Devil In The Detail

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DOW – 21 = 20,975
SPX – 1 = 2387
NAS – 0.27 = 6025
RUT + 8 = 1419 (record close)
10 Y – .02 = 2.31%
OIL – .41 = 49.15
GOLD + 5.00 = 1270.00

Here’s the good news – it wasn’t a big down day.

Yesterday was the big reveal on the president’s tax plan. White House chief economic advisor Gary Cohn and Treasury Secretary Steven Mnuchin presented the plan in a briefing to reporters at the White House. It largely echoes the proposal Trump outlined as a candidate and did not include some key details.

Trump’s plan will cut the number of income tax brackets from seven to three, with a top rate of 35 percent and lower rates of 25 percent and 10 percent. It is not clear what income ranges will fall under those brackets. The plan would exempt the first $24,000 of income from taxation.

It would also double the standard deduction. It would eliminate tax deductions, with only a few exceptions, including the mortgage interest, retirement savings and charitable contribution deductions. Trump’s plan would also repeal the alternative minimum tax and 3.8 percent Obamacare taxes.

The plan would get rid of the estate tax. The estate tax affects only a very small portion of Americans – individuals with a net worth above $5 million, or $10 million for a married couple, who otherwise do no planning. Eliminating the Alternative minimum and the estate tax are largely benefit wealthy taxpayers.

The proposal will cut the corporate tax rate to 15 percent from 35 percent. The White House said there will be a “one-time tax” on the trillions of dollars held by corporations overseas. However, Mnuchin said the rate for that tax has yet to be determined but the White House is “working with the House and Senate” on a repatriation rate, saying it would be “very competitive.”

Markets were expecting a lot of specifics and a specific rate on repatriation and they didn’t get it. Repatriation might have limited impact on the dollar. At Apple (AAPL), which has the most overseas cash among S&P 500 members, more than 90 percent of its $216 billion stash is in US dollars.

For Microsoft (MSFT), the second-largest holder of money abroad, dollar-denominated bonds alone make up more than 60 percent of total cash, based on securities filings. Repatriation could impact stock prices, as many companies would use repatriated dollars for share buybacks.

There are a few problems, and one of the first you may have noticed is that there would be a big difference between the proposed rates for individuals and for corporations. Any individual taxed above 15% would be sorely tempted to be taxed at the corporate rate.

Mnuchin also said the U.S. would go to a “territorial” tax system. Though further details were not forthcoming, such systems typically exclude most or all the income that businesses earn overseas. The proposal didn’t include any mention of a border-adjusted tax.

Mnuchin would not answer if the plan would be “revenue neutral,” meaning whether it would result in a larger budget deficit. He contended that it would “pay for itself with growth and with … reduction of different deductions and closing loopholes.”

Mnuchin’s argument is that tax cuts will lead people to work harder, but economic theory is ambiguous on this point, as some people will maintain their same after-tax income while working less. And, of course, most people can’t tweak their work schedules like this anyway when the tax code changes. “Accounting for the economic growth” allegedly generated by a tax plan is called “dynamic scoring”.

The Tax Policy Center is known for careful, state-of-the-art analysis, and their early analysis finds that the tax-cut plan losing between $6.15 trillion and $5.97 trillion in revenue over 10 years. If the revenue loss means less investment in public goods, including both productivity-boosting physical and human capital, growth could be slower.

Mnuchin claims the tax cuts would result in 3% growth. Getting to 3% growth and staying there would require a burst of productivity growth that’s never been seen in this country before. The administration is banking on tax cuts and deregulation to deliver that productivity revolution, but there’s no historical evidence that either policy can deliver the magnitude of investment that would be needed.

There is no historical precedent that confirms tax cuts create strong growth that could make this tax cut plan revenue neutral. Investment should have boomed when tax rates were low, and faltered when Presidents George H.W. Bush and Bill Clinton raised the top marginal rate in the early 1990s. But that didn’t happen: Investment increased in the mid-1980s as the economy improved, then faded even as tax rates were lowered further.

