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Improving The Republican Tax Proposals

Dear President Trump,

I applaud many of the provisions of the proposed House and Senate tax proposals, but, as discussed below, the reduction or elimination of important deductions will result in unfair tax increases for too many taxpayers and may adversely effect the solvency of high tax states and the growth of the US economy. I fear that the current proposals, if  modified and passed into law, may cause almost as much harm as good to our economy. You can encourage Congress to find better ways to raise offsetting revenue than by eliminating important deductions. This letter will suggest changes to improve the tax proposals by eliminating current loopholes that let many of our most successful individuals avoid paying hundreds of billions of taxes during their lifetimes. I know it is late in the process and that time is of the essence, but I expect there will be almost immediate approval of  the suggested changes. I believe that if the proposed changes are adopted at your suggestion they will be recognized as the major accomplishment of your presidency by making the tax code fairer and enable you to achieve your goals of greatly accelerating the growth of the economy and helping the middle class.

1. THE PROPOSED LIMITATION OR ELIMINATION OF THE HOME INTEREST AND PROPERTY TAX DEDUCTION. I consider the elimination or reduction of deductions for home mortgage interest and property taxes to be the most unjustifiable change. By allowing depreciation of rental properties and not private homes, the tax code currently favors renting over home ownership. The proposed changes compound the unfairness. Prior to the collapse in home values caused in large part by improvident or fraudulent lending practices, owning a home was a major source of wealth accumulation by the middle class as one’s home mortgage was repaid over time and the home value rose due to inflation. Young families today are beginning to rediscover the wonderful benefits of home ownership and the economy has benefitted. The reduction of the tax benefits for home ownership will make it much more difficult financially to purchase and meet the monthly costs of owning a home. It will also significantly reduce the equity value of current homeowners and cause great harm to the home building, maintenance and improvement industries and lead to reduced funding for public school education. It will result in the loss of millions of middle class jobs. We must find a better way to pay for the tax reductions contained in the current proposals even if it means raising the corporate rate to 21% or 22%. Property taxes and interest on mortgages up to at least $1,000,000 should remain deductible.

2. RAISING THE ESTATE TAX CREDIT OR ELIMINATING THE ESTATE TAX. Raising the Estate Tax Credit as proposed or even to eliminate the Federal Estate Tax on estates of spouses with aggregate estates of up to $25 million or $50 million is a good idea to protect family businesses and farmers. But, eliminating the Federal Estate Tax is likely to be political suicide for Republicans. You will be endlessly criticized for giving an enormous and unjustifiable benefit to our richest taxpayers, including you. The richest people in our country are among the most under-taxed. Their aggregate income and wealth that is growing by hundreds of billions of dollars per year is in the form of unrealized capital gains that are not taxed for valid reasons. Our wealthiest people, many of whom will probably be worth well over $100 billion at the time of their death, also avoid federal gift or estate taxation by making large charitable gifts or by creating charitable foundations. We should either deny the charitable deduction for estates or otherwise taxable gifts or provide for a capital gains tax to be payable at death or at designated dates (such as every three or  five years after the change is passed) or by individuals at the time they make charitable gifts of appreciated property. We could provide for such tax to be payable in kind or over a period of years. The assets paid to the government in kind could be non voting while held by the government and be redeemable or sold over time. The rate of tax should be open for discussion, but the amount of the tax should be very significant and allow for most of the deductions being targeted for elimination to be retained. Just think of the US government as one of the largest shareholders of Berkshire Hathaway, Microsoft or Amazon. I do not think Warren Buffett, Bill Gates or Jeff Bezos will object. Tax deductible contributions will be reduced, but mainly be reducing the size of charitable gifts by an amount equal to the current tax underpayments. Eliminating the estate tax might also reduce charitable gifts.

3. REDUCING THE TAX ON PASS-THROUGH ENTITIES. This is also a questionable change favoring the rich. C Corporations pay a tax on net income (after deducting salaries paid that are taxed at individual tax rates) and stockholders pay a SECOND tax on dividends paid. Pass through entities avoid double taxation and they do not need the added benefit of lesser rates. If a C Corporation is more favorable, a Subchapter S Corporation or LLC can convert to a C Corporation.

4. TAXING THE CARRIED INTEREST. After years of discussion your wall street advisers left taxing of the carried interest out of the tax proposal. The amount recovered may not be great, but closing a loop-hole is important for tax fairness. It should have been included with appropriate relief for illiquid positions, such as permitting payment of the tax over time or in kind.

