Japan Hikes National Sales Tax Despite Recession Fears

Japan has increased its national sales tax to 10% from 8% on Tuesday, a significant policy change that could tilt the world's third-largest economy into recession by depressing consumer sentiment, reported Market Watch.

The last two times policymakers increased the sales tax, 2-point rise to 5% in 1997 and another to 8% in 2014, an economic contraction shortly followed.

Prime Minister Shinzo Abe twice delayed the tax hike in recent years.

Abe has indicated the tax is now unavoidable given the demographic challenges in the aging country. He said the tax would help pay down the enormous national debt, and position the country towards more financial responsibility in balancing the budget by 2025. But taxing the consumer as the economy is deteriorating could be a recipe for economic disaster in 2020.

Japan's GDP expanded at an annual pace of 1.8% over the summer. The economy is quickly slowing into fall, thanks to the trade war between the US and China. Global trade volumes are plummeting through 2H19, has taken a toll on Japan's exports. The tax will likely sideline the consumer in 2020, force them into a savings pattern that could tilt the economy into a recession next year, similar to the tax increase in 2014.

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Congress courageously sticks US taxpayers with a $6 trillion liability

SECURE stands for “Setting Every Community Up for Retirement Enhancement”, which is pretty clever when you think about it.

People want to associate their retirement with a word like ‘secure’. So even without knowing anything about the law, most people will probably have good feelings about it based solely on the name.

But if you actually read the legislation, SECURE contains a number of predictably terrible consequences.

For starters, SECURE is a basically a gigantic tax increase. And it’s a tax increase that will particularly affect your children when you pass away.

Under current law, you could leave your IRA to your children in a fairly tax efficient way. That’s actually one of the nice things about an IRA.

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Trump: "Amazon Pays Little Or No Taxes, Puts Thousands Of Retailers Out Of Business"

If President Trump's tweet was not enough, White House spokesperson Raj Shah has just confirmed that tax policies need to catch up to Amazon, and President Trump would support tax changes aimed at leveling the playing field, which now favors the online retailer as Amazon has advantage over brick and mortar stores.

“Right now, there is no Internet sales tax and as a result companies like Amazon can buy and sell goods without having to pay basic retail taxes,”

AMZN is extending its losses on these latest headlines...

As we detailed earlier, the main driver behind yesterday's FANG plunge, was a report in Axios, according to which it was not Facebook that Trump wants to go after, but rather Amazon:

“He’s obsessed with Amazon,” a source told Axios. "Obsessed", and added that Trump has allegedly talked about changing Amazon’s tax treatment because he’s worried about mom-and-pop retailers being put out of business. Another Axios source said that POTUS has "wondered aloud if there may be any way to go after Amazon with antitrust or competition law."

Trump’s deep-seated antipathy toward Amazon surfaces when discussing tax policy and antitrust cases. The president would love to clip CEO Jeff Bezos’ wings. But he doesn’t have a plan to make that happen.

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Why Wall Street Is Furious At The Trump Tax Plan

Back in October 2016, the "millionaire, billionaire, private jet owners" of America's elitist, liberal mega-cities (A.K.A. New York and San Francisco) celebrated the tax hikes that a Hillary Clinton presidency would have undoubtedly jammed down their throats proclaiming them to be a 'patriotic duty'.  Unfortunately, now that Trump has given them exactly what they apparently wanted...an amazing opportunity to 'spread their wealth around"...they're suddenly feeling a lot less patriotic. 

Of course, as we've noted numerous times, while most people across the country and across the income spectrum will benefit from the Republican tax reform package, the folks who stand to lose are those living in high-tax states with expensive real estate as their SALT, mortgage interest and property tax deductions will suddenly be capped.  And, as Bloomberg points out today, that has a lot of Wall Street Traders in New York drowning their sorrows in expensive vodka and considering a move to Florida.

One trader, sipping a Bloody Mary on a morning flight to somewhere more tropical, said he’s going to stop registering as a Republican. En route, he sent more than a dozen text messages ripping the tax bill. 

A pair of hedge fund managers said the tax bill is too tilted toward corporations, rather than individuals who should get more relief. 

“My clients are hard-working young professionals on Wall Street. I don’t have a lot of good news for them,” said Douglas Boneparth, a financial adviser in lower Manhattan who counsels people throughout the industry. Most are coming to terms with it. “I don’t think anyone is going to be surprised by the economic reality.”

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Goldman Sachs Maintains The Most Tax Havens Of Any US Company... By Far

Multinational companies based in the United States are able to avoid paying an estimated $100 billion in federal income tax every year through the use of tax havens.

As Statista's Niall McCarthy notes, a recent report from the Institute on Taxation and Economic Policy has found that 366 of America's largest 500 companies maintain 9,755 tax haven subsidiaries holding over $2.6 trillion in accumulated profits.

