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Republican Tax Reform: A Windfall If Done Right – Updated

Saurabh Malkar

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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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Americas

Just What Is An American?

Rahul D. Manchanda, Esq.

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The greatest mistake any leader, or moneyed powerful individual, or even masses of people (all 3 of which tend to have the loudest voices) is to culturally appropriate unto themselves, just exactly what it means to be an American, based on their own selfish notion of what it means.

The fact remains that the ideal of Americanism is a concept – a truly growing, organic, ever changing, and ever expanding idea that is enshrined within its founding documents and laws.

For example, the Declaration of Independence, Bill of Rights, US Constitution, Civil Rights Act, and the Equal Rights Amendment, among scores of other acts of legislation, point to an ever growing ongoing journey to forge a new nation, just like ancient Rome did, united by a common destiny, and drawn from different experiences, cultures, cuisines, religions, ethnicities, races, nationalities, and world views.

So when President Trump on July 15, 2019 told four minority female congresswomen in sum and substance to “go back to there they came from” if they “didn’t like America,” he trampled over their own views, ideals, and experiences as Americans.

Quite simply his statement was an appropriation of what it means to be an American, from the point of view of a German/ Irish American senior citizen male, to a group of Latin/ Somali/ Palestinian/ African-American younger females.

Perhaps President Trump should re-visit his own people’s racial history, wherein the Irish were systematically excluded by the previously arrived and established Anglican Protestants, or even with the Germans in America who were actually interred in camps during the periods of World War I & World War II.

The German-American Experience

During World War II, the legal basis for this detention was under Presidential Proclamation 2526, made by President Franklin Delano Roosevelt under the authority of the Alien and Sedition Acts.

With the U.S. entry into World War I, German nationals were automatically classified as “enemy aliens.”

Two of the four main World War I-era internment camps were located in Hot Springs, N.C. and Fort Oglethorpe, Georgia.

Attorney General A. Mitchell Palmer wrote that “All aliens interned by the government are regarded as enemies, and their property is treated accordingly.”                                              

The Irish-American Experience

In 1836, young Benjamin Disraeli wrote: “The Irish hate our order, our civilization, our enterprising industry, our pure religion. This wild, reckless, indolent, uncertain and superstitious race have no sympathy with the English character. Their ideal of human felicity is an alternation of clannish broils and coarse idolatry. Their history describes an unbroken circle of bigotry and blood.”

Nineteenth-century Protestant American “Nativist” discrimination against Irish Catholics reached a peak in the mid-1850s when the Know-Nothing Movement tried to oust Catholics from public office.

Much of the opposition came from Irish Protestants, as in the 1831 riots in Philadelphia, Pennsylvania.

After 1860, many Irish sang songs about “NINA signs” reading Help wanted – no Irish need apply.

The 1862 song “No Irish Need Apply” was inspired by NINA signs in London.

Alongside “No Irish Need Apply” signs, in the post-World War II years, signs saying “No Irish, No Blacks, No Dogs” or similar anti-Irish sentiment began to appear as well.

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Billionaires, Vanity and Modern Democracy

Dr. Arshad M. Khan

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The bullying in Washington is the current trend.  On Monday, the British ambassador resigned his post after Trump refused to deal with him.  Well-liked in Washington and the halls of Congress, his downfall was an honest assessment of the Trump administration as ‘inept’ and ‘dysfunctional’.  The letters were leaked in the U.K.

Suppose the president tweets comments contrary to current established policy, does that mean a policy change?  Do departments adapt promptly.  Nobody knows.  That’s dysfunctional, and everyone knows it.  In the meantime, he has enjoyed 17 golf outings since February averaging three a month.  No wonder he is that rare president who does not seem to age in office from the stresses of the job.  Obama’s hair turned gray.

But then a lighter hand on the tiller has kept us out of war, whereas Obama, the Nobel Peace Laureate, destroyed Libya and escalated in Afghanistan.  The consequences are still being felt in Southern Europe particularly, through the hordes of refugees still continuing to arrive.  Also in the resurgence of anti-immigration political parties in northern Europe.