5. THE ELIMINATION OF THE SALT DEDUCTIONS. States with high income tax rates are already losing high income taxpayers to no income tax states. Some of them currently face insolvency. The elimination of SALT deductions causes a sudden change that is unfair to people who relied on the SALT deductions and bought homes and created business in high tax states. As discussed above, most, if not all, of the lost revenues from the rate reductions could be recovered by fairly taxing the unrealized gains of the super-rich and by properly taxing carried interests and pass-through entities. Limiting the SALT deductions to an amount such as 5% of taxable income may be needed to offset a portion of the proposed reduced tax revenues, and such limit should be phased in if possible and the middle class exemptions should be enlarged.

6. ENCOURAGE WAGE INCREASES BY OFFERING A FIRST YEAR TAX CREDIT FOR WAGE INCREASES OF LOWER PAID EMPLOYEES. We are permitting corporations to bring back trillions of dollars of funds parked overseas. Some of it will be spent on capital investments, but most of it will be used for dividends and stock buy-backs unless we encourage middle class wage increases. We could generate much higher GDP growth by giving employers a first year tax credit for wage increases to employees except for the top 10% of wage earners. Such credit would be lost if the wage increases were not continued during the next year. Including such a tax credit may prove to be revenue positive over ten years since it will grow the economy and increase individual incomes.

Sincerely,

Stephen Feinberg

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Approving and Improving the Kudlow, Moore, Laffer and Forbes Tax Proposal

Kudos for the Kudlow, Moore, Laffer and Forbes “Three Easy Pieces” tax proposal. However, the depreciation change is unnecessary and unrealistic and the tax rate is probably better at 20% or even 22%. I suggest a 4th piece, namely a 100% tax credit for the 1st year of all wage increases except for increases to the top 20%. Otherwise expect most of the earnings growth from tax savings to go to dividend increases, stock redemptions and increased compensation for executives as has been the main use of earnings growth in recent years.

Interest Rate Lunacy

The Obama administration missed an opportunity to extend the term of the US Debt. Each 1% increase in interest rates on the US Debt will soon cost our government $200 billion per year. Janet Yellen babbles on about unemployment, inflation and normalization of interest rates. She ignores the overriding need to keep interest rates as low as possible. The June increase in rates was a major mistake.

The Ryan Proposal To Replace Obamacare Needs To Add Annual And Lifetime Benefit Limits

I published a letter to President Trump in this blog on February 5 warning of the difficulties in dealing with the repeal and replacement of Obamacare prior to the Ryan healthcare debacle. The Ryan proposal to repeal and replace Obamacare does not resolve Obamacare’s most egregious problems, the continuous increases in healthcare premiums paid by the young middle class and employers and excessive deductibles. Such problems are caused mainly by the need for insurance companies to recover the billions of dollars of welfare benefits required to be given under Obamacare for people with pre-existing conditions, and the excessive fees charged by hospitals to paying customers to make up for patients who do not pay for mandated treatment at hospital ERs and resulting from Medicare and Medicaid underpayments. We must provide healthcare coverage for people with pre-existing as promised by President Trump, but we must subject people receiving underpriced coverage to annual and life-time benefit limits and make them responsible for helping to control the cost of their benefits. Excessive healthcare costs have negatively impacted jobs and wages, are a cause of off-shoring of manufacturing and have made it difficult, if not impossible, for young people who achieve and get a tax-paying job to re-pay their college loans, form families and purchase homes.

I urge everyone to read my February letter which discusses many of the issues affecting healthcare. I encourage treating the replacement for Obamacare as a work-in-progress beginning with a return to free-market competition and a realistic reduction in the Obamacare welfare benefits while we conduct a re-examination of all aspects of the healthcare industry and the health insurance business as it will change following the repeal of Obamacare.

