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Republican Tax Reform: A Windfall If Done Right – Updated

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Tax reform will be the litmus test for Republicans and President Trump and will be decisive in determining the latter’s re-election. With repealing and replacing Obamacare now relegated to the shed and progress on the border wall looking sluggish, tax cuts across the board might become the ace in the hole.

November 2 saw the unveiling of the new tax reform bill, entitled ‘Tax Cuts and jobs Act of 2017,’ in the Congress (House of Representatives). The New York Times did a great round up of the bill and what it entails, if it were to pass through the Congress and signed into law.

In a move to streamline the tax brackets in individual income tax, the new bill sets out four easy brackets, some of which involve merger of existing brackets. The bill also revises the income ranges for the brackets. Under the new bill, the top tax rate will be applied to households making $1 million and above as compared to $480,050 under the existing structure, thus relieving the burden on six digit earners. While low income earners ($0 – $19,000) will be taxed at 12%, up 2 percentage points from the existing 10%, a larger child tax credit for low income families might make up for the earnings lost in the mark-up.

Repealing the estate tax, which might double the amount of tax exempted inherited wealth to $11 million, seems like a huge windfall for the rich. Critics of the tax reform bill will and have certainly used this giveaway to label the bill as ‘tax cuts for the rich.’

But the real bonanza lies in the bill’s proposal to double the standard deduction – fraction of income immune from taxation. This is applicable to all but married couples with multiple children.

On the other hand, the bill proposes to eliminate local and state tax deductions – a move touted to negatively affect blue state residents more than red state residents, as the former have higher taxes. Could this be an attempt to pressure blue states into reducing their state and local taxes? The next few weeks might answer this question.

Pass-through businesses (sole proprietorships, partnerships, and S corporations) will be taxed at a new single tax rate – 25%. Although a fine streamlining measure, the flat tax rate seems high given the fact that most of pass-through businesses are small and medium enterprises that operate domestically and contribute a lion’s share to the economy. Taxing them lower than the proposed flat tax rate for corporations might make it reasonable and might win over at least one Senate Republican – Sen. Ron Johnson (R-Wis). Winning Senate Republicans over is critical for the passage of the bill, as we shall see later.

The corporate tax rate, under the bill, will be slashed to 20% from the current 35% – one of the highest in the world. The 35% tax rate doesn’t include taxes imposed by the state and local councils. The existing tax burden means more and more US corporations park their money abroad in ‘tax havens.’ The only way to lure that money back and earn taxes on it is to become competitive and incentivize firms to hold their money in the US. The change will have to be coupled with closure of all possible tax loopholes to make sure that the new policy delivers the proposed goodies.

The connection between tax relief to corporations and job creation and better wages is tenuous, yet widely leveraged. But it sounds sanguine and gets the masses to rally around such proposals – an indirect measure to influence the voting patterns of the elected representatives.

On the other hand, there might be some wisdom in cutting taxes for small businesses in a bid to create jobs, as these businesses hire locally and cannot replace human labor with automation due to the high costs of the latter. That’s one more reason to lower the tax rate for pass-through businesses.

The Senate has its own version of tax reform, which if passed, will need to be reconciled with the House version. The Senate version agrees with the House version on most of the key elements. Notable differences include further lowering taxes on overseas profits, an unreasonable tax to begin with, as the profits were made elsewhere and probably have been taxed locally.

The Senate has also added a repeal of Obamacare’s individual mandate that requires everyone to get health insurance or else pay a tax penalty. This is a huge boon for those who don’t want to buy health insurance or can’t afford the ever-increasing costs of O-care. This might also save the government some money, as there will be fewer people requiring health subsidies. The Congressional Budget Office (CBO) estimates that repealing the individual mandate will earn the federal government $338 billion in revenue, which it would otherwise spend on health subsidies.

On a conspiratorial note, the Senate’s repeal of the mandate might be a cloaked attempt to gradually chip away at Obamacare.

The tax bill has passed the House and is awaiting the Senate’s consensus over its own version, following which the complicated ‘reconciliation’ process will begin. Although the tax bill made it through the House without breaking a sweat, its Senate counterpart might have to struggle, given the fact that the Democrats are unanimously opposed to it and only three Republicans need to vote ‘nay’ for the Senate version to fizzle out. Given the current mood, the Senate version seems to be hanging by a thin thread.

(The story is developing and so will the commentary. Check back periodically for updates.)

