Mike & Co.,
Recent election news cycles have included precious little on a number significant fiscal and financial policy developments since Congress adjourned to go campaign. These developments may not be getting as much media attention as Trump’s gaffe du jour right now. But some will get more eventually.
We outline below a number of the key developments crowded out of the presidential campaign spotlight and address their relevance to the campaign and beyond.
- Child Tax Credit Plans Compared
Last week, HRC proposed an increase the child tax credit from $1,000 to $2,000 a year for each child up to age four, doubling the existing tax credit passed in the Bush tax plan, which itself was an increase from the Clinton administration’s original $500 child tax deduction.
The major difference between HRC’s plan and Trump’s child care subsidies is that the HRC plan will benefit lower income Americans. The Trump plan allows income tax payers could deduct up to the average cost of child care in their state, but excludes individuals earning over $250,000 and families earning over $500,000. But because the bottom 45 percent of income earners do not pay income tax, the benefit would favor upper middle class citizens.
The sharp criticism in the media led the Trump campaign to revise its proposal to permit up to $1,200 in spending rebates for childcare expenses for low income Americans through the EITC. The Trump plan is connected to market prices for child care on a state by state basis, reflecting the vast differences in average child care costs between high cost areas (Washington DC : $18,000/yr) and low cost areas (Mississippi : $5,000/yr).
The nonpartisan Tax Foundation estimates that HRC’s plan will cost $199 billion over the next ten years, which is in line with the $150-$200 billion range estimated by the Clinton campaign, a 40.1 percent increase from current policy cost. The Trump campaign says their plan will cost $25 billion over the next decade, but the ambiguities of the plan have prevented outside analysts from providing an accurate cost estimate.
The campaigns offered differing pay-fors: HRC claimed higher income taxes on the richest of Americans would pay for her program while Trump vaguely suggested eliminating waste in the unemployment insurance program to fund his plan. HRC’s plan would make the tax credit fully refundable, down from the current $3,000 threshold.
Electoral Implications | Trump’s child care plan is yet another example of his commitment to Trumped up trickle down, a case of his plans to help his friends while taking advantage of every day Americans.
- Fed Rate Hike in December?
At a Fed press conference on Friday, chairwoman Janet Yellen outlined several perplexing trends in the labor market which have made determining appropriate monetary policy difficult. The federal funds rate has not been above 0.5 percent since the recession and it is currently fluctuating between 0.25% and 0.50 percent. A rate hike has seemed inevitable for months, and it now seems that it will come in December b
A major issue raised Friday was whether keeping interests rates low encourages adults who are neither seeking employment or working to re-enter the workforce. Some questioned whether monetary policy is responsible for the relatively slow economic recovery; others blamed demographic shifts and slow productivity growth. Yellen suggested the lack of growth is due to households and businesses holding too much debt to make risky investments with low interest rates. Despite ostensibly lunfavorable investment side indicators, consumer spending increased a seasonally adjusted 0.6 percent in September and 2.7 percent above 2015 levels. Policy makers and academics have also not been able to understand why inflation, hovering at about 1 percent, has been so to increase since the recession.
Election Implications | Trump has repeatedly accused the Fed of keeping rates low to hide underlying economic trouble. HRC has provided relatively little comment about the nonpartisan board, but continuing to defend the growth led by the Obama administration makes sense — September consumer spending increases are additional reasons for optimism.
- Puerto Rico: New Austerity Measures
On Friday, a fiscal control board created by Congress charged with re-ordering Puerto Rican finances declared they would approve all non-ordinary public transactions, including the issuance of debt. This move came despite Gov. Alejandro Garcia Padilla’s plea to limit austerity measures as Puerto Rico attempts to restructure $70 billion of bond debt. The board also announced that major public institutions — including the island’s development bank, its largest university, and several utilities — would need to develop independent fiscal plans.
The fiscal oversight board is led by Jose Carrion III, a Republican nominated insurance executive based in San Juan. He is joined by six other board members, three appointed by Republicans and three by Democrats. The board was created in June when a rare piece of bipartisan legislation prevented creditors from suing Puerto Rico when they began defaulting on their debt. Had they been able to, public services would have been cut quickly and deeply, a grave fear of the Obama administration. But Treasury Secretary Jacob Lew was able to work out a deal with House Republicans, led by Paul Ryan, who feared that not permitting a debt restructure would have made mainland Americans responsible for the debt in the future.
- Warren and Progressive Priorities
Friday morning Sen.Elizabeth Warren released a letter to Pres. Obama urging him to remove SEC Chair Mary Jo White. In the letter, Warren accuses White of an “anti-disclosure agenda,” citing her failure to strengthen political spending disclosure requirements on publicly traded companies, which has not been a priority under White’s tenure. A rider in last month’s Continuing Resolution prevents the SEC from implementing any law on political disclosures, but progressives argue that the rider doesn’t prevent working on a regulation to be implemented after the CR expires. This is the most recent in a series of grievances Warren and other progressive groups have had with White, who has previously described the chair’s work as “extremely disappointing.”
While there is little chance that the president will remove White, this is part of a push to remove Obama appointees deemed too close to big business and to give progressives a stronger role in appointments under the next president. Progressives have recently attacked other moderate Obama appointees, including their successful block of Antonio Weiss for Treasury Secretary in 2015. Progressives have also called for the likely new Senate Democratic Leader Chuck Schumer to publicly announce his intent to further regulate Wall Street.
Some have raised a question over the chairmanship of Senate Banking following the election. Concerns center around the possible re-election of former Sen. Bayh. If Bayh regains his seat, he would be the ranking member it chair of the Committee, if seniority is calculated based on cumulative years served, outflanking current ranking member, Sen. Sherrod Brown.
But here is little chance that this will come to pass. Sources close to Democratic leadership have rejected the idea of Bayh over taking Brown for the Chairmanship, as it would go against the norm to calculate seniority cumulatively instead of concurrently.
Election Implications | The progressive Democrats in Congress, perhaps assuming Democrats gain control of the Senate and seeking to set the agenda for the coming Congress on economic policy. The next president will likely name a new Chair of the SEC and other key agencies. Sen. Warren and progressives are seeking to serve notice that they will make noise in this space if need be. Nominations may be a flashpoint.
- Earnings Stripping Regs
Last week, Treasury issued a revised final rule §1.385-2, under regulation 385 of the Internal Revenue Code in “interest stripping” that carved out debt instruments issued by most financial institutions. The Treasury proposal was targeted at transactions that use inter-affiliate debt to take deductions in a higher-tax jurisdiction and receive the income in a no- or low-tax jurisdiction. The practice is far more pervasive than headlines implied, with implications for ordinary operations of banks of any size.
Treasury carved out an exception to the rule for debt instruments issued by an “excepted regulated financial company,” including insured depository institutions, bank holding companies and certain savings and loan holding companies. Treasury did not lift documentation requirements for regulated entities, but S corporations are exempt from all aspects of the final rule.
Documentation under the final rule is treated as timely so long as it is prepared by the time the filer’s federal income tax return is filed. The final rule also provides a rebuttable presumption for documentation errors provided that covered entities are otherwise in compliance, instead of per se re-characterization of the debt to equity as proposed. Treasury also delayed the implementation date, with the final rule to come into force only for debt instruments issued on or after Jan. 1, 2018.