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Tax Reform And Interest Rates - The Nexus

Kaight | Oct 19, 2017 | 342 posts since 2011

The economy is doing well right now. The stock market is strong, employment is up, people are more optimistic about their prospects going forward. But this situation must endure and strengthen, in my view, in order for interest rates eventually to become higher. This article

http://dailycaller.com/2017/10/19/fortune-500-ceo-deliver-on-tax-reform-or-we-pull-out-millions-in-america/

points to the extent to which all this upbeat economic activity might be "on the come".

There is great antipathy for President Trump in America now, at least in certain quarters. In particular of concern is Republicans in Congress who hate him . . . . possibly enough to squirrel a tax cut so Trump is denied the positive outcome it likely will bring. As the article points out, lack of an anticipated tax cut could mean the end of the current positive economic expansion. In my view, at least, that also would result in interest rates remaining close to present levels.

So keep an eye on tax reform progress. If it all goes south, like health care reform did, you might want to adjust your CD buying accordingly.

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Bozo | Oct 20, 2017 | 1,276 posts since 2011

Kaight, I've been pushing the "sell" button for quite some time. Have you? It is ever so much easier to sell into a Trump bump, than sell into a Trump dump.

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Ally6770 | Oct 20, 2017 | 2,604 posts since 2010

30% of people making between $50,000 and $150,000 will be paying more in taxes while others could get a average $50 decrease in taxes, unless your in the top 10%.
Next year 12% of filers would have to pay about $1,800 more on average under the provisions of the framework, the Tax Policy Center estimates. That includes about 13.5% of middle income filers, who would pay an average of $1,000 more.
And more than a third of those making between $150,000 and $300,000 would pay about $2,880 more on average, primarily because the GOP framework calls for the repeal of most itemized deductions, including the lucrative state and local tax deduction.
http://money.cnn.com/2017/09/29/news/economy/gop-tax-reform-middle-class/index.html

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Kaight | Oct 20, 2017 | 342 posts since 2011

I am sympathetic to a desire by others today to personalize almost any writing. I'm probably guilty myself of that same failing. But in the present instance, considering this is Ken's website and Ken specializes in matters influenced strongly by interest rates, the OP seeks to explore an aspect thereof.

The question here is one of what might influence interest rates going forward. The hypotheses is that level of business and economic activity generally is an important factor in that realm. The nexus is that absent the salutary impact of anticipated and hoped for tax reform on business and commerce, the present vigorous activity could wither, with a concomitant depressing impact on the interest rates upon which so many of Ken's readers rely.

Interest rates are a function of numerous factors. I'm merely suggesting this tie-in to tax reform could be one factor in that mix.

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Kaight | Oct 20, 2017 | 342 posts since 2011

Charlie Gasparino opined on this today. While Charlie's focus is mainly on stocks, I continue firmly to believe the current healthy stock market strongly supports prospects for higher interest rates going forward. Said another way, I think if the stock market tanks that interest rates are unlikely to ascend further, and could even retreat. Here is Charlie's piece:

http://nypost.com/2017/10/19/failure-on-tax-cuts-really-could-tank-the-markets/

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Ricochet | Oct 20, 2017 | 425 posts since 2010

opening link
sounds like a bunch of 1930s' gangsters threatening to throw a bomb in your window

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lou | Oct 21, 2017 | 746 posts since 2010

With the budget deal getting 51 votes in the Senate, it is looking more likely we will get a tax cut, or hopefully simplification of the tax code, this year. The one Republican who voted against the budget, Rand Paul, indicated he would vote for a tax cut. People are too pessimistic because of the Obamacare fiasco, but tax reform/cuts is an entirely different dynamic. McCain, Collins and Murkowski are not likely to vote against it. They know without it, they may be in the minority in the next term, which would demote them from chair of their committees, in effect emasculating them of any power.

People here are making the mistake of treating the mixed emotions many Republicans have with Obamacare with tax cuts also, an issue that almost every Republican supports, otherwise you wouldn't be a Republican. It's hard to know what it will look like in its final form, but I am certain we will see legislation passing either this year or shortly thereafter.

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Bozo | Oct 21, 2017 | 1,276 posts since 2011

Lou, a more arcane issue is whether any tax reform bill would be subject to rules regarding reconciliation. If not, it could be filibustered in the Senate. I'm less sanguine than you. I think this tax reform is being rushed, and that might doom it.

For example, one idea being floated is to basically cap 401K contributions at a very low level (say $2400/year) to push folks into Roth IRAs. That would enhance current tax revenue, which could increase the odds of a tax package falling within reconciliation. But it would elicit howls and screams from "middle income" workers and financial institutions who rely on the current system, not to mention the employer match. One might say, it's complicated.