(Update: December 18, 2017)

President Trump must come through on his promises on tax, economic growth, jobs, and employment and the tax reform bill seems like the ace card. If nothing else, this bill upon passage will grant him the much-needed brownie points.

The bill sailed safe through the House and recently, the Senate voted on it. Here’s a brief, yet comprehensive, outline of the bill that passed the Senate.

The individual income tax remains tiered and progressive, but the brackets have been adjusted such that the highest rate (37%) is applicable to those earning half a million or above. Whether middle and upper middle-income families save the extra income, spend it, or invest it depends on a host of factors, including interest rates, stock market, and real estate. Nonetheless, it’s a significant tax cut for the middle class and a re-definition of the middle class through re-sizing of tax brackets.

A similar trend is seen in the alternative minimum tax (AMT) – a provision to ensure that individuals contribute their fair share – depending on how you define fair share. The trigger point for AMT and the threshold for phase-out have been scaled up significantly to move this burden to higher income individuals/couples, while lessening the burden on middle-income earners.

The bill is also a giant tax cut for corporations of all sizes – a point that has been used to malign the proposal as a ‘tax cut for the wealthy.’ Corporate tax will be diminished to 21% beginning 2018 and corporate AMT will be repealed. Repatriation of earnings will attract a modest 15.5% tax, which seems like an effort to not only lure businesses to keep their domestic earnings in the US, but to also move their overseas revenues stateside. Whether this move will deliver the proposed outcome depends on not just the tax rate, but also cost of compliance and scrutiny and any other regulations that may or may not burden the corporations. As I have said before, whether this influx of money will translate into more jobs is a highly questionable premise.

Business owners will have another means to increase their tax-free income – the pass through deduction of 20% applicable until $315,000 for joint filers and half that for single filers.

Repeal of Obamacare individual mandate, i.e. the unconstitutional requirement and the resultant penalty, stays.

The Senate version has left in state and local tax deductions, but has capped their net value at $10,000. This is a departure from the House version that proposed a complete repeal. A complete repeal could adversely affect the lives of mostly blue state residents and might perhaps, put pressure on state and local governments to reduce spending/taxation. If the House provision in this regard is rolled back to make way for the Senate provision, the chances of blue states controlling the growth of their governments seem fewer.

Mortgage interest deductible has been reduced to loans of $750,000. Upon researching into this scheme, I am not entirely convinced about its prudence. The deductible is just a means by which the government fiddles with the real estate market, contributing to a bubble. A total repeal of this deductible will be in line with free market principles.

The threshold for medical expense deduction has been brought down to 7.5%, which is a relief for the elderly and those with chronic illnesses. Additional measures to moving towards a free-market for healthcare hold the promise of making healthcare affordable for all.

The tax brackets for estate tax have been re-sized to re-define middle income families and to also provide relief to upper middle class. In addition, a sunset date has been put on this provision leaving room for amend.

The bill is currently being looked over for resolution of differences, following which it will reach the President’s desk. Trump has signaled his support for the bill and it is certain it will receive his assent.

Overall, although Republicans in Congress and representatives of Trump administration have skirted being quizzed about the windfalls the bill brings for the wealthy, it is increasingly clear that that tax reform bill is a tax cut for almost all.

The coming few weeks will be critical in deciding the direction of the economy for the next few years.

(Update: December 20, 2017)

The tax-reform bill passed the Senate 51-48 in a party-line vote. Sen. John McCain of Arizona was absent during the vote on account of medical circumstances. The cost of the bill is estimated to be $1.5 trillion over the next 10 years, i.e. individuals and corporations, in total, will save about one and a half trillion dollars over the next decade.

An ex-dentist and a business graduate who is greatly influenced by American conservatism and western values. Having born and brought up in a non-western, third world country, he provides an ‘outside-in’ view on western values. As a budding writer and analyst, he is very much stoked about western culture and looks forward to expound and learn more. Mr. Malkar receives correspondence at saurabh.malkar[at]gmail.com. To read his 140-character commentary on Twitter, follow him at @saurabh_malkar

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Hardened US and Iranian positions question efficacy of parties’ negotiating tactics

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The United States and Iran seem to be hardening their positions in advance of a resumption of negotiations to revive a 2015 international nuclear agreement once Iranian President-elect Ebrahim Raisi takes office in early August.