A VITAL THIRD OBJECTIVE FOR THE FED

The fools chatter incessantly as to whether based on its Congressional mandate the Fed missed the opportunity to raise interest rates or when they should raise interest rates based on misleading unemployment statistics and inflation prospects. Now they talk about a host of international economic events to speculate and advise on what the Fed might or should do.  The rarely mention the cost of paying interest on the National Debt which is approaching $20T on its way to $25T and $30T in a few years no matter who wins the presidency unless we have unexpected growth in the economy

At a 1% rate,  interest on the National Debt totals $200B per year and it rises to $800B if the government is required to pay 4%. The latter rate would raise interest costs to an amount roughly equal to our military budget or our federal welfare or infrastructure spending.  We need to spend substantially more on military and infrastructure needs and printing dollars to pay excessive interest will exacerbate our National Debt problem. We simply can’t afford to pay higher interest rates so that they can be lowered if our economy goes into recession. Like the Europeans and the Japanese, the Fed will be able to find ways to stimulate the economy and deal with future banking problems even if interest rates remain low.

The Twitter Stock Price Roller Coaster

In the short time period since the Twitter IPO its stock price has performed as if it was riding a roller coaster.  Various factors have contributed to its meteoric rise to a peak, followed by a rapid decline. Market factors unrelated to the fair market value of Twitter shares have influenced the price movement. Prior to the Twitter offering, IPOs were in a state of great demand (which occurs from time-to-time) with investors of most IPOs being allocated less shares than requested. Many investors were purchasing  the unallocated portion of their subscription as soon as the IPO commenced trading. The Twitter offering was highly glamorized by the financial press. Twitter shares like those of many other IPOs immediately skyrocketed in price. Twitter has many loyal users who were unable to obtain an allotment on the IPO and they and other investors for various reasons elected to buy the shares in the after market. Chart theorists added fuel to the fire as they determined buy points as the Twitter stock price rose and gathered momentum. As the stock price rose far above the IPO price it attracted short sellers. However, as ofter occurs when short sellers sell into a rapidly rising market, they get squeezed and panic, one-at -a-time, and cover their shorts at ever increasing prices, thereby driving the stock price higher. 

When the price of Twitter shares peaked and started to decline, various factors, acting in a manner similar to the way that gravity effects a roller coaster car, precipitated the decline. Some analysts withdrew their support based upon market capitalization and recommended sale . Stop loss orders, which have become fashionable and which were placed at various levels during the share price increase, began to be executed at declining prices, creating selling pressure. Chart theorists interpreted sell signals. Short sellers, who follow the analyst reports, know about the existence of stop loss orders and understand chart theory, exacerbated the decline by selling short at declining prices. As the stock declined, margin calls and tax loss considerations came into play and some unsophisticated stockholders sold in panic. 

Like a roller coaster the ride will stop at the bottom. If Twitter can generate revenues and profitability from its large number of followers, its shares will begin to rise again. If, as I expect, the rise occurs, the SEC should conduct an investigation as to when every short sale took place to try to determine the role of short selling in exaggerating stock market declines.

A Proposed Tax Law Change To Encourage Our International Corporations To Bring Home Cash Held Overseas To Invest In Transporatation Infrastructure Projects

Our transportation infrastructure is a national disgrace. We are the richest country in the world and yet we fail to upgrade, or even maintain, the vital paths of commerce. The main reason is that our states and cities, which are primarily responsible for infrastructure projects, are saddled with ever-growing welfare and employment obligations and excessive debt. We must find a way to supplement transportation infrastructure funding.

President Obama, as he has every time an important election nears, is attempting to promote a plan for HUD funding of infrastructure spending. Why should Congress approve the president’s request for funding? A large portion of previously approved infrastructure funding has not been used by the Obama administration for shovel ready projects, but to promote Democrat candidates and to reward friends. Republican Congressmen don’t trust or like President Obama who disregards Congress and abuses Republicans at every opportunity. They are unlikely to approve the funding he seeks.

This writer in his book entitled “Perpetuating American Greatness After The Fiscal Cliff”, published in March 2013, has proposed changes in the corporate income tax laws to encourage the creation of “Jump Start America Bonds”. Such bonds would be sold offshore by states and their transportation agencies to our international corporations to finance transportation infrastructure construction projects. Jump Start America Bonds would have properties to make them a win, win, win for the investing corporations, the states and the federal government. The corporations would receive a fair return and be protected against loss of principal resulting from default or interest rate risk. They would also be able to repatriate the funds over a term of years at favorable tax rates. The states would get transportation infrastructure construction funding on reasonable terms. The federal government would collect outstanding taxes on overseas profits at reduced rates and would benefit from dynamic economic growth leading to middle class job creation and increased income tax revenues. See my previous article on this blog entitled “Jump Start America Bonds Represent the Perfect Economic Stimulus”.