You will find more statistics at Statista

Despite only having three tax haven subsidiaries in Ireland, Apple stashes the most cash off shore by far, some $246 billion which helps the company avoid $76.7 billion in U.S. taxes.

The Goldman Sachs Group maintains the most tax havens of any large U.S. company by far with 905 in total. That includes 511 in the 511 in the Cayman Islands (though the company does not have an office there), 183 in Luxembourg, 52 in Ireland and 41 in Mauritius.

Morgan Stanley is in second place with 619 tax haven subsidiaries while ThermoFisher Scientific rounds off the top three with 199.

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The “Trump Tax Plan” - Details & Analysis

Business tax changes:

• A 20% corporate tax rate. This is the first time Trump has publicly backed down from one of his earliest campaign promises: a 15% corporate tax rate. The budget math required for a 15% rate was too difficult, so the somewhat higher rate is the opening bid. The current statutory federal rate is 35%.
• A 25% rate for pass-through businesses. Instead of getting taxed at an individual rate for business profits, people who own their own business would pay at the pass-through rate. The plan also says it will consider rules to prevent “personal income” from being taxed at this rate. Mnuchin previously suggested there may be limitations on what types of businesses get this rate — it could apply only to goods producers and not service-oriented companies to prevent people from creating limited-liability corporations to store their assets and receive a lower rate.
• Elimination of some business deductions, industry-specific incentives, and more. There are few details, but the plan includes language regarding the “streamlining” of business tax breaks.
• A one-time repatriation tax. All overseas assets from US-owned companies would be considered repatriated and taxed at a one-time lower rate — this is designed to bring corporate profits back from overseas. Illiquid assets like real estate would be taxed at a lower rate than cash or cash equivalents, and the payments would be spread out over time. While there is no precise number in the plan, officials have indicated the rate could end up somewhere around 10%.

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From Coke To Coors: Philly Soda Tax Leading To Alcoholism As Beer Now Cheaper Than Soda

Perhaps The Burning Platform summarized the idiocy of Philadelphia's soda tax better than anyone to date:

In a shocking development, the Philadelphia soda tax is a big fucking fail. Who could have predicted that. Democrat government drones and their brain dead minions are so desperate for money to fund their gold plated union pensions and bloated salaries, they lie, cheat and tax the poor into oblivion. Result: lost jobs, further impoverished poor people, no help for children, more closed businesses, and a further hole in the city budget. But at least the city union workers can keep their gold plated pensions – for now. Maff is hard for liberals, but it always wins in the end.

But, as The Washington Free Beacon points out, the unfortunate side effects of Philly's disastrous soda tax may not be limited just to the economic consequences enumerated above.  As a study by the Tax Foundation recently found, there are social consequences as well with people now choosing to substitute beer for soda in light of the fact that, well, beer is just cheaper.

Philadelphia's tax on sugary drinks has made soda more expensive than beer in the city.

The Tax Foundation released a new study on the excise tax last week, finding that the 1.5-cent per ounce tax has fallen short of revenue projections, cost jobs, and has forced some Philadelphians to drive outside the city to buy groceries.

The study finds that the tax is 24 times higher than the Pennsylvania tax rate on beer.

"Purchases of beer are also now less expensive than nonalcoholic beverages subject to the tax in the city," according to the study, written by Courtney Shupert and Scott Drenkard. "Empirical evidence from a 2012 journal article suggests that soda taxes can push consumers to alcohol, meaning it is likely the case that consumers are switching to alcoholic beverages as a result of the tax. The paper, aptly titled From Coke to Coors, further shows that switching from soda to beer increases total caloric intake, even as soda taxes are generally aimed at caloric reduction."

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Goldman Pours Cold Water On Trump's Fiscal Stimulus Plan

Goldman Sachs' Chief US Political Economist Alec Phillips writes that tax reform faces a risk of failure, but tax cuts remain likely... in 2018 and investors need to stay realistic about the impact of fiscal stimulus.

President Trump’s campaign proposals initially raised expectations of several forms of fiscal stimulus, driving investor optimism on both infrastructure spending and various elements of tax reform. However, we expect only tax cuts to have a meaningful effect on growth over the next couple of years. Three risks are behind this view: tax reform failure, fiscal constraints, and delayed enactment.

Debates, delays, distractions

First, tax reform faces a real risk of failure. If Republicans pursue revenue-neutral tax reform, they are likely to encounter the same challenges they encountered in passing their health legislation. Inclusion of controversial proposals like the border-adjusted tax (BAT) or even the repeal of corporate interest expense deductibility, for example, could sink the effort. Views on these issues do not follow traditional party lines, which could easily lead to some Republican opposition (we have already seen significant opposition to the BAT, for example). With few if any Democratic lawmakers likely to vote for the tax bill, Republicans would need nearly unanimous support from their own party. Thus, while revenue-neutral tax reform might be preferable from a policy perspective, imposing this restriction would lower the odds of enactment by next year.

