Tuesday, July 31, 2018

The Real Benefit of the Tax Cuts and Jobs Act to Corporate America

A recent study by Penn Wharton looks at the impact of the Tax Cuts and Jobs Act (TCJA) on federal corporate tax rates across 19 main industrial sectors over the next decade and compares them to current tax rates.  While the current administration in Washington is touting TCJA as the panacea to America's economic woes, the Penn Wharton study suggests otherwise.

I want to start this section with a definition that is used in the Penn Wharton study.  The effective tax rate is known as the effective tax rate (or ETR) which is calculated by dividing taxes paid by book income (i.e. pre-tax financial income as reported on company's income statements).   As you know, the current corporate statutory tax rate in the United States is 35 percent which will be reduced to 21 percent under the TCJA.  As you also know, most corporations pay taxes at a rate that is far lower than the headline tax rate thanks to various deductions, tax credits and tax deferral strategies; currently, the effective tax rate ranges from 18 percent (mining) to 33 percent (agriculture) and averages about 23 percent.  Under the TCJA, the effective tax rate average is projected to fall to 9 percent in 2018, however, it will double to 18 percent over the next decade as various tax provisions change. 

The authors of the Penn Wharton study calculated the effective federal corporate tax rate for various industries under both current law as well as under the TCJA's proposed amendments.  They note that there are several major provisions and phasing-out of provisions in the TCJA that will impact the calculation of ETR for each industry as follows:

1.) 2018 - corporate headline tax rate drops to 21 percent, increased equipment and software expensing, bonus depreciation is extended and expanded, net interest deceptions are limited, net operating loss deceptions are limited

2.) 2022 - Amortization of research and experimental expenditures, change in rules for the limitation of net interest deduction.

3.) 2023 - phasing out of extended and expanded bonus depreciation begins.

4.) 2026 - complete phasing out of extend and expanded bonus depreciation.

The Penn Wharton model shows that the effective tax rate average across all industries declines from 21.2 percent in 2017 to 9.2 percent in 2018.  Once the changes to various deductions begins in 2023, the decline in the effective tax rate is even smaller and is calculated at 17.33 percent.  By 2027, the decline in the average corporate effective tax is smaller yet again and is calculated at 18.27 percent, barely 3 percentage points better than it is currently and only 4.7 percentage points better than it would be under current tax law.  

Here is a table showing how widely variable the effective tax rates are for each of the 19 industries and how these tax rates will vary over time under the current law and under the Tax Cuts and Jobs Act:


As you can see, in a significant number of industries, a great deal of the tax savings under the TCJA evaporate over time.

Now, let's look at the details of the change in the dollar amounts of taxes (i.e. tax savings) each of the 19 industries will pay over the ten-year budget timeframe:

1.) Agriculture, forestry, fishing and hunting - $7.8 billion

2.) Mining - $38 billion

3.) Utilities - negative $15.6 billion

4.) Construction - $12.9 billion

5.) Manufacturing - $261.5 billion

6.) Wholesale trade - $146.5 billion

7.) Retail trade - $171.4 billion

8.) Transportation and warehousing - $62.7 billion

9.) Information - $99.2 billion

10.) Finance and Insurance - $249.4 billion

11.) Real estate, rental and leasing - $12.7 billion

12.) Professional, scientific and technical services - $22.7 billion

13.) Management of companies (holding companies) - $154.2 billion

14.) Administrative and support and waste management - $19.0 billion

15.) Educational services - $3.7 billion

16.) Health care and social assistance - $5.9 billion

17.) Arts, entertainment and recreation - negative $0.5 billion

18.) Accommodation and food services - $18.0 billion

19.) Other services - $4.6 billion

Notice that second biggest beneficiary of the proposed tax changes, thanks to the Tax Cuts and Jobs Act, is the finance and insurance sector which will benefit from about 19.5 percent of the total reduction in corporate taxes paid even though they pay only 17.8 percent of corporate taxes under current law.  No surprise there given this:


Despite Washington's touting of the Tax Cuts and Jobs Act as the ultimate answer to Making America Great Again, the Penn Wharton study shows that, while the TCJA reduces the effective corporate tax rate in 2018 to just 43 percent of its value under current tax laws, by 2027, most of that gain is lost as the effective tax rate rises to 80 percent of its value under current laws.  As well, with Corporate America's share of Washington's total revenue declining over the past decade as shown here:


...and with the mounting federal debt and rising interest rates, how long will it be before Washington is forced to raise personal taxes for those Americans who have no lobbying voice to speak on their behalf to Congress?


