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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

Nancy Pelosi and her dual approaches

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In her remarks, the United States House Speaker Nancy Pelosi, asserted that Trump’s border wall campaign has nothing to do with border security. She said it’s one of the US President’s plans for energizing his conservative base, and in this way, he aims to distract the country from the various scandals dogging his administration.

“I don’t even know if the president wants the wall. I think he just wants a debate on the wall. And he’s having some difficulty with it,” Pelosi said during a press briefing at the Capitol.

“He keeps increasing the amount of money; increasing the amount of beds; increasing the obstacles to finding a solution — because I don’t think he really wants a solution,” Pelosi said. “I think he loves the distraction that this is from his other problems,” She added.

Pelosi, along with Senate Minority Leader, Chuck Schumer, noted that they disagree with Trump over building a physical border wall, which according to them, would be expensive and ineffective.

“Democrats and the president both want stronger border security. However, we sharply disagree with the president about the most effective way to do it … Most presidents have used Oval Office addresses for noble purposes. This president just used the backdrop of the Oval Office to manufacture a crisis, stoke fear, and divert attention from the turmoil in his administration,” said Schumer in answer to Trump’s recent remarks.

On the other hand, Pelosi is among those who are seriously standing against Trump’s impeachment. This dual approach taken by Pelosi towards the White House, and the fact that the House speaker and other Democrat leaders have argued against the serious consideration of Trump’s impeachment, may lead to conflicts inside the Democratic Party in the future.

“We have to wait and see what happens with the Mueller report. We shouldn’t be impeaching for a political reason, and we shouldn’t avoid impeachment for a political reason. So we’ll just have to see how it comes,” Said Pelosi.

However, Pelosi’s remarks were not unprecedented! When Pelosi was the House Minority Leader in the years between 2016 and 2018, she opposed the idea of impeaching Trump. Nancy Pelosi has made it clear that she has a conservative approach towards Trump. This is while with a majority of seats in the House of Representatives, Democrats can initiate impeachment proceedings against Donald Trump. The fact that some Democrat leaders have opposed Nancy Pelosi’s Minority leadership in the US House of Representatives is rooted in the same reason. In any case, it seems that Pelosi prefers scenarios such as “making a political deal with Trump” to “Confrontation with the President”. Nancy Pelosi argues that Democrats’ direct confrontation with Trump, and in particular the impeachment of the President of the United States, will lead to the anger of some American citizens, and the Democrats will be accused of posing a blow to the American political and social equations. However, it seems that some Democrats do not agree with Nancy Pelosi’s opinion! Politicians such as Bernie Sanders believe that Trump is not politically negotiable. They believe that any compromise reached between Democrats and Trump will hold a bad result for them in the US 2020 presidential election.

At any rate, there’s plenty at stake: Amid this crisis, Trump has come with the idea of declaring a national emergency at the border, a move that could free up wall funding without the Congress approval.

“If this doesn’t work out, probably I will do it. I would almost say definitely,” said Trump.

The US government shutdown, which is resulted from the disagreements over border wall funding, is still ongoing. Trump is demanding $5.7 billion for new wall construction; Pelosi and the Democrats have offered $1.3 billion for border security measures, but have opposed construction of any new physical barriers. In spite of this, Trump has previously claimed that he’s ready to hold the shutdown for months and even years! If Pelosi surrenders in the face of Trump’s demands, she would be regarded as a defeated figure inside the US political circles.

First published in our partner MNA

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Trump is mocking Biden

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News sources in the United States announced that Joe Biden, the U.S. former Vice-President (from 2009 to 2017), and a prominent figure in the Democratic Party will soon announce his run for the president in 2020. Biden has previously said that he’s “the most qualified person in the country” for being president.

Biden mentioned these words in a controversial interview which has attracted the attention of many American analysts. However, Biden’s final decision for participating in the presidential campaigns wasn’t clear. Eventually, a number of Biden’s followers, including his brother Frank Biden, announced his final decision to run for the general elections. Polls conducted in the United States indicate that Biden is currently more popular than other potential candidates of the Democratic Party in the upcoming elections.

