Monday, July 11, 2016

Story of the Week: Auditing the Presidential Candidates’ Tax Proposals

Part one of a two-part series. By noted Austrian Christopher P. Casey, CFA ®, managing director at WindRock Wealth Management, in Naperville, IL, USA.

Economic intervention by government derives from monetary, regulatory and fiscal (taxation and spending) policies. While all three possess great potential for mischief and misery in bulk, fiscal policy stands alone as a subject in political races. Taxation, in particular, evokes strong emotional responses from voters who instinctively chant “soak the rich” or plead for tax relief.

History, however, does not support knee jerk reactions about presidential tax policies. The labels of Republican and Democrat bear little correlation with increases or decreases in tax rates and code complexity: for every Reagan there is a Kennedy, and for every Bush (pick either) there is a Roosevelt. Presidents, not parties, ultimately guide tax policy.

By what criteria should tax policies be judged? Overall magnitude, simplicity and fairness should be the bright lines. With this in mind, and while unrealistically ignoring any difficulties in passing tax legislation through Congress, what would a sober assessment of Republican Donald Trump, Democrat Hillary Clinton, and Libertarian Gary Johnson tax platforms conclude?

Unsurprisingly, due to his business background, Trump’s platform pushes for dramatically lower tax rates for both individuals and businesses across the board. Ordinary individual (head of household) income tax rates would be capped at 25 percent (from the current 39.6 percent) with other tax brackets equaling 0 percent, 10 percent and 20 percent.

These brackets would also be expanded substantially:

  • Those earning up to $37,500 would pay no income tax;
  • Individuals earning up to $75,000 would pay 10 percent (the current bracket ends at only $13,250); and
  • Anyone earning less than $225,000 would pay no more than 20 percent in ordinary income tax.

Businesses would likewise enjoy massive tax reductions as rates would drop from 35 percent to 15 percent. Equally impressive, the magnitude of tax rate reduction would be matched by tax code simplification. For individuals, numerous exemptions and complexities (e.g., life insurance interest, Alternative Minimum Tax, etc.) would be eliminated while the number of tax brackets would drop from seven to four.

Also, the estate tax and all of its required filings would be eliminated.

Not all of Trump’s proposals are positive since, presumably in a misguided attempt at “fairness,” pass-through businesses (e.g., S corporations and partnerships) would be taxed at 15 percent (which may be beneficial in certain situations but does introduce double taxation when dividends/distributions are made), and carried interest taxes for individuals would be at ordinary income tax rates instead of at capital gains tax rates.

Overall, however, Trump’s tax plan would be a significant boon to the economy as a whole and to every household individually.

Clinton’s tax platform, though, proposes significant tax rate increases and voluminous additions to the tax code. To wit:

  • A new individual tax bracket of 43.6 percent would be added for those earning $5.0 million and above;
  • Long-term capital gains tax rates would increase to between 27.8 percent and 47.4 percent;
  • The estate tax rate would revert to 2009’s 45 percent (from 40 percent) with the exemption lowered to $3.5 million (from today’s $5.45 million); and
  • Tax-free or tax-deferred retirement accounts would be limited in total value.

Given the current state of U.S. government insolvency, many may object that the Clinton tax plan would raise revenue and lower debt levels. However, the static models utilized to project tax revenue additions from tax rate increases fail to account for the lower economic activity (the ultimate source of tax revenue) attributable to these same taxes.

And even if the Clinton plan did increase tax revenues, history has demonstrated that increased tax revenues possess little correlation with decreased debt, but significant correlation with increased spending. While Americans may have been spared from “Feeling the Bern,” they may end up burned nonetheless.

The Johnson tax platform deserves a separate column, for it is not one of magnitude, but rather of nature, and thus requires additional discussion in next month’s column.

However, platforms, like promises, are frequently broken, ignored or rendered unfeasible in the world of politics, so while the contrast between each candidates’ tax proposals may appear dramatic, the ultimate tax profile of American households and businesses may change very little in the years ahead.

Look for part two from Mr. Casey in an upcoming post. He can be reached via email at

Tuesday, July 5, 2016

Story of the Week: Clinton’s Proposal Least Friendly to Investors

Part two of our series on the tax proposals of each of the three top candidates for the American presidency. Last week, we focused on the proposals of the Republican nominee, billionaire businessman Donald Trump.

