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US Taxation Reform: Four Trillion Reasons Why

 5 min read / 

The Trump Administration has finally released a more detailed version of proposed tax legislation. It is detailed enough for the lobbying process to begin in earnest.

The goal of the next few articles in this series is to focus on the distinct parts of the US Tax Code and explain their relevance to the everyday concerns of business. It is easy to get lost; easy to outsource understanding to a paid cadre of experts whose living depends on first obfuscating and then explaining by the billable hour.

The History

A proper understanding of taxation in the US requires a brief discussion of the Sixteenth Amendment. It was ratified in 1913 and has provided the equivalent of crack cocaine for politicians ever since.

Income tax was not without precedent before this. The Revenue Acts of 1861 and 1862 had introduced taxes to fund the Civil War. These taxes expired in 1872 but had proven to be extremely popular and had drawn around 60% of the total funding from the Northeastern, industrialized states of New York, Massachusetts and Pennsylvania.

When politicians saw the possibilities of taxation to help fund government and the efforts of those who ran it, they worked tirelessly to bring it back. It was needed to help the central government keep pace with the military ambitions of Europe and Japan and defend the American fleet. The primary means of revenue raising until then – tariffs – was considered regressive and, with inflation increasing, an income tax was believed to be fairer.

The Democrats ran the Senate, Congress and the White House in 1912 and the country was in a left-leaning mood. Three-quarters of the states ratified the 16th Amendment and, eight months later, on October 3, 1913, President Woodrow Wilson signed the Revenue Act 1913 into law. The addiction has continued ever since.

Grasping the Big Picture

Before looking at what the Tax Code says, it is worth a short detour to understand the scope of what it comprises. In 1913, the Revenue Act comprised 27 pages. During its first year, the Code and associated regulations grew to 400 pages. It now exceeds 73,000 pages. During this golden age of governmental growth, the administration of the system of taxation has developed a robust infrastructure of tax accountants, tax lawyers and even a specialized court called the Tax Court.

The U.S. Code is the collection of laws that comprise the rule of law in the United States. The U.S. Code is divided into Titles. Title 26 relates to taxes. It contains eleven Subtitles, A-K, comprising almost ten thousand (9,834) Code Sections.  Subtitle A, Income Taxes, has 1,564 sections; Estate and Gift Taxes has 800 sections; Miscellaneous Excise Taxes almost 900; Procedure and Administration has 1,874 (more than Income Taxes); Trust Fund Code has 102; and the balance, just over 120, are split between The Joint Committee on Taxation, the Financing of Presidential Election Campaigns, Coal Industry Health Benefits and Group Health Plan Requirements. The list is exhausting to think about.

Just Income Taxes

Subtitle A encompasses six chapters of which Chapter 1 – Normal Taxes and Surtaxes – comprises 1400 of the 1564 tax-related sections.

Chapter 1 is divided into Subchapters – A through Y – of which the most frequently referred to are Subchapter C relating to corporate taxation; Subchapter K relating to partnerships; Subchapter S, a hybrid of corporation and partnership and Subchapter M relating to regulated investment vehicles (mutual funds, REITs).

Tax professionals tend to refer to the Code in shorthand: Sub C, Sub K, Sub M, Sub S. The above taxonomy will help decode this. Subsequent articles will refer to this article for context.

What This Adds Up To

The Bureau of Economic Affairs calculates tax statistics going back to 1929. In 1929 total tax receipts were $3.8bn and expenditures were $2.9bn. In 2016, total receipts were $3.5trn and total expenditures were $4.2trn. Since 1929, the government has relied increasingly on borrowing. Expenditures have not been covered by receipts since 1960.

Although taxes have grown strongly since 1913, they have still not caught up, as a percentage of GDP, with the OECD average or, to give a more specific example, with the United Kingdom. Tax revenue sits at around 26% of GDP versus an OECD average of nearly 35% and only a little less in the United Kingdom.

Concluding Thoughts

Taxation has now been enshrined as part of the Holy Trinity of Things Certain – alongside birth and death. To the words of Bob Dylan’s “Not Dark Yet” “I was born here and I’ll die here – against my will”, one might easily add “and pay taxes here”.

Taxation is a key tool in ensuring financial incentives are properly aligned with the efficient allocation of capital and, accordingly, with productive economic behaviour. Meaningful change is tough and needs careful planning. That rarely happens because taxation, like most legislation, is the misshapen creation of many compromises. Businesses right now crave the reduction in corporate tax rates as a primary means of increasing profits and economic growth. They are less enthusiastic about losing some tax breaks such as interest deductibility.

Individuals are no different. Lowering the personal tax rate and having fewer bands of taxation is attractive. People, especially in the high rent districts of the two coasts, are less enthusiastic about losing the ability to deduct property taxes against their Federal taxable income

Taxation, of course, is highly political. It is no accident that the loss of the property tax deduction would have its greatest impact in two strongly Democratic states – New York and California. That is precisely the target of a Republican President, a Republican Senate and a Republican Congress.

Whether or not the recent proposal on tax reform from the Trump Administration is passed, the funding gap between tax receipts collected and government outlays is not easy to close by reducing receipts.

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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


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


The US Senate Approves the Republican Tax Bill

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senate tax bill

During the early hours of Saturday morning, the Senate passed the Republicans’ landmark bill in what could become the USA’s first tax overhaul since 1986 and the first legislative success of the Trump presidency. Meanwhile, Democrats have denounced the bill as essentially a handout to the wealthy that will disproportionately squeeze other segments of society.