Concern among supporters of the agreement to curb Iran’s nuclear program which former US President Donald J. Trump abandoned in 2018 may be premature but do raise questions about the efficacy of the negotiating tactics of both parties.

These tactics include the Biden administration’s framing of the negotiations exclusively in terms of the concerns of the West and its Middle Eastern allies rather than also as they relate to Iranian fears, a failure by both the United States and Iran to acknowledge that lifting sanctions is a complex process that needs to be taken into account in negotiations, and an Iranian refusal to clarify on what terms the Islamic republic may be willing to discuss non-nuclear issues once the nuclear agreement has been revived.

The differences in the negotiations between the United States and Iran are likely to be accentuated if and when the talks resume, particularly concerning the mechanics of lifting sanctions.

“The challenges facing the JCPOA negotiations are a really important example of how a failed experience of sanctions relief, as we had in Iran between the Obama and Trump admins, can cast a shadow over diplomacy for years to come, making it harder to secure US interests,” said Iran analyst Esfandyar Batmanghelidj referring to the nuclear accord, the Joint Comprehensive Plan of Action, by its initials.

The Biden administration may be heeding Mr. Batmangheldij’s notion that crafting sanctions needs to take into account the fact that lifting them can be as difficult as imposing them as it considers more targeted additional punitive measures against Iran. Those measures would aim to hamper Iran’s evolving capabilities for precision strikes using drones and guided missiles by focusing on the providers of parts for those weapon systems, particularly engines and microelectronics.

To be sure, there is no discernable appetite in either Washington or Tehran to adjust negotiation tactics and amend their underlying assumptions. It would constitute a gargantuan, if not impossible challenge given the political environment in both capitals. That was reflected in recent days in Iranian and US statements.

Iranian Spiritual Leader Ayatollah Ali Khamenei suggested that agreement on the revival of the nuclear accord was stumbling over a US demand that it goes beyond the terms of the original accord by linking it to an Iranian willingness to discuss its ballistic missiles program and support for Arab proxies.

In a speech to the cabinet of outgoing President Hassan Rouhani, he asserted that the West “will try to hit us everywhere they can and if they don’t hit us in some place, it’s because they can’t… On paper and in their promises, they say they’ll remove sanctions. But they haven’t lifted them and won’t lift them. They impose conditions…to say in future Iran violated the agreement and there is no agreement” if Iran refuses to discuss regional issues or ballistic missiles.

Iranian officials insist that nothing can be discussed at this stage but a return by both countries to the nuclear accord as is. Officials, distrustful of US intentions, have hinted that an unconditional and verified return to the status quo ante may help open the door to talks on missiles and proxies provided this would involve not only Iranian actions and programs but also those of America’s allies.

Mr. Khamenei’s remarks seemed to bolster suggestions that once in office Mr. Raisi would seek to turn the table on the Biden administration by insisting on stricter verification and US implementation of its part of a revived agreement.

To achieve this, Iran is expected to demand the lifting of all rather than some sanctions imposed or extended by the Trump administration; verification of the lifting;  guarantees that the lifting of sanctions is irreversible, possibly by making any future American withdrawal from the deal contingent on approval by the United Nations Security Council; and iron-clad provisions to ensure that obstacles to Iranian trade are removed, including the country’s unfettered access to the international financial system and the country’s overseas accounts.

Mr. Khamenei’s remarks and Mr. Raisi’s anticipated harder line was echoed in warnings by US officials that the ascendancy of the new president would not get Iran a better deal. The officials cautioned further that there could be a point soon at which it would no longer be worth returning to because Iran’s nuclear program would have advanced to the point where the limitations imposed by the agreement wouldn’t produce the intended minimum one year ‘breakout time’ to produce enough enriched uranium for a bomb.

“We are committed to diplomacy, but this process cannot go on indefinitely. At some point, the gains achieved by the JCPOA (Joint Comprehensive Plan of Action) cannot be fully recovered by a return to the JCPOA if Iran continues the activities that it’s undertaken with regard to its nuclear program…The ball remains in Iran’s court, and we will see if they’re prepared to make the decisions necessary to come back into compliance,” US Secretary Antony Blinken said this week on a visit to Kuwait.

Another US official suggested that the United States and Iran could descend into a tug-of-war on who has the longer breath and who blinks first. It’s a war that so far has not produced expected results for the United States and in which Iran has paid a heavy price for standing its ground.