The supreme irony is the fact of refugees being rescued from ramshackle boats and dinghies or often dying in one part of the Mediterranean while the Obamas cruise on a billionaire’s luxury yacht in another.  Is that a metaphor for democracies in the modern world?  One is also reminded of Mr. Modi’s specially woven pinstripe cloth repeating his name endlessly on the stripes in the material. 

Fortunately, the current president does not like the sea, or we would never see him in Washington.  As it is he has had 14 visits to golf clubs (not as much time on the course however) since the beginning of June.  He once had a small yacht that lay anchored in New York until he sold it.  His pleasures have generally centered on the more mundane:  cheeseburgers and women — the younger the better, although perhaps not as young as those that have gotten his friend Jeffrey Epstein in trouble again.  To be fair, Trump had a falling out with him ‘about 15 years ago’ he said recently.  ‘I was not a fan of his, I can tell you,’ he added although he called him a ‘terrific guy’ in 2002.

At least one party had 28 girls to a so-called calendar-girl party at Mar-a-Lago (Trump’s estate and club) in Florida, meaning selection of a calendar girl.  The male celebrities attending, according to the man assigned the task of finding the girls, happened to be Trump and Epstein, and no one else!  So surprised, the man still remembers the story.  The falling out between Trump and Epstein was rumored to have been a business deal.

It brings us to the second resignation, that of Alex Acosta the Labor Secretary.  A Harvard-educated lawyer, Mr. Acosta was the US attorney for the Southern District of Florida when he made a generous agreement with Epstein who had been charged with sex crimes.  For a 13-month sentence of mostly community work, usually from his mansion, Mr. Epstein was protected from further prosecution.  In a clear rebuke to Acosta, the case has been re-opened with a new charge of sex-trafficking minors.

As a result, Mr. Acosta has had to bow to the chorus of calls for his resignation.  The real question:  How ever did Trump get elected?  A mainstream press failure?

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What has happened to Western liberal idea?

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In the recent interview with President Putin, the Financial Times seems to have launched a discussion on liberalism only at its own peril. Inadvertently, a real problem was touched upon, whose pressing nature is no longer denied by anyone in the West. The newspaper had to admit it in its Editorial of 29 June. Its authors claim that the threat to liberalism comes from within, including President Trump and his policies, Brexit and, certainly, the rise of “populist nationalism”. They refer to voters’ disillusionment with liberalism and loss of confidence in the economic system and trust in political elites. The latter are invited to redouble their efforts to take into consideration issues raised by voters and “to renew liberalism”.

Hence, the Russian leader has only identified a problem that Western elites are unable to acknowledge, desperately defending the status-quo as having no alternative. But where is the problem?

The systemic crisis of Western society, if we are to call a spade a spade, has its roots in Reaganomics and Thatcherism. In early 1980s, disregard for the lessons of the Great Depression led to Anglo-American attempts to sort of try the pre-1929 Pure Capitalism. This unleashed the forcers of a “self-regulated market” with the state playing a minimal role – a key concept of liberal economics. The idea of social accountability of business had no place in that system.

At the same time, financial sector was deregulated through the step-by-step repeal of the Glass-Steagall Act, which was one of key elements of Franklin D. Roosevelt’s New Deal. Its architect was British economist John Maynard Keynes. It was only natural that the 2008 crisis also started in the financial sphere which had practically lost touch with the real sector of economy.

Then neoliberalism (as it became known) came to be imposed by Anglo-Saxon nations on the whole of the EU through the Lisbon agenda. The then Prime Minister Tony Blair was pretty good at it. When asked what she considered as her key legacy, Margaret Thatcher pointed to Blair who continued her economic policies under the “New Labour” slogan.

For instance, everyone knows what the nationalization of British railways led to. Profits are reaped by operators, while costs are borne by taxpayers who finance UK Rail, the state-run company responsible for railroad infrastructure. And this is not the only way to privatise profits while collectivising costs. In fact, globalisation has become one such practice for Western elites. Its original motive was quite liberal and far from being altruistic or even geopolitical (Donald Trump has reassessed this part of it when he blamed globalisation for China’s economic rise). It was about cheap labour for increased profits. The jobs  that were to be transferred abroad should have been compensated for by a new technological revolution. But it’s not happening, not even in the second generation. Information technologies do not create as many jobs, and we are already talking of robotisation and artificial intelligence, as well as a universal minimum living allowance as a solution to the problem of poverty and unemployment. It was Keynes who said: “Free trade assumes that if you throw men out of work in one direction you re-employ them in another. As soon as that link is broken the whole of the free trade argument breaks down”.