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lou | Oct 21, 2017 | 746 posts since 2010

The budget bill, which recently passed with 51 Republican votes, allows the Senate to pass tax reform with 51 votes.This is why I am encouraged that something will happen, unlike the Obamacare fiasco which never got 50 votes in any of its iterations.

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Bozo | Oct 21, 2017 | 1,276 posts since 2011

Lou, I guess it's up to the Senate Parliamentarian to decide whether reconciliation rules apply.

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Bozo | Oct 21, 2017 | 1,276 posts since 2011

Lou, the employer match is a huge issue. Employer matches are often set forth in employment agreements. The match applies to 401K contribs, not to Roth IRAs*. One wonders if the GOP solons have thought through this issue? I suspect not.

*For example, to my knowledge, there is no way for an employer[ to track, much less match, a contribution to a Roth IRA. Backdoor Roth IRAs (funded with a tax refund) are a good example.

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Bozo | Oct 22, 2017 | 1,276 posts since 2011

Lou, further to my post of 22 hours or so ago, fiddling with 401K contribs is a minefield. We all know many folks are woefully unprepared for retirement, and intend to keep working until they "die at their desk". If they have a 401K plan, and are of a certain age, they can contribute "catch-up" contributions well into their dotage, if they continue working. Should any tax bill eliminate this "catch-up" feature, folks may just throw in the towel and retire. Retired folks and their former employers don't pay FICA tax.* I think serious analysis of any proposed tax bill needs more than roughly 20 working days, the amount of time remaining for reconciliation.

*An interesting wrinkle: Folks who continue to work past age 70 continue to pay FICA, as do their employers. I'll let the Congressional Budget Office score that one.

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Bozo | Oct 22, 2017 | 1,276 posts since 2011

Lou, another wrinkle, of which I am sure you are aware, so long as a person continues to work, and has a 401K plan, RMDS are not required until the calendar year of retirement. Retirement is loosely defined. If an employee throttles back his or her hours, say to five or ten hours per week, is that employee still "employed"?

I mean, seriously, just dealing with the "ins-and-outs" of tax-deferred plans could take legions of tax wonks weeks, if not months. And that's just one little cubby-hole of the Tax Code.

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lou | Oct 22, 2017 | 746 posts since 2010

I haven't really followed the debate on 401K's and what the Ways and Means Committee may propose in this area, although I recognize your legitimate concerns. Of course, the problem is what tax loopholes do you plug to raise the revenue so tax rates can be lowered, which is almost always on balance good public policy. I would certainly focus on other tax revenue enhancers before making changes to the deductibility of 401K contributions. Placing a cap on state and local tax deductions, as well the tax exemption of municipal bond interest, should be definitely be prioritized before opening the pandora's box of retirement savings.

Everyone of these loopholes will be battles, but I think the politics now favor tax reform. Republicans know they will be signing their death warrant if they don't get something accomplished.

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Bozo | Oct 22, 2017 | 1,276 posts since 2011

Lou, every ox has it's gore, so to speak. Further to your examples, eliminating the deduction for state and local taxes carves out Republican votes in high-tax states. Tax preferences for muni bond interest, well, you'd get resistance from all over the country.

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lou | Oct 23, 2017 | 746 posts since 2010

The irony is the deductibility of state and local taxes and the muni interest exemption favors the wealthiest Americans, something you would think Democrats would be opposed to. The Democrats are over the map regarding tax reform: no tax cuts for the top 1% but don't you dare take away any on their tax breaks.

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Bozo | Oct 23, 2017 | 1,276 posts since 2011

Lou, as I said, it's complicated.

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Bozo | Oct 23, 2017 | 1,276 posts since 2011

The drama continues. Trump now tweets that 401Ks won't be affected. Whatever that means. Actually, the latest leak from "knowledgeable sources" (whoever they are) proposes keeping the 401K but capping the pre-tax at $9000 (down from the current $18,000 and $24,000 for catch-up). Candidly, that makes some sense.

Most folks enrolled in 401K plans contribute well below $9000, and the match (if any) would still apply. From a purely political standpoint, seems like a fair compromise. High earners could still avail themselves of the $9000 401K exclusion, and use Roth IRAs for the balance. Of course, Roth IRA limits and age restrictions might have to be tweaked, but that's just a bookkeeping issue.

Example: Joan is 70 1/2 years old. She continues to work. She currently uses the "catch-up" provision in the 401K to contribute $24,000/yr, tax-deferred. Should the 401K limit be reduced to $9000, she could then contribute $9000 via the 401K, and $15,000 to a Roth IRA if (and this is a big if) the Roth rules are changed. Her employer match might take a bit of a haircut, but the key would be to loosen up the Roth IRA limits and age restrictions.

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