Monday, July 30, 2018

The War in Yemen and Saudi Royal Family Forgiveness

The ongoing Middle East war receives almost no attention from the mainstream media.  What war, you might ask?  The war between Saudi Arabia, America's second-best friend in the Middle East and Yemen, one of the most impoverished nations on earth.  It is most important that you keep in mind that this war is a religious war between two sects of Islam - the Shias which are represented by the Houthis in Yemen (and by Iran) and the Sunnis which are represented by Saudi Arabia in the form of the fundamentalist Wahhabist sect which believes that Shias are not true Muslims.

Let's open this posting with a map of Yemen for your illumination:


As you can see, Yemen is located on the heel of the Arabian peninsula with borders shared with Oman to the east and Saudi Arabia to the North. 


According to the United Nations, the conflict which began in 2011, had its roots in a political transition following an "Arab Spring"-type uprising that forced the nation's long-serving president, Ali Abdullah Saleh, to hand over power to his deputy, Abdrabbuh Mansour Hadi.  Prior to the transition, hundreds of Yemenis were killed in mass protests which called for an end to corruption and repression which was common during the Saleh presidency.  President Hadi faced a continuation of the ongoing Houthi rebellion which ended up taking over the province of Saada and neighbouring regions.  The Houthi movement began in the 1990s under the leadership of Hussein Badreddin al-Houthi, a Zaidi opposition to former president Saleh as an offshoot of Shia Islam.  Houthi was killed in 2004 by the Yemeni armed forces, an action which has led to the current Houthi war against the nation's leadership.  Here is a map showing how Yemen was divided by religion prior to the ongoing hostilities:


As you can see, Sunnis form the majority of the population and are located along the cost of the nation. Zaidi Shiites predominate in the northern highlands and, despite their differences, intermarriage between the two groups was common until recently.  Thanks to the rise of political Islam, the two groups are now at war with the Houthis being supported by elements of the Yemeni military that are loyal to former President Saleh.  

In March 2015, President Hadi was forced to flee the capital city of Sanaa by the Houthis going into exile in Saudi Arabia and then returning to Yemen on November 17, 2015 where he now governs Yemen from the port city of Aden, located along the coast of the Gulf of Aden.   Here is a map showing the expansion of the Houthi presence between 2012 and 2015:


On March 25, 2015 a Saudi-led international coalition launched strikes against the Huthis in Yemen.  The coalition consists of the Gulf Cooperation Council States (excluding Oman), Egypt and Sudan and is backed by the United States and the United Kingdom.  As we all know, the United States supplies Saudi Arabia with a very, very significant quantity of military equipment with a 2017 deal for nearly $110 billion worth of arms immediately as shown here and $350 billion worth of arms over the next decade:


Here is a map showing the current areas of military activity:


According to Amnesty International, more than 5900 civilians have been killed during the conflict, 3 million people have been forced from their homes by the fighting and 22.2 million people or 75 percent of the country's people are in dire need of humanitarian assistance. 

Here are some additional statistics:

1.) 79 percent of the nation is considered poor, up from 49 percent in 2017 

2.) per capita GDP has declined by 61 percent in the last three years

3.) less than 50 percent of health facilities are functioning

4.) 18 million Yemenis do not know how they will obtain their next meal

If you want a complete background on the war in Yemen, please click here.

With that background, let's look at a recent development and the main subject of this posting.  Here is a news release that recently appeared on the Saudi government website:


In case you weren't aware or had forgotten given the imaginative naming of U.S. military operations around the globe, Operation Restoring Hope (aka Operation Renewal of Hope) is the rather sanitized name of the Saudi-led military operation in Yemen which is allegedly aimed at protecting Yemeni civilians and fighting the so-called terrorist elements present in Yemen.  This news release from the Saudi government (aka the Saudi royal family) is particularly interesting given that it shows us the very close links between the Saudi royal family and the Saudi Wahhabist religious leadership.  This decree suggests that the religious leadership of Saudi Arabia (the custodian of the two holy mosques) will pardon all men taking part in the military operations against Yemen for any infractions (i.e. human rights abuses which I assume includes the killing of women and children and other non-combatants) that they might have incurred during their service to the Saudi royal family in attempting to rid the Arabia Peninsula of the Houthi/Shia "scourge".  Islam allows for war in the case of self defense and in the case where Islam is to be defended.  As well, war is to be conducted to avoid injuring non-combatants and according to the principles of Allah's judgement.  Here's a quote from the Qur'an 5:32:

"...whosoever killeth a human being for other than manslaughter or corruption in the earth, it shall be as if he had killed all mankind, and whoso saveth the life of one, it shall be as if he had saved the life of all mankind."

