The Republican National Committee (RNC) joined with Mitch McConnell and approximately 18 Republican Senators in urging Roy Moore to resign. They pulled campaign funding and took the moral high ground…until the Senate voted on the tax reform legislation and they discovered that they only had one vote to spare.
The Alabama election takes place on December 12, 2017, before the date of a final vote on the reconciled tax bill that Republicans hope to place on the President’s desk before year end. And so, following the lead of the President, who is satisfied that Roy Moore not only denies but “totally denies” all allegations against him, the RNC changed direction and agreed to re-dedicate its support for the alleged perpetrator of over eight sexual assaults, four of which were on minors.
The Senate Tax Bill
Analysis of the Senate Bill has been extensive in the past few days. It has highlighted several problems arising from the hasty way it was passed.
Firstly, the alternative minimum tax (AMT) has not been repealed. Under current law, AMT is 20% compared to a regular tax rate of 35%. The bill passed by the Senate has both at 20%. Because certain deductions permitted against the regular tax liability are added back for AMT purposes, most corporations will, unless this is fixed in conference, now pay AMT rather than regular tax.
Additionally, the base erosion anti-abuse tax (BEAT) is a problem. It’s complicated. It’s intended to protect the tax base from US parent companies making payments to overseas affiliates whose earnings will be subject to a lower tax rate. But it will have negative consequences for the US taxpayer who reduces its US tax bill by any number of legitimate tax credits available to investors in renewable energy or low-income housing.
It’s not clear if these problems are oversights or intended features. It’s hard to admit the truth – that this was passed too quickly and without due consideration – because that is the point made by the Democratic Senators. Perhaps, as Nancy Pelosi said in respect of the Affordable Care Act, “We have to pass the [healthcare] bill to know what’s in it”. It was a terrible argument then; it’s a terrible argument now.
Christmas for the 1%
The 1% wealth bracket in the so-called Blue states of California and New York will be negatively impacted by the elimination of deductions for state and local tax and the limitation of the property tax deduction to $10,000. Overall, however, it is clear where the benefits of the Senate Bill flow, state, local and property taxes notwithstanding: to those making over $1,000,000.
The reduction in the corporate tax rate that has been approved will, according to many the CEOs interviewed, result not in additional investment in human or other capital but rather in share buybacks and increased dividends.
Why is the 1% Angry?
Senator Charles Grassley observed that the importance of repealing the estate tax was to ensure that those productive members of society would not be punished for a lifetime of thrift and hard work:
“I think not having the estate tax recognises the people that are investing, as opposed to those that are just spending every penny they have, whether it’s on booze or women or movies.”
The quote from Grassley raises a great point: fundamental attribution error. People are comfortable attributing outcomes to others based on their character and disposition: the poor are lazy; that’s why they are poor; the rich are rich because of hard work and intelligence. When explaining their own misfortunes, however, people are inclined to attribute causation to external circumstances. Gressley reinforces this fundamental error by his tactless comment.
The last ten years have been extremely rewarding for the top wealth slice of US society. Corporate earnings have been strong, and the financial markets have delivered robust returns to those who have been able to participate. It is not clear why either corporations or the wealthy have any reason to complain.
The middle and lower classes, on the other hand, have struggled with wages that have been essentially flat over the same period and with health, education and housing costs that have been climbing. It was this constituency that Donald Trump appealed to in his bid to be elected.
One of the unfortunate features of this tax bill is that, while everyone will enjoy tax cuts for the next ten years, the benefits will flow disproportionately to those with incomes over $500,000 after ten years. Individual tax cuts will phase out unless extended, whereas corporate taxes will remain at the same level. Consequently, the benefits of the corporate rate cut – increased dividends and share buybacks – will continue to flow to those with incomes over $1mn.
There is hypocrisy on both sides of the political divide, but the Republicans are running the show at the moment and the ‘house’ is beginning to look very crooked indeed.
Neil is the CEO of Sevara Capital Advisors. He is passionate about solving tax, accounting and regulatory problems for institutions that have invested billions of dollars of capital in multiple jurisdictions. His company provides solutions for banks, insurance companies and hedge funds to tackle their problems related to tax returns, financial statements, accounting and internal finance matters. Neil holds a master’s degree in Law from the University of Cambridge.