Mixed Feelings

There is also a strong feeling among many Democrats and Republicans that the bill was hastily drafted and improperly thought through. Democrat senator Chuck Schumer said:

“I have not seen a more regressive piece of legislation, so devoid of rational, so ill-suited for the condition of the country”.

For Trump, however, this is a victory and a step towards making good on some of the policy promises that formed his election manifesto. So far, the Trump presidency has been characterised by racial tensions, a failure to repeal Obamacare and no sign of the infamous border wall being built. Accordingly, the President made his feelings known on Twitter following the Senate’s approval of the tax bill.

The tax bill is not yet in the clear, however. It will now be amalgamated with legislation that has passed through the House of Representatives. This process will commence next week and it is likely that there will be further complaints from Democrat lawmakers.

Meanwhile, business groups, who will be the primary beneficiary of the tabled plan to reduce corporation tax from 35% to 20%, have welcomed the bill’s progress. Jamie Dimon, JPMorgan’s CEO, congratulated the Senate and said that the reforms would “boost [our] economy and benefit American workers.”

Uncertainty Ahead

It is yet unclear what impact the tax cuts will have on the USA’s national budget. Despite Trump’s promise to balance the nation’s books, a congressional watchdog has recently said that Trump’s tax plan will send the deficit soaring and only put slightly more cash in the wallets of millions of ordinary American families across the country.

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How Trump Inadvertently Prompts Discussions of Unlikely Issues

 5 min read / 

trump discussion

In 1916, in a letter to David Lloyd George’s daughter, Winston Churchill admitted:

“I think a curse should rest on me – because I love this war. I know it’s smashing and shattering the lives of thousands every moment, and yet, I can’t help it, I enjoy every second of it”

Can Trump be considered the moral equivalent of World War One in terms of the mayhem he has wrought upon civilised notions of the way the world should be? Probably not, but the damage he has caused is nonetheless considerable. The juxtaposition of Trump with Churchill seems appropriate because, as the President dismantles so much of what has come to be normative behaviour in civilised society, he is inadvertently promoting a re-examination of the things that America holds dear – in the same way that the world has re-examined its opinion on war in the 100 years since Churchill made his aforementioned remark.

The fact that Trump was elected notwithstanding the revelations in the Access Hollywood tape has likely been responsible for women finally declaring enough to be enough. Would Harvey Weinstein, Kevin Spacey, Louis CK, Matt Lauer have been exposed in a Hillary Clinton administration? The fact that Trump’s tweets are ill-considered, often factually wrong and inflammatory, has promoted a sober discussion of how to deal appropriately with the issues of racism and immigration.

The fact that Trump is actively withdrawing from the theaters of international endeavor – trade, diplomacy and climate change – has led to a careful consideration of why those things might be important to Americans. The fact that Trump shamelessly panders to his base, regardless of collateral damage to broader public opinion, has resulted in a careful review of the stakes involved in tribal loyalty.

Sexual Assault and Tax Reform

Susan Collins, one of the senators for Maine, was asked at a recent Christian Science Monitor Breakfast whether, if Roy Moore were elected to fill the Alabama Senate seat vacated by Jeff Sessions, he should be unseated by the Senate. She stressed, firstly, that she protested his candidacy even before the allegations of sexual assault. She went on to say that the question of whether the Senate would have the right to unseat him if he were to be elected by the people of Alabama, accusations of sexual assault notwithstanding, was a very difficult one.

She is right. A trial in the court of public opinion has a different standard and different procedures from a trial in the justice system. An election is perhaps the most exacting kind of public opinion trial. An acquittal by the voters does not preclude future legal proceedings, but, while it is clear that NBC is within its rights to fire Matt Lauer, it is less clear that the US Senate or House of Representatives has the right to unseat Moore – if elected – or, respectively, John Conyers as Nancy Pelosi has urged.

Tax reform is currently top of mind in DC and, as this article is written, the Senate is close to passage of its bill. As it stands, neither Moore not Conyers will be voting for tax reform: Moore because the vote will likely pre-date his election; Conyers because he is a Democrat and votes for the bill that is presented to both Houses of Congress, after it has been to conference committee to sort out the differences between House and Senate versions, are expected to proceed along party lines.

Hypocrisy and Principle

Fitness to serve and uphold the values for which representatives are elected are both called into question by the context in which the current tax reform legislation is proceeding.

Mitch McConnell, Senate Majority leader made it clear in an interview in May 2017 that he believed any tax overhaul could not add to the growing budget deficit. Steve Mnuchin, Treasury Secretary, claimed the proposed tax reforms, which include a reduction in the corporate tax rate from 35% to 20% would pay for themselves.

The Joint Committee on Taxation was asked to conduct a macroeconomic analysis of the impact of the Senate Tax Cuts and Jobs Act bill – the so-called dynamic scoring report that would validate Mnuchin’s statements. The report revealed approximately $458bn of savings due to economic growth. That left a deficit increase over the next ten years of $1trn.

The report leaves the Republican party with the uncomfortable choice of passing a bill that contradicts its stated, fiscally prudent governing principle of not increasing the deficit or failing to pass tax reform, which, it is assumed, would have dire electoral consequences in 2018.In the court of public opinion as it stands in 2017, hypocrisy and lack of principle may prevail.


Churchill was a little ashamed of enjoying World War One. Should one be equally ashamed while watching the unravelling of the hypocrisies of the elite-world order? Perhaps, but there is a decent chance that, as public officials (Mike Flynn, for example) are convicted of lying in the service of their president and the unwinding of male privilege rolls through the power venues of Hollywood and Washington DC, hypocrisy and abandonment of principle may extract a price and the Republican Party may find that it has made a profound mistake.

Keep reading |  5 min read