What A Week!

We took a brief hiatus at Thanksgiving and a news explosion the size of the Lituya Bay Tsunami erupted while we were gone.

Where to begin?

The most important news would be the major tax legislation passed by both the House and the Senate, but the most scintillating would be Special Council Mueller’s dinging of former National Security Advisor Michael Flynn for lying during an interview with the FBI.

Never, ever, do that! Just ask Martha Stewart.

So, we’ll start with the Flynn imbroglio that has all the talking heads talking impeachment – a bit prematurely, we would suggest. Nonetheless, Mueller has what he needs to squeeze Flynn into singing falsetto.

While there were, reportedly, a number of more serious charges that could have been directed against Flynn relating to Flynn’s undisclosed work for a foreign government (Turkey), Mueller chose a relatively minor offense in return for Flynn’s agreement to cooperate in the investigation of other “senior” and “very senior” officials. Think former campaign advisor George Papadopoulos (“senior”), and think son-in-law Jared Kushner (“very senior”).

As usual, based on what is thus far known, the criminal idiocy appears to be the determination to cover up an offense rather than the offense itself. So far, the focus does not, at this time, seem to be on Trump campaign collusion with Russia designed to cripple the Clinton campaign, but rather collusion by the Trump campaign to tamp down Russian retaliatory reaction to President Obama’s sanctions against Russia. Specifically, the Trump campaign’s  “very senior” official (presumably Kushner) apparently directed Flynn to contact officials from foreign governments, including Russia, to feel them out on a UN Security Council resolution critical of Israeli settlements.

Because the Obama administration was still in office, this “very senior” official apparently wanted Russia to delay the vote or defeat the resolution. This would have been a violation of the arcane Logan Act which has never been used to prosecute anyone. The Logan Act prohibits private citizens from negotiating foreign policy with a foreign government. At the time, Kushner was still a private citizen. The “gotcha” here is probably lying about or trying to cover up, that such an entreaty was made by a “senior official” of the campaign, rather than a technical violation of the Logan Act itself.

Now, regarding the biggest tax overhaul in a generation.

We often quote the late Senator from New York, Daniel Patrick Moynihan. He was one of the wisest men in a chamber where wisdom is invariably in short supply.  Moynihan wisely counseled that transformative legislation should never be passed on a purely partisan basis because, when all is said and done, it seldom turns out well. So, let’s take a look at this sausage-making exercise. Dubbed the Tax Cut and Job Creation Act, the new House and Senate tax versions of the new tax legislation, which now await reconciliation between the two chambers, is the first major legislative accomplishment of the Trump Administration.

Senate rules both helped and hindered getting a satisfactory tax bill passed. First, how the rules helped. Generally, Senate rules require a supermajority, or 60%, to pass a resolution. There can be a one-time exception to the 60% rule in each term as long a new Act won’t increase the deficit over a predetermined amount within ten years. The Senate passed a budget that requires that any new tax bill not add more than $1.5 trillion to the deficit over the next ten years. That means some tax reform measures have sunset or phase-out provisions so that the deficit effect will not exceed the predetermined ceiling within ten years. In addition, a new tax law might also literally have provisions to raise revenue to offset the lost income from tax reductions. The new tax legislation just passed by the Senate does both. It includes both phase-out provisions and revenue generation provisions.

For example, the legislation makes tax-rate reductions permanent for businesses (a reduction from 35% to 20% for C-corporations {mostly large businesses} and a reduction to 25% for so-called pass-through or S-corporations {mostly small businesses}, the profits of which are currently taxed at personal income rates for the owners.) Needless to say, businesses like these provisions.

Another strong pro-business provision allows corporations that hold their profits abroad to repatriate those profits at a one-time tax of only 10% instead of 35%. That could draw anywhere from two to three trillion dollars back into the United States from abroad. The impact of such an infusion of dollars into the American economy could, the argument goes, stimulate enormous economic growth as those dollars find their way into circulation through higher wages, capital purchases or other investment. Even if the funds are used to buy back corporate stock, the money winds up in someone’s hands and, therefore,  would be available for further investment or for other consumer purchases.

Because most of the tax reductions for individuals in the new tax resolutions are subject to expiration, the new legislation is often referred to as a giveaway to the wealthy (business people) at the expense of the middle and lower economic classes.  There is some truth to this and some exaggeration as well.

One of the existing “tax provisions” the Senate tax bill eliminates is the Obamacare mandate. Repealing the mandate frees up more than $300 billion to help finance the proposed tax cuts. It also could result in millions of people losing their health insurance. Fortunately,     Senators Lamar Alexander and Patty Murray have introduced legislation modeled after proposals drafted by the Problem Solvers Caucus in the House, which would maintain insurance coverage for at least the next two years.

Another questionable provision taxes tuition waivers for graduate students as income, even though they receive no income. Now, we recognize that imputed income may be taxed, but taxing tuition graduate-school waivers which could run $20,000 or more as income is, in our opinion, a stupid thing to do. First, these graduate students almost assuredly can’t afford the tax, and taxing learning is something only unlearned people would do, which, come to think of it, probably explains the thinking (or lack thereof) that went into this provision.

The non-partisan Joint Committee on Taxation, however, estimates 80% of Americans earning $50,000 to $75,000 would get a sizable reduction in their taxes by 2019. Overall, about 62% would pay less in taxes in 2019. A bugaboo, however, is that the Senate bill has the lower rates for individuals disappearing after 2025, assuming there is no new tax legislation introduced by that time. Republicans, of course, argue a future Congress is almost certain to extend the cuts. Also, there would be a reduction in refundable tax credits, a mechanism in which payments are made to those who don’t earn enough to pay any taxes at all.

Republicans also believe the tax bill provisions (especially the corporate tax cuts and the repatriation of corporate dollars held abroad) will promote so much economic growth that all costs will be offset by new revenue. How much new revenue? It’s next to impossible to accurately estimate how to “dynamically score” the legislation to account for increased economic activity that hasn’t occurred yet. Therefore,  most estimates of economic impact are predicated on static scoring which makes few assumptions about economic growth stimulated by the money the new legislation leaves in the economy or attracts to the economy.

And of course, Americans who own stock, either directly or through their pension funds have, for the time being anyway, enjoyed an incredible windfall as the stock market surges to new highs week after week.

In any event, the new tax legislation is clearly historic and will influence how history looks at the Trump years.

On other matters, we’ve given up tallying the titans in business and government who have fallen as their unwanted sexual predations have caught up with them. Similarly, President Trump’s tweet storms are just as unwarranted and just as hard to keep up with. Suffice to say, our President enjoys cutting adversaries down to size with his tweets and outbursts. Sadly, he fails to recognize that it’s the office he’s cutting down as well.