Liberalism in politics, especially after the end of the Cold War, has degenerated into averaging and alternative-free policies in the “end of history” spirit. Even Henry Kissinger admitted in his “World Order” (2014) that Western elites had again relied on automaticity, as was the case with the market. But as it was shown by Karl Marx supported by modern economists (Joseph Stiglitz, Paul Krugman, Thomas Picketty and others), free markets always give advantage to the investing classes, which only leads to more inequality.

In this respect, the 45-year post-WW2 period was an exception to the rule due to the creation of a social welfare state – the one that is now being destroyed by the neoliberal economics. Along with it the middle class is being destroyed – the pillar of Western democracy. For these reasons the real discourse of democracy is being substituted in the West by a discourse of liberalism. This involves labelling all protest voters as “populists” and “nationalists”, allowing to side-step the issue of the inability of the actual political system to represent this silent majority. Yet, that is what’s going on when differences blur between the Right and the Left, Tory and Labour in Britain, Republicans and Democrats in the US, or Christian Democrats and Social Democrats in Germany’s “Grand coalition”. Is it any wonder that when an opportunity arises to have a say, this majority votes for Brexit, Trump, or newly-created anti-system parties and movements, often with marginal ideologies?    

In social terms, as BBC is trying to explain in this ongoing debate, liberalism is about protecting the rights of minorities of all kind, including transgender persons. It turns out that there’s nobody to protect the interests of the majority. Yet, we are speaking of the post-war “social contract”, which simply does not work in liberal economics. Anglo-Saxons are on the path of further liberalisation, which the continental Europe cannot afford. Boris Johnson, contributing to the discussion, has said the other day that Brexit is precisely aimed at giving a new lease of life to it by following the US in income tax reductions for business and private individuals.    

British political analyst David Goodhart (in “The Road to Somewhere: The Populist Revolt and the Future of Politics”, 2017) shows another perspective of the issue. In his opinion, the elites have become cosmopolitan, but the majority has remained rooted in their own countries, regions and communities. In other words, the majority sticks to its national identity, unlike the elites. Even the European middle class, united by similar living standards and occupations, becomes aware of its nationality when hit by bad economic times.

Those who accuse Russia of meddling in internal affairs of Western countries are essentially denying their voters the right to vote, while the genesis of the liberalism crisis clearly points to its roots and origins inside the system. It was no-one else but Angela Merkel who in 2010 spoke of failure of multiculturalism in Germany, while calling for intensifying efforts at integrating immigrants into German society.

It was not Moscow that drew the attention to this problem. As early as 2007, the Economist wrote of a “secular overreachl” in the West, while today many are voicing concerns over a “liberal overreach”. Speaking broadly, it can be said that in the absence of a competitive environment in the realm of ideas after the end of the Cold War (which ended up doing a disservice to Western elites), liberalism has mutated into a dogma, a totalitarian ideology which does not tolerate dissent or pluralism of ideas. No wonder that the elites have resorted to political technologies, media control and political correctness to tighten the grip on the freedom of speech and generate semblance of an alternative-free existence. Social media have put an end to this, becoming a tool for politically alienated electorate to self-organize. As a measure to protect the status quo, the elites are now constructing an artificial dichotomy of liberalism vs authoritarianism, i.e. if not one, it’s definitely the other.

It is, therefore, not about the end of the liberal idea, just as President Putin pointed out, but that it cannot claim to be a one-size-fits-all model negating the wealth of ideas in Europe and the world. The problem is that any ideology, as history has shown, is always aggressive when it claims the ultimate truth, exceptionalism and, as a result, becomes a threat to the world. The notion of a “liberal world order” has also been introduced only recently, as a defensive reaction of the West when its dominance in global politics, economy and finance is coming to an end. Everything could have been different, had Western elites bothered to make this order, Bretton Woods institutions included, truly liberal, open and inclusive. Nobody was preventing them from doing so.

From our partner International Affairs

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