On the other side of the political spectrum, it’s no shock that Democrat contender, former Secretary of State Hillary Clinton, long dubbed her party’s presumptive nominee by the mainstream news media and numerous political pundits alike, is advocating public policy positions that would prove downright painful for many entrepreneurs, savers and investors.

Declaring on her campaign website that “the defining economic challenge of our time is raising incomes for hardworking Americans,” the former New York senator and first lady said she wants to reform the U.S. tax code so the wealthiest “pay their fair share.”

Mrs. Clinton supports ending the “carried interest” loophole, enacting the “Buffett Rule” that “ensures no millionaire pays a lower effective tax rate than their secretary,” and closing tax loopholes and expenditures that benefit the wealthiest taxpayers in order to pay for her plan to make college affordable and to refinance student debt.

On the business side of the equation, she has called for reform that closes corporate tax loopholes and drives investment in the U.S. Her plan would create a 15 percent tax credit for “companies that share profits with workers on top of wages and pay increases.”

Mrs. Clinton also indicated she wants to put an end to “quarterly capitalism.”

“We need an economy where companies plan for the long run and invest in their workers through increased wages and better training – leading to higher productivity, better service and larger profits,” her campaign said. “Hillary will revamp the capital gains tax to reward far-sighted investments that create jobs.”

Among other things, Mrs. Clinton wants to address the rising influence of the kinds of “activist” shareholders that focus on short-term profits at the expense of long-term growth. Further, she has pledged to reform executive compensation to better align the interests of executives with long-term value.

The Democrat also wants to “impose accountability on Wall Street,” said her campaign. “Nowhere will the shift from short-term to long-term thinking be more important than on Wall Street.”

Apparently alluding to the Dodd-Frank Wall Street Reform and Consumer Protection Act, her campaign said, “Clinton will defend the Wall Street reforms put in place after the financial crisis – and she’ll go further. She’ll tackle dangerous risks in the financial sector, and she’ll appoint and empower tough, independent regulators and prosecute individuals and firms when they commit fraud or other criminal wrongdoing.”

However, the fact that Mrs. Clinton has made tens of millions of dollars in speeches to Wall Street interests has many skeptics doubtful about such promises.

Skeptical economic types also note a big disconnect in that the Democrat said she wants to provide tax relief for small businesses, increase private investment and expand employment opportunities. Yet, she also wants to “encourage” companies to share their profits with their employees, expand overtime, raise the minimum wage and support unions and collective bargaining.

In an interview in April with the New York Daily News, the candidate estimated her plan would cost about $100 billion a year in additional taxes. That works out to $1 trillion over 10 years.

Analysts Weigh In

According to an analysis by Tax Foundation Economist Kyle Pomerleau and Senior Fellow Michael Schuyler, the Clinton plan would raise taxes on both individual and business income, but perhaps not as much as the candidate would like.

“Hillary Clinton’s plan would raise tax revenue by $498 billion over the next decade on a static basis,” they said in a recent analysis. “However, the plan would end up collecting $191 billion over the next decade when accounting for decreased economic output in the long run.”

According to their calculations, a majority of the revenue generated under Mrs. Clinton’s plan would be derived from a cap on itemized deductions, otherwise known as “the Buffett Rule,” and a 4 percent surtax on taxpayers with incomes over $5 million.

Further, “Clinton’s proposals to alter the long-term capital gains rate schedule would actually reduce revenue on both a static and dynamic basis due to increased incentives to delay capital gains realizations,” Messrs. Pomerleau and Schuyler pointed out.

Referencing the foundation’s Taxes and Growth Model, the analysts said the Democrat candidate’s plan would lower the national economy’s gross domestic product by 1 percent over the long term because of slightly higher marginal tax rates on capital and labor.

“On a static basis, the tax plan would lead to 0.7 percent lower after-tax income for the top 10 percent of taxpayers and 1.7 percent lower income for the top 1 percent,” the analysts said. “When accounting for reduced GDP, after-tax incomes of all taxpayers would fall by at least 0.9 percent.”