Meanwhile, Biden is probably to face rivals such as Bernie Sanders, Senator from Vermont, and Elizabeth Warren, and even Hillary Clinton. During the 2016 presidential competitions, Biden was also scheduled to attend the in-party election competitions, but he changed his mind due to his son’s death and Hillary Clinton’s insistence on attending the presidential campaign. Biden’s remarks, however, show that he’s greatly interested in defeating Trump in the 2020 election.

However, we shouldn’t forget that Biden can’t really count on the current polls conducted among Democrat supporters! We can all remember that during the 2008 presidential elections and inside the Democratic Party, Obama had far less chance of reaching the final round of the elections than those like Hillary Clinton. But his successful speeches in states like Iowa and South Carolina led to Clinton’s final defeat and Obama’s victory.

Hence, the success of Biden’s rival candidates in states like Iowa and New Hampshire (where American in-party elections begin with them) can completely change the equations, and that won’t be to Biden’s advantage.

Accordingly, Trump’s position on Biden’s participation in the presidential competitions are noteworthy. In a phone interview with Fox News’ Jeanine Pirro, Trump called Joe Biden “weak”. He also claimed that he’s not worried about a potential challenge from the former vice president in the 2020 presidential race; “You know, a lot of people say Biden’s doing OK, but he was always a 1-percenter. He was a 1 percent guy. He ran two or three times, he never got above 1%, and then, Obama came along and took him off the trash heap, and he became the vice president. He’s weak. So, we’ll see what happens with him.”

Trump’s words came on the same day that Biden had told some top Democrats that he was definitely running for president. “If I’m walking, I’m running,” said Biden.

Trump’s literature on Biden’s presence in the U.S. presidential race, reflects the U.S. President’s dissatisfaction and anger with the country’s former Vice President and his candidacy. Obviously, Trump preferred figures such as Hillary Clinton, Elizabeth Warren to be his potential rivals in the next general elections.

However, Trump knows well that Biden can challenge his position at the White House by maneuvering again on issues such as public medical health insurance plan. On the other hand, Trump attempts to turn the game into an emotional rivalry through using ugly words against Biden, and this is very much like Trump’s populist personality and approach. However, Biden now has his main focus on Democrats’ inner-party race, and he doesn’t consider direct competition with Trump until he has won his victory in the competition.

First published in our partner Tehran Times

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John Bolton’s Hawkish Flight

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The American edition of The Wall Street Journal (WSJ), citing former and currently serving politicians who wished not to be named, reported a few days ago that the US National Security Council (NSC), led by presidential adviser John Bolton, turned to the Pentagon last autumn with a request to devise several variants of striking Iran.

The reason for such a request was a mortar attack carried out in September 2018 by a pro-Iranian group against the diplomatic quarter of Baghdad, where the US embassy is located. Two days later, a similar attack was reported to have occurred in the southern Iraqi city of Basra, where the American consulate is based. No casualties or damage were reported. However, former deputy national security adviser Mira Ricardel described the shelling as an “act of hostilities” and made it clear that the United States should have responded with a “similar act.”

As a result, the US national security team held a series of meetings to discuss how the American side should respond. After that, Mr. Bolton urged the Pentagon to provide options for attacking Iran.

Officials neither confirmed nor denied the WSJ reports. NSC press secretary Garrett Marquis did not provide a clear answer to the question of whether the Council had been considering a military strike against Iran. “We are considering a  full range of measures to ensure security and guarantee our interests,” he said.

It should be noted here that the general staffs of the armed forces of any self-respecting country plan variants of both offensive and defensive operations against a potential adversary in advance. This work is carried out with a constant analysis of the changes taking place in the camp of the enemy, and in their own country. Therefore, undoubtedly, the Joint Chiefs of Staff (US General Staff) has in its secret vaults a variety of options for a war with Iran – the main potential opponent of the United States, as Washington has called it on more than one occasion.

Another matter is the case of John Bolton, when his personal request, even through the channels of the National Security Council, was carried out, according to observers, bypassing President Trump. Such a request took the Pentagon by surprise and put defense department officials who were used to everything “in a shock.” However, the request was accepted for consideration.

According to the WSJ, the Pentagon provided a complete layout proposing some general options for the operation, including a cross-border air strike on an Iranian military facility, which would be mostly symbolic. But the then Secretary of Defense Jim Mattis and other senior military officials strongly opposed retaliatory actions, arguing that the damage from the shelling of the US diplomatic missions was insignificant. And this basically logical viewpoint eventually prevailed.

