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Are the Proposed US Tax Reforms Too Good to Be True?

 5 min read / 

On April 26th, Steve Mnuchin, the US Secretary of the Treasury, and Gary Cohn, Director of the National Economic Council (NEC), unveiled the “most significant tax reform (plans) since 1986“.  The proposed US tax reforms aim to address the complexity of the current structure and established rate figures, both of which have been cited as troublesome for US enterprises. The main points put forward were:

  1. Moving to a ‘territorial’ system by developing a foundation for the application of a 15% corporate tax rate, a sharp decrease from the existing 35% rate;
  2. Slashing the highest marginal tax rate from 39.6% to 35%, with the other two tax rates being 25% and 12%;
  3. Repealing estate tax and the alternative minimum tax;
  4. Providing tax relief for families with child and dependent care expenses.

Mnuchin stated that the reforms were aimed at “creating jobs and economic growth”. However, sceptics argue that the reforms are more likely to benefit the rich than the general economy and ordinary citizens. Additionally, whether or not the reforms will even be implemented remains a major doubt due to how divided Congress presently is. Nonetheless, it is worth considering the main issues at hand.

Overseas Profits

Unlike most countries, the existing American tax regime taxes corporate profits when they are remitted back home at very high rates. Furthermore, declarations of foreign profits being reinvested or held indefinitely are not subject to any fiscal charges.

The result of this is that many American businesses hold their cash overseas in havens such as Ireland or Luxembourg. The value of American cash hoarded abroad is estimated to be a rather substantial $2.6trn.

By moving to a ‘territorial’ tax system, American businesses will pay tax in the country that profits are earned, which will significantly lower net cash outflows and thus boost financial performance. In theory, this should encourage US enterprises to repatriate cash into the country.

However, this is not likely in the case of the US. Large tech giants such as Apple, GE and Microsoft, are highest on the list of US agencies that hoard cash abroad. The early signals from this group have not been positive. For example, Apple has indicated that the extra cash will be used to pay shareholders instead of being spent on domestic manufacturing.

Additionally, despite the enormous sums of money held overseas, companies hold $1.94trn cash domestically – the highest level in two years. Remittance of foreign cash will not compensate for the trillions of dollars of tax revenue lost through lower corporate and income tax rates.

Legal Status

Another problem cited due to the current tax structure is that firms classified as “corporations”, often change their legal status to adopt simpler entities such as partnerships, sole proprietorships and private firms with limited liability.

The reason is that these entities do not need to pay tax at the corporate level. Instead, the parties – individuals or other agencies – that receive profits from the firm pay income tax. These types of entities have increased in volume and value, and now account for half of all profits recorded within the US.

Compared to the overseas hoarding issue, Mnuchin’s tax plans address this aspect of the problem to a stronger degree. By reducing the corporate tax rate from 35% to 15% for businesses of all types and sizes, corporations are less likely to convert to simpler legal structures. Theoretically, this will cut tax bills and boost corporate profitability. The “one-tax-fits-all” approach will also ease the overall collection and payment process.

An Unlikely Proposal

Accordingly, it seems unlikely that the Trump administration’s tax plans will take off.

Despite Mnuchin’s statement that the motivation for the proposal is to stimulate wholesome economic growth and benefit “ordinary citizens”, this is somewhat disingenuous. Smaller forms of businesses, such as sole proprietorships, pay an already low 15% tax.

The real benefits of the tax plans will be reaped by the richer echelons of the US economy due to the 20% reduction in corporate tax and the approximately 5% reduction in income tax within the highest bracket.

The overall feasibility of the tax plan is another area of concern. Estimates indicate that the proposals will significantly reduce the collected tax revenue. Something that could offset this issue, albeit to a limited extent, is the application of a “one-off tax” on overseas cash being repatriated. The last time this was used was in 2004, under the Bush administration, at a 5.45% rate.

Overall, the loopholes in the tax reform proposals simply seem too numerous for further progression in Congress. The first step towards strengthening the American tax regime should be the formulation of a proposal that exclusively supports ordinary citizens of the country.

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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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