Investment boomed after the Bush-Clinton tax hikes, and increased again after the tax cuts early in President George W. Bush’s first term. It appears investment is driven largely by economic forces, not by marginal tax rates. The tax rate isn’t totally irrelevant, but it’s not that important either.

The plan that has been announced today is very aggressive, and unlikely to pass, at least in its current form; which is basically a rough draft.

There was a Q&A session with Mnuchin and Cohn following the presentation. They could not answer some basic questions such as: what is the overall size of the tax plan in dollars? What would it mean to a median American family of four making about $60,000? – How about their tax bill? The response was that they were working on details. Of course, the devil is in the details, which means that any chance of timely change in the tax code will be wicked hard to pass.

The House Freedom Caucus, a group of conservatives who were instrumental in blocking President Trump’s plan to repeal the Affordable Care Act last month, gave its approval today to a new, more conservative version. The bill has a chance to get through the House, possibly as early as Friday or Saturday.

It was not clear whether conservative support for the revised legislation would be matched by losses in the center. The latest proposal would allow states to obtain waivers from federal mandates that insurers cover certain “essential health benefits,” like emergency services, maternity care, and mental health and substance abuse services.

The new plan would still allow an age-rating scheme that allows older people to be charged more, and would dramatically inflate costs for older low-income people. It would permit states to waive requirements that insurers charge the same rates for people the same age, essentially ending the current ban on rejecting coverage for pre-existing conditions if state governments establish high-risk pools where sick people can purchase health care.

While the law doesn’t allow insurers to bar coverage for sick and elderly people, it doesn’t limit how much they can be charged, which means they can be functionally priced out of coverage.

The White House is considering a draft executive order to withdraw the United States from the North American Free Trade Agreement. The possible executive order, first reported by Politico, sent stocks and currencies falling in Mexico and Canada.

It was not clear what the language of the executive order would be, or what steps would come next. But an executive order could start a required six-month notification period for withdrawal, during which time talks on renegotiation could be pursued.

The chairman of the Federal Communications Commission, Ajit Pai, has outlined a sweeping plan to loosen the government’s oversight of high-speed internet providers. Pai, said high-speed internet service should no longer be treated like a public utility with strict rules, as it is now. Instead, he said, the industry should largely be left to police itself.

The existing rules are meant to prevent broadband providers like AT&T (T) and Comcast (CCV) from giving special treatment to any streaming videos, news sites and other content. The rules were intended to ensure an open internet, meaning that no content could be blocked by broadband providers and that the internet would not be divided into pay-to-play fast lanes for internet and media companies that can afford it and slow lanes for everyone else.

Pai said he was generally supportive of the idea behind net neutrality but said the rules went too far and were not necessary for an open internet. The new plan could include only voluntary commitments by broadband companies. Consumer groups and tech companies have warned of a legal challenge. The current net neutrality rules were affirmed by a federal appeals court, which could put an extra burden on Mr. Pai to justify his changes.

The Trump administration hosted senators for an extraordinary White House briefing on North Korea. All 100 senators were invited and transported in buses for the unprecedented, classified briefing. President Trump’s secretary of state, secretary of defense, top general, and national intelligence director outlined the North’s escalating nuclear capabilities and US response options. The briefing team was to meet later with House members in the Capitol.

Congress inched toward a deal to fund the government through September but was preparing to possibly extend a midnight Friday deadline to wrap up negotiations and avoid an imminent government shutdown. The one-week extension would give leading Republicans and Democrats “a little breathing room” to finish negotiations.

US Steel (X) reported a first quarter loss of 83 cents per share. Analysts were expecting a profit of 35 cents per share. US Steel also cut its 2017 profit outlook in half. The stock plunged 27% in very heavy volume; its worst day of trading since it went public 26 years ago.

Paypal (PYPL) posted earnings of 44 cents per share on revenue of $2.98 billion, up from a year earlier and beating estimates. Shares rose 6% in after-hours trade.