With all of this background, it is important to keep in mind that Washington unconditionally supports the Saudi royal family, most particularly with military equipment, and that the royal family and, by extension, the Wahhabi religious leadership of Saudi Arabia, has decreed that all combatants in the Yemeni war are pardoned for any misdeeds that they may have committed.  Given the humanitarian crisis that is occurring in Yemen and the millions of Yemenis that are suffering, this is nothing less than shameful and were these actions against civilians taking place in the nations that Washington defines as the "Axis of Evil", you can bet that U.S. forces would be much more heavily involved than they already are.

Friday, July 27, 2018

Prosecuting Julian Assange - A Judicial Warning

In recent days, there have been numerous reports that Julian Assange is about to be expelled from the Ecuadorian embassy in London where he has been in asylum for over six years.  While many politicians in the United States would like to get their grubby paws around Mr. Assange's neck as shown here:


We know that the underbelly of Washington (i.e. the Deep State) has long had plans in place to kill off WikiLeaks as shown here and here




While all of this sounds very clear cut from a Congressional perspective, a recent speech by David McCraw, the deputy general counsel and lead litigation attorney for freedom-of-information lawsuits for the New York Times provides us with a completely different viewpoint on the prosecution of WikiLeaks.  According to an article in the Courthouse News Service by Maria Dinzeo, McCraw's speech to the Ninth Circuit's annual judicial conference held in Anaheim, California, Mr. McCraw made the following comments to a roomful of judges and other judicial officials about the potential prosecution of Julian Assange as part of a panel on "The Law of Leaks":

"I think the prosecution of him would be a very, very bad precedent for publishers. From that incident, from everything I know, he’s sort of in a classic publisher’s position and I think the law would have a very hard time drawing a distinction between The New York Times and WikiLeaks.

Do I wish journalism was practiced in a certain way, like it is with The New York Times, The Washington Post, or The Wall Street Journal? Of course. But I also think new ways of publishing have their value. Our colleagues who are not only challenging us financially but journalistically have raised an awareness that there are different ways to report.

But if someone is in the business of publishing information, I think that whatever privilege happens to apply – whatever extension of the law that would apply – should be there.  Because the question isn’t whether he’s a journalist.  It’s in that instance was he committing an act of journalism.

He also noted that he does find some of the methods used by Assange to be discomfiting and irresponsible, particularly the dumping of unredacted documents that reveal personal information.

According to Assange's lawyers, back in 2011, there was concern that if Mr. Assange were extradited from Britain to Sweden, he could end up in the United States where he could face the death penalty as shown here:



What is critical to remember about WikiLeaks and its targets is that no one has ever denied that the documents released by Assange et al are not genuine.

Let's close with this interview with John Pilger and Julian Assange regarding the Clinton emails that were released by WikiLeaks in 2016:

"

Here's a key excerpt:

"John Pilger: The Clinton campaign has said that Russia is behind all of this, that Russia has manipulated the campaign and is the source for WikiLeaks and its emails.

Julian Assange: The Clinton camp has been able to project that kind of neo-McCarthy hysteria: that Russia is responsible for everything. Hilary Clinton stated multiple times, falsely, that 17 U.S. intelligence agencies had assessed that Russia was the source of our publications. That is false; we can say that the Russian government is not the source."

Enough said.  But, let's not let facts get in the way of a perfectly good narrative!

Thursday, July 26, 2018

Poking the Russian Bear - The Proposed National Center to Respond to Russian Threats

Never ones to be left out of a good fight, two United States senators have recently entered their names in the anti-Russia movement with a proposal to further sanction America's Cold War II foe.  Here is the announcement from Senator Bob Menendez' website:


You will notice that Senator Lindsey Graham (R - South Carolina) and Senator Bob Menendez (D - New Jersey) have put their political differences on the back burner and joined forces to beat back the Russian threat that is hanging over the heads of Americans.

