In brief, the tax reform was largely in line with what was leaked and what was expected. Small surprises: the tax bracket for high income earners was 2% more (at 35%) than what Trump campaigned on, and the standard deduction has been doubled so that no married couple pays tax on their first 24k earned, Citi notes.
As expected, no mention of border adjustment taxes. The plan also looks to repeal real estate taxes, alternative minimum tax and the death tax. Territorial taxes are also included. As we type, Mnuchin and Cohn are answering their last question.
Below is the actual tax from the White House:
2017 Tax Reform for Economic Growth and American Jobs
The Biggest Individual And Business Tax Cut in American History
Goals For Tax Reform
Grow the economy and create millions of jobs
Simplify our burdensome tax code
Provide tax relief to American families—especially middle-income families
Lower the business tax rate from one of the highest in the world to one of the lowest
When one strips away the partisan rhetoric and posturing, the practical impact of Friday’s GOP failure to repeal Obamacare has a specific monetary impact: approximately $1 trillion.
Since the ObamaCare repeal bill would have eliminated most of the 2010 health law’s taxes, this would have lowered by a similar amount the revenue baseline for tax reform. Essentially, with the ObamaCare taxes gone, it would have been easier to pay for lowering tax rates. Now, if Republicans want to eliminate the ObamaCare taxes as part of tax reform and ensure the bill does not add to the deficit – which they need to do to assure Trump’s reform process continues under Reconciliation, avoiding the need for 60 votes in the Senate – they will have to raise almost $1 trillion in revenue.
In other words that – all else equal – is how much less tax cuts Trumps and the republicans will be able to pursue unless of course they somehow find a source of $1 trillion in tax revenue (or otherwise simply add to the budget deficit) to offset the Obamacare overhang.
Considering Paul Ryan’s statement on Friday, it appears that at least for the time being, Republicans would leave the ObamaCare taxes in place. “That just means the ObamaCare taxes stay with ObamaCare,” he said. “We’re going to go fix the rest of the tax code.”
Ryan also pushed back on the idea that the setback on healthcare previews difficulties with other items on the legislative agenda “I don’t think this is prologue to other future things, because members realize there are other parts of our agenda that people have even more agreement on what to achieve,” he said. “We have even more agreement on the need and the nature of tax reform, on funding the government, on rebuilding the military, on securing the border.”
As the vulture pundits in the mainstream media pick apart hollow political scandals, the essential bankruptcy of the federal government looms just ahead. The national debt is creeping toward 20 trillion dollars, and the United State’s largest problem is once again staring the world in the face.
Just before the government was slated to shut down in 2015 (as it did in 2013), Congress was able to pass a delay on the debt ceiling decision until March 15th of this year — Wednesday of this week. Recurring uncertainty caused by events like this has implications that extend far beyond our own borders. The amount of leverage in the current system has already forced foreign holders of U.S. debt to question the real value of America’s full faith and credit.
2016 was a record-setting year for the liquidation of foreign-held U.S. bonds, topping out at nearly $405 billion. The selling was led by China, America’s second-biggest creditor, which currently holds over $1 trillion of U.S. debt, almost 28% of the total held by foreign central banks. They weren’t alone, though, and even the U.S.’ number one lender, Japan, has rolled back their positions to protect themselves as the reality of U.S. insolvency comes into focus. A gradual change has been set in motion, and the global superpower status of the United States may be systematically eroded — not militarily, but economically.
If the government does shut down again, the Treasury Department reportedly has as little as $66 billion in reserves and just enough income from taxes to meet its essential obligations.
Just as everyone was finally accepting the idea of deflation and negative interest rates, inflation decides to pay a return visit. In the past week, articles with the following headlines appeared in major publications around the world:
What happened? Well, towards the end of 2015 most of the world’s major governments apparently got spooked by deflation and decided to ramp up their borrowing and money creation. China, for instance, generated the following stats in 2016:
New loans totaling 12.65 trillion yuan, or $1.8 trillion.
M2 money supply growth of 11%.
Debt-to-GDP ratio jump from 254% to 277%.
In Europe, the European Central Bank ramped up its bond buying program, pumping about a trillion newly-created euros into the Continental economy:
Apart from saying its military budget will grow “roughly 7%” this year, China dropped no more hints on how much it was planning to spend on defense and foreign affairs amid rising tensions on both sides of the Pacific.
In the budget, the item “national defense” is substantiated by a guiding principle devoid of specific figures, while “foreign affairs” as an accounting item is not mentioned in the report.
The Ministry of Finance said in the English version of the document that the department will ensure adequate funds to support China’s aim of “building a solid national defense and strong armed forces that are commensurate with China’s international standing and are suited to our national security and development interests.”
The two figures are usually disclosed in the country’s most important political event known as the “Two Sessions” every March, where its rubber-stamp legislature National’s People Congress and advisory Chinese People’s Political Consultative Conference converge.
Despite that, state mouthpiece Xinhua said on Monday that China’s total military budget for 2017 is 1.044 trillion yuan ($151.4 billion), citing an official at the Ministry of Finance. This compares with last year’s 954.35 billion yuan.
Premier Li Keqiang’s state-of-the-nation address and budget announcement on Sunday was the first time in decades that specific spending figures were not mentioned.
