Details of Trump tax plan leak prior to Indianapolis speech

Allegedly dovish Yellen comments now interpreted as hawkish, Financial sector stocks get a boost Wednesday, anticipating higher interest rates.

Death and taxes. Maybe we can at least do something to fix the second problem. (Public domain image)

WASHINGTON, September 27, 2017 – Wednesday trading action on Wall Street is all over the place, reflecting this week’s accumulation of disparate moving parts.

Fed Chair Janet Yellen’s remarks on interest rate policy, which had earlier been taken as dovish on further interest rate hikes, are now being viewed as hawkish. Meanwhile, the particulars of President Trump’s long-awaited tax policy speech, scheduled for this afternoon in Indianapolis, have already been leaked, very possibly by the Administration itself for a change.

As reported by CNBC,

“Fed Chair Janet Yellen on Tuesday said the Fed should be ‘wary of moving too gradually’ especially since “persistently easy monetary policy” might have “adverse implications for financial stability.” But she also said the Fed may have overstated the labor market’s strength and rate of inflation.”

Yellen’s comments are now being interpreted as tilting toward the Fed’s economic hawks, as opposed to the way many in the financial press were handling her remarks Tuesday. That’s given a boost to the financials today (mainly banks, insurance companies and mortgage REITs), and also serves to support a minor rally in the dollar, which has already gained two cents this week on the euro, after declining sharply against the EU currency over the past several months.

Given the already existing Fed pledge to start lightening its balance sheet by letting bonds in its portfolio gradually mature (or possibly selling some of their inventory as well), it’s clear that at least a passive interest rate increase via this route is already in play.

Read also: Trading Diary: Restructuring our stock portfolio in confusing times

In a moderately related matter, the Houston/Hurricane Harvey-induced increase in prices at the pump, caused by a temporary yet sharp curtailment in refinery output, may already be causing a ripple effect on the more or less dormant U.S. inflation rate.

Also somewhat related: The news yesterday that Target (symbol: TGT) is boosting entry level wages significantly at its stores, as it’s having difficulty finding the employees it needs at current wage levels.

This is what happens in a normal, growing economy, and without false government help, we might add. If Target is doing this, other companies with similar employee profiles are doing the same, and wage inflation – such as it currently is – is another key ingredient contributing to more inflation.

We might suggest that recent boosts in entry-level wage levels might also be due in large part to President Trump’s immigration policies. Trump’s border clampdown has largely (though not entirely) shut the door on the Obama administration’s disastrous “World War Z”-style illegal alien surge that was a hallmark of his second term. Without the constant, wage-dampening surge of illegal migrants, it’s entirely possible that American wages – stagnant for decades except for the very rich – might at last experience tangible, meaningful increases, leading to a genuinely rising economic tide that at last lifts all economic boats.

Speaking of Trump: This afternoon in Indianapolis, Indiana, the President will present details of the current tax reform package his administration has put together with at least some Congressional buy-in.

Given Congress’ absolute inability to act in 2017 on anything of larger significance, this tax plan may ultimately go the way of Obamacare “repeal and replace,” which died a second death this week due to RINO intransigence. On the other hand, the plan will open key discussions on this vital issue, which will have significance not only for the American taxpayer, but also for voting trends in next year’s midterm elections.

ZeroHedge’s “Tyler Durden” provides the details in a Wednesday entry on the topic. For those without the time to read the whole thing, here’s our bullet-point condensation:

Trump/GOP Tax Reform Highlights:

General Goals

To encourage growth, support middle-class families, defend and protect American jobs and put America first again. In addition, reform the American tax system in a fiscally responsible way by broadening the tax base, closing counterproductive loopholes, and implementing policies that will get the American economy on a robust growth path. Specifics include:

  • Middle-class tax relief
  • Uncomplicated postcard tax returns for a majority of American taxpayers
  • Business tax relief, particularly for small businesses
  • Eliminating tax policies that encourage American businesses to send jobs and manufacturing to other countries
  • Broadening the tax base and closing loopholes

Tax brackets and tax simplification

  • Double the standard deduction to $24,000 for married couples filing jointly and by $12,000 for single filers
  • Reduce today’s 7 individual tax brackets to just three brackets: 12, 25 and 35 percent
  • Reduce the corporate tax rate to 20 percent, while finally eliminating the unworkable AMT calculation that has snared increasing numbers of middle-class taxpayers
  • Those currently paying taxes at a 10 percent rate will still be better off, given the new, higher standard deduction plus larger child tax credits and other tax relief elements TBD
  • Possibility of a fourth, higher tax bracket geared toward keeping the progressivity of the current tax code
  • Eliminate most itemized deductions, save for home mortgage interest and charitable deductions
  • Possibly introducing a formula to reduce the double taxation of corporate earnings
  • Allowing businesses to immediately write off, or “expense” new investments in depreciable assets (other than buildings) for at least a 5-year period beginning today

Intent of corporate tax reform is, over all, to transform

“our existing ‘offshoring’ model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).” [via ZeroHedge]

 ZeroHedge also notes that the long-controversial “carried interest” loophole that allows wealthy hedge funds and private equity managers to treat most of their income as lower-taxed capital gains rather than ordinary income has yet to be addressed.

The wild rumpus on tax reform will launch this afternoon, appropriately in America’s Rust Belt. Once again, the GOP will have a chance to demonstrate that it can actually do something about America’s completely out-of-whack tax system.

Given their current track record, we’d give the Stupid Party only a 50-50 percent chance at this point for achieving anything meaningful or of lasting value on this controversial front.

After all, if the Republicans have proved utterly unable to jettison the horribly flawed health plan brutally put in place by Obama and his exclusively Democrat Congressional majority, what chance do they have putting through a tax reform proposal that will be battled at every turn by hordes of special interests and grossly overpaid corporate lobbyists?

Even now, these mega-wealthy untouchables and their minions are descending in waves in the Nation’s Capital, laden with swollen moneybags and hell bent on making sure that absolutely nothing in the tax law ever changes.

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