But how will acting Secretary of Defense, Patrick Shanahan, act?

Any blow on Iran may lead to a full-blown armed conflict. Hypothetically,  considering the possibility of an airstrike on an Iranian military facility, it will undoubtedly trigger a return missile strike by the Iranian armed forces on any US military base in the Middle East. The Iranian missile forces have every potential to do so. And this means a war.

Is the United States ready for such a scenario?

It has to be pointed out that even massive missile and air strikes against Iran will not force Tehran to surrender. As in any war, the winner must march over the conquered territory. This calls for a ground operation.

Is the United States ready for this?

As the Field Service Regulations the US Army recommends, in order to achieve the goal of an offensive in the direction of the main blow it is necessary to create at least 6-fold superiority over the defensive forces and facilities. The question arises whether the US Armed Forces are capable of building such a superiority at least in one direction of the Iranian theater of war?

The number of regular armed forces of Iran ranges, according to various sources, between 540 and 900 thousand. The defense doctrine of the IRI puts a major emphasis on the Basij Islamic Revolutionary Guard Corps resistance forces, a paramilitary, irregular militia and a reserve force of the regular armed forces whose main task is to participate in the defense of the country’s territory. The main combat units of “Basij” are “Ashura” battalions, which consist of men, and “Al-Zohra” female battalions, numbering an average of 400 each. Currently, 2500 such battalions are formed in Iran, consisting of 1 million volunteers, well trained both militarily and ideologically. In total, Iran’s “Basij” system embraces more than 12 million Iranians.

Is it possible for the United States and their allies to outnumber, if not 6-fold, then at least by 2-fold, the regular and irregular forces of Iran in the Iranian theater of military operations on the ground (without using nuclear weapons)? The answer is clear – no. And the Pentagon is fully aware of this.

For this reason, the likelihood that the United States will venture into an armed conflict with Iran is small.

John Bolton’s actions can be described as dangerous amid the current situation in the top echelons of power in the United States, which is controversial, to put it mildly. The opposition Democrats are exerting a serious and effective pressure on President Trump, while the State Department (and other as significant structures) is trying, as journalists say, to prevent the president’s “reckless” decisions from being put into effect.

In turn, US National Security Advisor John Bolton is making the most of the current state of affairs putting an end to internal strategic debates and discussions that could reveal the controversies within the Donald Trump administration. Mr. Bolton does not want to hear conflicting points of view, hates leaks, and wants to control the entire flow of information that is sent to the US President. This is a sure way towards excessive consolidation of power in the hands of one individual. Moreover, sometimes he acts without notifying President Trump, like in the recent case in which he appeals to the Pentagon.

John Bolton is one of the irreconcilable hardliners on the issue of Iran. Having assumed  his current position, Bolton stepped up the administration’s policy of isolating and exerting pressure on Iran, thereby demonstrating his hostile attitude toward Iranian leaders, which dates back to the days when he served as an official for the administration of George W. Bush. As a private individual, he called for military strikes on Iran, as well as a change of regime. In March 2015 – three and a half months before the signing of a nuclear deal, when it became clear to everyone that the Joint Comprehensive Plan Of Action (JCPOA) was ready and its authors were busy putting the final touches to it, – Mr. Bolton published an article in The New York Times under a provocative headline “To Stop Iran’s Bomb, Bomb Iran”. From the very beginning, John Bolton was against the JCPOA and fully backed President Trump in his efforts to pull out of the nuclear deal.

Bolton summed up his political credo in one phrase: “There is no such thing as the UN. There is the international community that can be headed by the world’s only superpower, which is the United States of America. ”  This he says despite the fact that in 2005-2006, he was the US representative to the UN.

Defense department officials, The New York Times writes, express growing concerns that John Bolton may indeed provoke a serious conflict with Tehran at a time when President Trump is losing influence in the Middle East.

Concern is being voiced not only by US military and politicians but throughout the world. After all, the main danger lies in the unpredictability of actions of President Trump and his hawkish employees, like John Bolton.

first published in our partner International Affairs

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