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How US Tax Policy Funds the US Debt Burden

 4 min read / 

Tax policy is fascinating – really. Although according to the Tax Policy Center 45.3% of the US adult population pays no income tax, tax touches most people’s lives. As discussed in this article, the rules are complex because they need to cover the many ways in which people and corporations act in the pursuit of profit and even philanthropy. Tax laws need to deal with individuals, corporations and hybrid entities such as partnerships and trusts. They also need to deal with the foreign interests of domestic taxpayers and the domestic interests of foreign taxpayers.

Tax laws are the subject of intense lobbying and a great deal of political effort. The Taxpayer Advocate Service estimates that around six billion hours a year are spent preparing taxes. The Tax Code and Regulations now exceed ten million words. For most people, taxes are a frustrating maze of complexity. And yet, there is a logic and coherence, which if explained properly can emerge as a roadmap to everyday understanding.

Portfolio Interest

Portfolio interest is an obscure term but extremely important for foreign investors lending money to US borrowers, including the US government. It is like a signpost to heaven written in small font.

To understand portfolio interest, it is important to recall the political and economic conditions in 1984. Ronald Reagan was elected for the first time in 1980. His policies – tax reduction, an increase in military spending, increasing budget deficits, tight control of the money supply – were associated with (some would say “caused”) soaring government borrowing to fund a growing budget deficit, high unemployment and very high-interest rates (approaching 20% at their peak).

While the economic recovery that began in 1983 reduced unemployment and inflation, deficits and interest rates remained high and, because US domestic savings rates were low, deficits were largely financed by foreign lenders. Interest rates overseas were attractive not only to the US government but also to domestic corporations.

The growth in the size of the Eurobond market had for years made it the target of capital markets-led lobbying for relief in the tax treatment of interest payments to foreign lenders. The need to finance growing government borrowing and the re-election of Ronald Reagan in 1984 gave the necessary impetus for reform.

The Withholding Tax Problem

The problem was that interest payments to foreign lenders were subject to 30% tax withheld at the source of payment. To be competitive with other avenues of lending, US interest rates needed to be 43% higher. US corporations had a solution to the problem: they set up financing subsidiaries in the Netherlands-Antilles to issue the Eurobonds and relied on the favourable treaty between the US and the Netherlands-Antilles to level the playing field with non-US issuers of Eurobonds.

This solution worked but was only practical for larger corporations and was not something the US government could use. Accordingly, tax reform legislation was passed in 1984 that created an exception to the withholding tax on interest paid to foreign lenders. This exception was called the “portfolio interest exception”.

In summary, if a non-US lender that is unrelated to the US borrower, is not a bank, is not a CFC (controlled foreign corporation), and is not engaged in the conduct of a US trade or business, lends money to a US borrower documented in the form of a registered debt instrument paying a fixed rate of interest, then the interest payable on the loan should qualify for the portfolio interest exemption (no 30% tax withheld), provided the non-US lender provides adequate documentation as to its non-US status.

The measure has been successful. Treasury reports show total US securities held by foreign investors have grown from $363bn in 1984 to $17.1trn in 2016.

The Bottom Line

Foreign investors in the US have no interest in being taxed in the US on the interest income they receive. Nor do they want to file US tax forms relating to their investments. The interest of the IRS in collecting the maximum amount of revenue from the economic activity that occurs in the US is sometimes overridden by other macroeconomic interests. Government debt has continued to grow since the Reagan era. The need for the US government and US domestic borrowers to source capital from foreign sources remains paramount in the design of US tax policy. The portfolio interest exception has been a key part of this capital raising initiative.

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Americas

Bulletproof Clothing: How US Fashion Is Going Ballistic

 2 min read / 

Bulletproof Clothing

As the US continues to allow civilians to carry weapons and gun violence becomes more of a concern, an increasing number of bulletproof apparel retailers are emerging across the country. Their target clients? The average Joe. Or at least those who can afford the hefty price tags associated with the “exotic” new fashion segment.

Miguel Caballero, a Colombian designer, sells his bulletproof blazers for 4,343.50 euros, and his tank tops for 2,023 euros. At a lower price, but still too high for most people, Joe Curran, who owns BulletBlocker, sells his bulletproof leather jacket for $875 and bulletproof classic two-piece suit for $1,200.

Source: Miguel Caballero

Caballero said that his clients include world leaders from South America and the Middle East, and international businessmen. Damien Ross, another manufacturer of bulletproof clothing, said that his clients are mostly college-educated, professional men, between the ages of 34 and 75.

Ross said:

“They [clients] see what’s happening on the news, and, any time they’re in a crowd or an area that can be prone to attack, they are concerned.”

Source: Bullet Blocker

Body armour manufacturing is a $465 million-a-year industry in the US, according to a report in August from Market Research. The retailers, who mostly entered the industry because of the surge in gun violence taking place around them, are presenting upscale bulletproof clothing, from blazers to tank tops.

Owning body armour is completely legal, and does not require a special permit or background check. However, guidelines vary from state-to-state, and felons are not able to purchase it.

Keep reading |  2 min read

Americas

Trump Promises Tax Cut “for Christmas”

 2 min read / 

Trump Tax Cut

US President Donald Trump has said the country is “just days away” from the biggest tax reform since the Reagan administration.  Speaking at the White House, Trump said he was close to fulfilling his campaign promise “to cut taxes for the everyday working American” and that he wanted “to give [the American people] a giant tax cut for Christmas”.

This week, Republicans and Democrats have reached an agreement on the two different tax bills that were rapidly pushed through Congress last month. If passed, it will be the first significant piece of legislation passed by the Trump administration. The compromise reached by both parties will see a corporate tax cut from 35% to 21% and cap the top tax rate for individuals at 37%.

Following a Democrat victory in Alabama’s senatorial election on Tuesday, the GOP was left with a majority of just 51 out of 100 in the upper house. As such, the Republicans are pushing for a vote on the tax bill for early next week, before the newly-elected Doug Jones can take his seat in Congress.

Tax reform was a keystone in Trump’s electoral campaign and success here would allow other tax deductions at a state and local level to work. It would also give Trump a chance to reverse his low approval ratings which have averaged at 39%, which makes him one of the most unpopular Presidents in the history of political polling.

Keep reading |  2 min read

Americas

Venezuelan Digital Currency Backed by Oil

 2 min read / 

Venezuelan Digital Currency

The Story

Venezuela has announced plans to launch a digital currency, “the petro”, backed by the country’s oil and mineral reserves. The petro aims to help ease the country’s monetary crisis but sceptics claim the proposal has no credibility and will not help those in extreme need.

Why It’s Important


source: tradingeconomics.com

Hyperinflation has eroded the Venezuelan bolivia’s value by 97% this year, making imports incredibly expensive and causing many to abandon trust in the currency. The country’s oil reserves made up 95% of its exports in 2016, while oil and gas extraction accounted for 25% of GDP. Rich supplies of resources provide some initial credibility to the proposal, but President Maduro’s questionable track record when it comes to monetary policy is making many sceptical about the proposal. His currency controls and money printing have only added to the monetary crisis. Maduro has not announced when the digital currency would come into use or any details regarding how the country would create such a system.

Opposition leaders argue the country’s shortages of food and medication are far more pressing and that the digital currency will not address this. The digital currency may provide a more trusted medium of exchange, but it is unlikely to help those in excessive poverty.

Keep reading |  2 min read

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