Friday, July 1, 2016

Quote of The Day

[M]arkets in general are not a casino, but a purposeful force, the Misesian market process at the very heart of the progression of civilization.

From: The Dao of Capital: Austrian Investing in a Distorted World, by Mark Spitznagel.

Thursday, June 30, 2016

This Is So *Definitely* Not Your Father’s Housing Bubble...

Don't have the cash to come up with a downpayment on a house? No problem.

Two mortgage lenders, Quicken Loans and Guaranteed Rate, both have quietly rolled out a new 1 percent down mortgage to help squeeze “qualified” (cough, cough), cash-strapped borrowers into a new house.

The new loan products are offered in conjunction with the Home Possible Advantage program of Freddie Mac, the mortgage finance giant that, along with Fannie Mae, helped facilitate the housing crisis that brought on the Great Recession. (Both government-sponsored enterprises remain in government conservatorship, after the Bush administration took them over in September 2008).

With Quicken’s mortgage product, the borrower needs just a 1 percent out-of-pocket contribution, which is then matched by a 2 percent grant from the lender in order to bring the borrower up to the 3 percent down required for participation in the Freddie program.

Other qualifying criteria include a FICO score of 680 or above, an income less than the median income for their county, and a debt-to-income ratio of no more than 45 percent.

Guaranteed Rate provides a similar mortgage in the Chicagoland area, thanks to support from the city government and the Chicago Infrastructure Trust. In order to participate, a borrower has to come up with $1,000 or 1 percent of the purchase price as a downpayment. That is matched by a forgivable grant of as much as $7,000 from the Chicago Home Buyer Assistance Program. If all payments are made on time during the first five years, the grant is forgiven.

Potential homebuyers need an annualized income of up to $113,000, regardless of family size, and credit score of at least 640 to qualify.

Repeat after me... this is not a bubble...

Wednesday, June 29, 2016

Tax Complexity Will Cost the U.S. Economy $409 Billion This Year

From the Tax Foundation:

“The time it takes to comply with the tax code imposes a real cost on the economy. Individuals and businesses need to devote resources to complying with the tax code instead of doing other productive activities. For example, a business owner who needs to file a complex tax return each year may hire an accountant or tax lawyer to do it. This tax professional may cost $70,000 a year or more. This is $70,000 that this business owner cannot devote to purchasing equipment or hiring workers. Economists refer to this as an opportunity cost, and it results in lost productivity.

“Put in dollar terms, the 8.9 billion hours needed to comply with the tax code computes to $409 billion each year in lost productivity, or greater than the gross product of 36 states.”

Tuesday, June 28, 2016

It Takes America 8.9 Billion Hours to Comply with IRS Paperwork

From the Tax Foundation:

“Tax complexity creates real costs for American households and businesses, starting with just the time it takes us to comply with the tax code.

“According to the latest estimates from the Office of Information and Regulatory Affairs, Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. This is equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. The majority of the 8.9 billion hours will be spent complying with U.S. business (2.8 billion hours) and individual income (2.6 billion hours) tax returns.

“It wasn’t long ago that official estimates put the annual IRS paperwork burden at 6.1 billion hours. However, the IRS recently revised its estimate of the hours required to comply with business tax returns from 363 million to 2.8 billion, which increased the total time estimate by nearly 50 percent.”

This Is NOT Your Parents' Housing Bubble! (cough, cough)

Today’s S&P/Case-Shiller U.S. National Home Price Index reported a 5.0 percent annual gain in April. The 10-City Composite posted a 4.7 percent annual increase, and the 20-City Composite reported a year-over-year gain of 5.4 percent. All of these figures represent a drop from the month of March.

That being said,  “an increasing number of cities have surpassed the high prices seen before the Great Recession,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, which publishes the information. “Currently, seven cities – Denver, Dallas, Portland OR, San Francisco, Seattle, Charlotte, and Boston – are setting new highs.

Meanwhile, Black Knight Financial Services’ Home Price Index now stands at $260,000, up 30.4 percent from the housing market’s bottom and a mere 2.9 percent off the peak reached in June 2006.

But the mortgage finance industrial complex would have you believe we are *NOT* in another financial bubble.

Austrians know better.