Saturday, November 4, 2017

The Great Republican Tax Cut Hoax

The devil is always in the details, and the Republican Tax Cut proposal which was unveiled on Thursday November 2nd has changes buried within it that will affect a broad swath of tax-payers.  A large segment of the mass individual tax-payer population gets a bigger tax bill or nothing.  Using averages to sell the plan to the public is misleading.  I suggest checking how the personal exemption elimination while upping the standard deduction while eliminating many popular deductions affects your particular circumstances.  Many families of 4 who own a home with a high mortgages will lose ground if this plan becomes law. 

Meanwhile there is a big reduction proposed for corporate taxes from 35% to 20%.  It appears the plan is constructed to give Apple Inc. (AAPL), and multi-national companies a big pay-off for their prior transfer pricing shenanigans whereby the multinationals set prices of goods, services and intellectual property rights that constantly move between their national business units. In this scheme, which is widely used, a foreign parent (say a Chinese affiliate) charges a U.S. business unit an inflated price for an I-Phone, which allows the U.S. tax bill of Apple to be greatly reduced or potentially even eliminated. 

This transfer pricing practice is widely utilized by multi-nationals throughout the world to avoid paying U.S. taxes.  They can avoid the taxes as long as they do not repatriate these inflated profits to the U.S., which is precisely what Apple has been doing for years, particularly since the I-Phone took off in volume about 5 years ago.  Instead of paying their fair share of U.S. taxes, Apple has amassed $268B in cash and marketable securities, the majority of which is held in foreign custodian accounts in U.S. dollars.  (See Apple 10-K here)  This massive figure represents about $800 in cash for every American citizen. 

Buried deep within the Republican tax bill is a provision to attempt to correct this practice.  The provision would slap a 20% excise tax on goods and services multinationals routinely make on cross border transactions between business units.  Under the proposal, U.S. business units that import products, pay royalties or other tax-deductible, non-interest fees to foreign parents or affiliates in the course of doing business would either pay a 20-percent tax on these or agree to treat the amounts as income connected to their U.S. business and subject to U.S. taxes.

If this provision becomes law, many corporate tax experts believe multi-nationals would opt to avoid the excise tax by electing to pay U.S. corporate tax on all the profits related to products sold in the United States. (read here) These profits may include profits on activities conducted overseas, like manufacturing or research, which are also subject to foreign income taxes.  In other words, the door would close on a practice that for many years has sucked American manufacturing of goods for consumption in the U.S., particularly technology goods, textiles and autos, overseas.

This provision is a pivotal part of the Trump election platform targeted to discourage the practice of dodging U.S. taxes by shifting production overseas to lower tax and labor cost countries, and hoarding the savings by purchasing large quantities of U.S. Treasuries, which are in ample quantity because the U.S. National Debt has been indirectly ginned up by the large U.S. trade deficit. It is one big incestuous cycle that needs to end.

Here is the rub, and why I believe the Republican Tax Bill is a hoax.  This provision is likely never to be voted on or become law.  If it does, I will be glad to say I was wrong, because it is very badly needed to begin to correct a 25 year long fleecing of America that has reached unsupportable proportions today.  But the reason it will not become law is the resistance it is going to get from lobbyists representing the multinational companies who have become major beneficiaries of the process.  The provision could also be disruptive to debt markets as well as inflationary for U.S. consumers in the short to intermediate term.  Overall, however, in my assessment these would be small prices to pay in order to return the country to a more sustainable path for the long-term.

However, what is most likely to happen is the provision will be silently withdrawn from the proposed tax bill, and the 20% corporate flat tax could get passed without any strings attached.

Does anyone truly believe Apple is going to bring a substantial amount of jobs back to the U.S. now just because the corporate tax rate is lower?  I think there are two chances of this happening, slim and none, and slim has bolted out of the country.  All the proposed Republican Tax Cut  plan, without the 20% excise tax provision would do is provide a big welfare check to companies like Apple who are the primary driving force behind the US deficit ballooning to ever greater levels in the first place (not paying their taxes due, and reducing jobs of tax paying Americans).  As a result American citizens end up with politicians with pea sized brains trying to sell a tax cut sham to foist the burden of paying down the US debt, or at least keeping it under control, while Apple Inc. gets off paying very little and continues the practices that are currently in place.

Apple is just one of many well-known corporations who want this welfare check so they can pull even more money into their feudal coffers at the expense of everyone else, like (MSFT) (CSCO) (ORCL) (WMT) (PFE) to name a few.   Multi-national corporate elitists are the primary problem that needs to be dealt with in the Washington Swamp. 

Donald Trump ran on an election platform to fix this problem.  Instead the Republican tax plan that is more likely to actually become law would entrench a corporate welfare system that enriches foreign countries while dumping and ever greater burden on Americans citizens in the future.  Or, the reform tax plan may just not pass at all, leaving the status quo in place.

Beware if the Excise Tax Provision in the Republican Tax Cut plan is eliminated. – If so, then the plan will become a complete hoax pulled off on the American people.

Daniel Moore is the author of the book Theory of Financial Relativity: Unlocking Market Mysteries that will Make You a Better Investor.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

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