David R. Kotok
Cumberland, May 1, 2017
Taxes: some quick bullets.
Markets like lower taxes. People like lower taxes. Businesses like lower taxes. Devils always lurk in the details: those devils are put there by Congress.
Congress will lose if it attempts to block a tax cut. Voters understand lower tax rates and want them. Voters do not focus on longer-term deficit projections. Voters do not care about CBO scoring or a change from static scoring to dynamic scoring. Most voters care more about the ballgame score or the book club than about CBO’s long-term projections.
Conclusion: some form of a tax cut is coming.Repatriation is NOT a zero-sum game.
Money moves from a stagnant holding position to a dynamic position. The value of that dynamism is enough to motivate a company to pay a repatriation tax as long as the rate is low. We believe it makes no difference if the rate on repatriation is 8.75%, as in the Brady memo, 10% as in Mnuchin memo or some other low rate. Remember, this rate is being compared against a 35% current corporate rate. What happens with a new and lower corporate rate is another matter. This is one of those devilish details. Tying the historical 35% rate to the repatriation low rate is logical and delivers a large incentive.
Simply put: global businesses that are US based are on notice about $2 trillion. They can either move it or lose it.
The writing of a tax proposal is an art form. It takes a lot of skill and finely honed, practiced deception. Such is the nature of politics.
Here is a sterling example, surfaced by my friend Dennis Gartman (The Gartman Letter, April 26, 2017, http://www.thegartmanletter.com/). Dennis found in the Tax Reform Act of 1986.
“Subsection (f) of section 621 of the Tax Reform Act of 1986 is amended by adding at the end thereof the following new paragraphs: For purposes applying section 382 (k) (6) of the Internal Revenue Code of 1986, preferred stock issued by an integrated steel manufacturer incorporated on November 9, 1982, and reincorporated on February 11, 1983, and having its principal place of business in Trenton, Michigan, and mentioned in a letter of intent dated July 10, 1987, signed by such a manufacturer, shall not be treated as a stock.”
“Shall not be treated as Stock?” Really good tax reform policy?
Dennis then provided this commentary, which cuts directly to the issues with so-called tax reform:
“A brief internet review indicated that an individual… a lawyer of some renown at the time… bought the company in question… purchased the bankrupt assets of the company and was thereby able to use tax losses that were to expire as his and his company’s own losses, deferring income and incumbent taxes that were to have been paid for years into the future. [Editor’s note: We have the names of the company and the owner, which we secured after a web search, but for legal reasons we shall refrain from naming them here.] According to newspaper reports, the individual in question received a $26 million tax break over the next three years following his purchase of the bankrupt company for $250.00.”
We echo Dennis’ sentiments about this type of legislative mischief and applaud him for his research.
We will leave it to readers to guess whether or not there were any other “integrated steel manufacturers incorporated November 9, 1982, and reincorporated on February 11, 1983 with a principal place of business in Trenton, Michigan who are mentioned in a letter of intent date July 10, 1987.”
We conclude that markets like tax cuts. And we conclude that deceitful politicians like to use the words tax reform to sneak into law all sorts of self-serving measures – and we see the results we get in the text like the one above.
We remain fully invested in our US ETF portfolios as the market continues to celebrate the developing outlook for tax cuts. We expect a “no change” from the Fed May meeting.
Lastly, we are offering this link to a June 19, 1988 article in the Detroit Free Press: https://www.newspapers.com/newspage/99821718/. The rest of this story is left to the reader.