Fiscal deficit in the first 10 months to January was Rs 5.64 lakh crore or 105.7% of the budgeted target for the fiscal year ending in March 2017, government data showed on Tuesday.
The fiscal deficit was 95.8% of the full-year target during the same period a year ago.
Net tax receipts in the first 10 months of 2016/17 fiscal year were Rs 8.16 lakh crore, the data showed.
The government’s tax receipts usually rise in the last two months of the fiscal year than its spending, thereby helping it meet the budgeted full-year fiscal deficit target.
The federal government reiterated earlier this month that it would meet the 2016/17 fiscal deficit target of 3.5% of gross domestic product, and had also set the next fiscal year’s target at 3.2% of GDP.
As China gears up for its annual legislative session, all eyes are on the economy: specifically, how fast the Communist leaders intend China to grow, and what they are willing to sacrifice for that goal.
The most hotly awaited event of the National People’s Congress will come on March 5 — opening day — when Premier Li Keqiang will announce the government’s economic growth target for 2017. Many expect a downgrade from 2016’s goal of 6.5-7% to “around 6.5%,” according to a major bank.
Beijing aims to bring China’s gross domestic product to twice the 2010 level by 2020 — a goal frequently, and mistakenly, taken to be merely an aspirational target. President Xi Jinping has called for the eradication of poverty in China by 2021, the hundredth anniversary of the Communist Party’s formation, and pledged a “great revival of the Chinese nation.” In this context, missing the mark could mean the leader’s downfall.
Doubling GDP over a decade requires 7.2% annual growth on average. Rates that were higher than that from 2011 to 2014 mean the country has only to hit 6.3% during the next few years. Targeting 6.5%, and thus avoiding a steep drop-off from last year’s goal, is a clear attempt to avoid any possible misstep ahead of the party’s twice-a-decade National Congress this autumn, when the group will name its next slate of leaders.
But in today’s China, 6.5% is no slight hurdle. To be sure, exports are recovering thanks to a brisk U.S. economy and a yuan some 10% weaker than at its peak. But areas outside major cities remain mired in vacant housing stock, and private investment is sluggish, leaving public works as one of the only viable drivers of growth.
Japan’s government debt stood at a record 1,066.42 trillion yen ($9.4 trillion) as of Dec. 31, highlighting the difficulty of restoring the country’s fiscal health, data by the Finance Ministry showed Friday.
Per capita debt, the amount owed per person, came to around 8.40 million yen, based on the country’s total population estimated at around 126.86 million as of Jan. 1.
The central government’s debt marked an increase of 3.85 trillion yen compared with the end of September, due to the issuance of “zaito” debt to finance projects such as the construction of a magnetically levitated high-speed train line in central Japan as well as ballooning social security costs.
By the end of the current fiscal year through March, the government’s debt is projected to grow further to 1,116.4 trillion yen.
According to the ministry, the debt total as of December consisted of a record-high 928.91 trillion yen in government bonds, 54.26 trillion yen in borrowing mainly from financial institutions and 83.25 trillion yen in financing bills or short-term government notes of up to one year.
The value of corporate and government debt that trades with a sub-zero yield has dropped below $10tn, a substantial decrease from September when investors piled into the fixed-income market, according to Tradeweb.
Roughly $9.6tn of bonds trade in negative territory, down from nearly $14tn four months ago and $10.7tn near the end of December, as rising inflation expectations and hopes of a rebound in economic activity propels yields higher, Yields rise as bond prices fall.
European and Japanese sovereign debt comprise the vast majority of negative-yielding securities, while some $514m of euro-denominated corporate bonds also trade with a yield below zero. That figure is down from $916m in September.
The rise of negative-yielding debt was spurred by central bank stimulus meant to accelerate lacklustre economic growth. Inflation expectations have climbed in the wake of Donald Trump’s election, as investors await promised government stimulus, tax cuts and a weaker regulatory regime that may prompt a more hawkish Federal Reserve.
The declining value of debt trading with a negative yield also reflects a stronger US dollar, which makes foreign obligations appear smaller when converted back to the greenback.
While the Fed watchers have been obsessing in recent weeks about the pace and size of any upcoming Fed rate hikes, summarized best by Dallas Fed president Robert Kaplan who earlier today said:
KAPLAN: AMONG BIGGEST DISAGREEMENTS AT FED IS ON HOW QUICKLY TO RAISE RATES
… and unexpected new buzzword emerged today, namely Fed balance sheet unwind when first Philly Fed’s Steve Harker noted it in his speech earlier this morning…
HARKER: WHEN RATES AT 1%, NEED TO LOOK AT UNWINDING BAL SHEET
followed later in the day by St. Louis Fed’s James Bullard who, likewise, hinted that selling Fed assets may be coming soon:
BULLARD: BAL SHEET ROLLOFF MAY BE BETTER THAN AGGRESSIVE HIKING
Of course, how credible it is that the the Fed may actually engage in this is anyone’s guess: should the Fed “unexpectedly” start to reduce its balance sheet, the impact on global yields would be devastating, and make the Taper Tantrum and the TanTrump seems like child’s play in comparison. Which, perhaps, is why today for the first time we got not one but two such “trial balloons” from two separate Fed presidents, just to gradually acclimate the market with the concept of upcoming balance sheet normalization.