The official said that a breakdown in talks could “look a lot like the dual-track strategy of the past—sanctions pressure, other forms of pressure, and a persistent offer of negotiations. It will be a question of how long it takes the Iranians to come to the idea they will not wait us out.”

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Wendy Sherman’s China visit takes a terrible for the US turn

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Photo: Miller Center/ flickr

US Deputy Secretary of State, Wendy Sherman, had high hopes for the meeting in China. At first, the Chinese side did not agree to hold the meeting at all. The reaction had obvious reasons: Antony Blinken’s fiasco in Alaska left the Chinese disrespected and visibly irritated. This is not why they travelled all the way.

So then the State Department had the idea of sending Wendy Sherman instead. The US government actually needs China more than China needs the US. Sherman was in China to actually prepare the ground for Biden and a meeting between the two presidents, expecting a red carpet roll for Biden as if it’s still the 2000s — the time when it didn’t matter how the US behaved. Things did not go as expected.

Instead of red carpet talk, Sherman heard Dua Lipa’s “I got new rules”. 

That’s right — the Chinese side outlined three bottom lines warning the US to respect its system, development and sovereignty and territorial integrity. In other words, China wants to be left alone.

The bottom lines were not phrased as red lines. This was not a military conflict warning. This was China’s message that if any future dialogue was to take place, China needs to be left alone. China accused the US of creating an “imaginary enemy”. I have written about it before — the US is looking for a new Cold War but it doesn’t know how to start and the problem is that the other side actually holds all the cards

That’s why the US relies on good old militarism with an expansion into the Indo-Pacific, while aligning everyone against China but expecting the red carpet and wanting all else in the financial and economic domains to stay the same. The problem is that the US can no longer sell this because there are no buyers. Europeans also don’t want to play along.

The headlines on the meeting in the US press are less flattering than usual. If the US is serious about China policy it has to be prepared to listen to much more of that in the future. And perhaps to, yes, sit down and be humble.

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Why Jen Psaki is a well-masked Sean Spicer

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When Sarah Huckabee Sanders showed up on the scene as White House Press Secretary, the reaction was that of relief. Finally — someone civil, normal, friendly. Jen Psaki’s entry this year was something similar. People were ready for someone well-spoken, well-mannered, even friendly as a much welcome change from the string of liars, brutes or simply disoriented people that the Trump Administration seemed to be lining up the press and communications team with on a rolling basis. After all, if the face of the White House couldn’t keep it together for at least five minutes in public, what did that say about the overall state of the White House behind the scenes?

But Psaki’s style is not what the American media and public perceive it to be. Her style is almost undetectable to the general American public to the point that it could look friendly and honest to the untrained eye or ear. Diplomatic or international organization circles are perhaps better suited to catch what’s behind the general mannerism. Jen Psaki is a well-masked Sean Spicer, but a Sean Spicer nevertheless. I actually think she will do much better than him in Dancing With The Stars. No, in fact, she will be fabulous at Dancing With The Stars once she gets replaced as White House Press Secretary.

So let’s take a closer look. I think what remains undetected by the general American media is veiled aggression and can easily pass as friendliness. Psaki recently asked a reporter who was inquiring about the Covid statistics at the White House why the reporter needed that information because Psaki simply didn’t have that. Behind the brisk tone was another undertone: the White House can’t be questioned, we are off limits. But it is not and that’s the point. 

Earlier, right at the beginning in January, Psaki initially gave a pass to a member of her team when the Politico stunner reporter story broke out. The reporter was questioning conflict of interest matters, while the White House “stud” was convinced it was because he just didn’t chose her, cursing her and threatening her. Psaki sent him on holidays. Nothing to see here folks, move along.

Psaki has a level of aggression that’s above average, yet she comes across as one of the most measured and reasonable White House Press Secretaries of the decade. And that’s under pressure. But being able to mask that level of deflection is actually not good for the media because the media wants answers. Style shouldn’t (excuse the pun) trump answers. And being able to get away smoothly with it doesn’t actually serve the public well. Like that time she just walked away like it’s not a big deal. It’s the style of “as long as I say thank you or excuse me politely anything goes”. But it doesn’t. And the American public will need answers to some questions very soon. Psaki won’t be able to deliver that and it would be a shame to give her a pass just because of style.

I think it’s time that we start seeing Psaki as a veiled Sean Spicer. And that Dancing with the Stars show — I hope that will still run despite Covid.

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