As well, here's what Lindsey Graham tweeted on July 24, 2018:


Under the proposed legislation, Washington will establish a National Centre to Respond to Russian Threats.  This isn't the first time that such a center has been proposed as you can see here:


U.S. Representative Joseph P. Kennedy III (D - Massachusetts 4th) and grandson of Robert F. Kennedy, sponsored H.R. 2924 "To amend the National Security Act of 1947 to establish the National Russian Threat Response Center within the Office of the Director of National Intelligence, and for other purposes" on June 15, 2017.  Here is a summary of the missions of the center according to the bill:

"The primary missions of the center shall be:

- to serve as the primary U.S. government organization for analyzing and integrating all intelligence pertaining to threats posed by the Russian Federation to the national security, political sovereignty, and economic activity of the United States and its allies;

- to synchronize the efforts of the intelligence community regarding countering efforts by Russia to undermine such security, sovereignty, and activity;

- in coordination with the relevant elements of the Department of State, the Department of Defense, the intelligence community, and other U.S. agencies, to develop policy recommendations for the President to detect, deter, and respond to such threats and to monitor and assess Russian efforts to carry out such threats;

- in coordination with the Global Engagement Center, to examine Russian efforts to use propaganda and information operations relating to such threats; and to identify and close gaps across federal agencies with respect to expertise, readiness, and planning to address such threats.

The Director of the center shall be appointed by the DNI with the concurrence of the State Department. The Director shall: (1) ensure that the relevant federal agencies participate in the center's mission, and (2) have primary responsibility for establishing requirements for collecting intelligence regarding threats posed by Russia.

A Board of the center is established to conduct oversight.

The Director may convene biannual conferences to coordinate international efforts against such threats."

H.R. 2924 was referred to the Committee on Intelligence and the Committee on Appropriations for their consideration where it now sits gathering dust.
  
As thought that weren't quite enough, in addition, Representative Kennedy also recently cosponsored H.R. 6437, a bill entitled "To combat subversive activities of the Russian Federation ,and for other purposes" for which the text has not yet been received.

Actually, I always thought that the Pentagon served the purpose of responding to Russian threats but I guess, as shown here, with thanks to Franklin Kramer and Lauren Speranza at the highly influential Atlantic Council, that is no longer sufficient:

"Since its takeover of Crimea in 2014, Russia has become increasingly emboldened , undertaking actions that, rather than propping up a failing regime, strike directly against the functioning of Western democracy. Employing a combination of "hybrid" actions – political, diplomatic, informational, cyber-, economic, covert and low-level force – the Kremlin has targeted countries not only on the fringes of its sphere of influence, but in the heart of Europe and even the United States….

The strategy should contain six main efforts:

Create an intelligence hub focused on Russia.  NATO, the EU or, ideally, both should create an intelligence hub focused on Russia. Assessment of Russian intentions, capabilities and activities would provide the requisite agenda. Information could be gleaned and shared among the participating nations to increase the West's collective ability to recognize and respond.
Enhance and expand contingency planning. This is important, particularly in dealing with the prospect of Russian low-level force, cyberattacks and information warfare….

Use legal tools in response to foreign violations of domestic laws.  As an example, the United States recently indicted members of the Russian intelligence service in connection with the hacking of the Democratic National Committee. …More broadly, when one country has been seriously violated by Russian hybrid actions, the transatlantic community should also consider multinational sanctions as appropriate….

Bar any political finance in Europe and the United States by Russia or Russian-supported entities.  As a follow-on, existing European national mechanisms that review foreign investments or other financial transactions should enhance their focus on actions by Russian entities that could lead to detrimental impacts on the national security, economy and/or the democratic functioning of a country….

Develop a comprehensive response to Russian election interference.  This could include a voluntary code of standards for media-provided information in the context of elections, which could build on the EU's recently adopted "Code of Conduct on Countering Illegal Hate Speech Online" and draw on national laws related to defamation, privacy and objectivity – such as those that already exist in Germany and the United Kingdom….

Establish a "Coordinating Council" to work on these matters. To facilitate this coordination and go beyond the existing limited and still informal efforts between NATO and the EU, the transatlantic community should establish a "Coordinating Council." This new entity could operate on a voluntary, consensus basis – comparably to the Financial Stability Board in the financial arena – to provide coordinated diplomatic, economic, information, security and military actions among NATO, the EU, their nations and the private sector…."

Let's go back to Senators Graham and Menendez and Representative Kennedy and their bipartisan legislative proposal.  To me, the saddest thing about the whole anti-Russia narrative is that these legislative desk-jockey warriors won't be anywhere near the front lines should hostilities break out between the United States and Russia.  If it were otherwise, you can assure yourselves that Mr. Graham, Mr. Menendez and Mr. Kennedy would be doing whatever they could to prevent poking the Russian bear any further.