last month.
Look at the LIBOR lately. Interest rates globally are starting to go up. There’s too much debt and governments at all levels everywhere are broke and their bonds are looking more and more questionable. The US will be the last affected by this trend, but it will hit here.
The bajillion dollar deficits can only go on as long as the interest is free. The republican coalition is now in the process of canceling slated automatic spending cuts. Amazing. Trump will probably surpass Obama for the deficit record now. What we need is massive cuts to government spending *and* tax cuts.
I am planning my life around a fiscal and monetary crisis inside the next 15 years, but probably sooner rather than 15 years from now. The USA will default in some form well within my lifetime.
BTW, this is a major reason the DOW has been going up relentlessly. A lot of European and Asian debt is starting to freak investors out and the money is flowing into blue chip stocks for lack of anything else reasonable to do. A piece of Apple is better than a piece of Stuttgart or Cook County.
There’s no way this game of musical chairs continues indefinitely. Modern people just aren’t used to the munis and sovereigns leading the crisis. Well, once the European debt market and the US muni market blows up, believe it or not the DOW will eventually also tank. But the trade right now is equities higher as the capital flees the bond bubble.
Slightly off topic:
A friend of mine who made a fortune in the convenience store business put it this way when someone argued against tax cuts for the rich and stated that all tax benefits should go to the poor (insert various definitions for “poor”): “If you think jobs are the answer, tell me how many poor people are hiring.”