In light of the challenges tax reform faces, we believe that President Trump, who did not emphasize revenue-neutrality during the campaign, is likely to eventually endorse more limited reforms that result in a net tax cut. However, the size of such a cut would be limited by fiscal constraints; centrist Republican lawmakers seem especially likely to balk at large tax cuts that would eventually require deep spending cuts to maintain fiscal sustainability. Dynamic scoring and other budget accounting strategies might provide several hundred billion dollars’ worth of room for a tax cut in 10-year budget projections, but alone would allow for only a very modest cut. Our current expectation is a tax cut of $1.75tn over ten years, taking effect in 2018.

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Trump's Tax Cuts Imply Billions Worth Of Deferred Tax Asset Writedowns For Wall Street Banks

Corporate tax reform has been a key policy initiative of Trump's as he has called for slashing the corporate tax rate from 35% down to 15%.  While this is welcome news for most companies, it would result in some fairly staggering writedowns for Wall Street's largest banks that amassed substantial net operating losses in 2008 and 2009.

According to Bloomberg, Citibank would be hardest hit with writedowns that could hit earnings for up to $12 billion or more. 

Donald Trump’s planned U.S. corporate tax cuts could translate to a big one-time earnings hit for many of the biggest U.S. banks, thanks to tax benefits they generated during the 2008 financial crisis.

Citigroup Inc. would take the deepest earnings hit -- perhaps $12 billion or more, according to recent estimates by the bank’s chief financial officer and several banking analysts. Mark Costiglio, a Citigroup spokesman, declined to comment. Others, including Bank of America Corp. and Wells Fargo & Co. could face multibillion-dollar writedowns.

The banks might have to write down deferred tax assets, which often pile up when a company loses money and can’t immediately enjoy the tax benefits of those losses. Any writedowns won’t have much impact on capital levels for the banks for regulatory purposes, and lower taxes will allow for higher earnings in the long run. But a one-time hit to earnings can make for a bruising quarter -- and even year -- for a bank’s results.

“It’s a traumatic experience for companies with large” amounts of such assets, said Robert Willens, an independent tax and accounting expert in New York. “In one fell swoop, a significant part of their net worth goes up in smoke.”

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"Rampant Fraud" Exposed In Obamacare Exchanges: 100% Of Fictitious Enrollees Obtained Subsidies

A recent "undercover enrollment" investigation conducted by the Government Accountability Office (GAO) found that pretty much anyone can sign up for Obamacare and receive taxpayer funded incentives without having to worry about pesky little details like proving citizenship, identity or income-based needs.  In fact, the study found that every single one of its 15 fictitious Obamacare applications were actually approved for coverage despite intentional application omissions, fictitious identification and citizenship documentation, etc. Moreover, all of the applications were also approved for federal subsidies which totaled $60,000 per year. 

Per the GAO:

Our undercover testing for the 2016 coverage year found that the eligibility determination and enrollment processes of the federal and state marketplaces we reviewed remain vulnerable to fraud, as we previously reported for the 2014 and 2015 coverage years. For each of our 15 fictitious applications, the marketplaces approved coverage, including for 6 fictitious applicants who had previously obtained subsidized coverage but did not file the required federal income-tax returns. Although IRS provides information to marketplaces on whether health-care applicants have filed required returns, the federal Marketplace and our selected state marketplace allowed applicants to instead attest that they had filed returns, saying the IRS information was not sufficiently current. The marketplaces we reviewed also relaxed documentation standards or extended deadlines for filing required documentation. After initial approval, all but one of our fictitious enrollees maintained subsidized coverage, even though we sent fictitious documents, or no documents, to resolve application inconsistencies.

For each of our 15 fictitious applications, the federal or state-based marketplaces approved coverage at time of application—specifically, 14 applications for qualified health plans, and 1 application for Medicaid.  Each of the 14 applications for qualified health plans was also approved for APTC subsidies. These subsidies totaled about $5,000 on a monthly basis, or about $60,000 annually. These 14 qualified-health-plan applications also each obtained CSR subsidies, putting the applicants in a position to further benefit if they used medical services.

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Treasury Implements New Rules Aimed at Inversions, Other Tax Strategies, Scuttling Pfizer-Allergan Deal and Evoking Howls from Pharma

Surprisingly, the Treasury Department took aggressive action to make it much more difficult to do corporate inversions, a recently-popular strategy by which a US company was acquired by a smaller firm in a lower-tax foreign jurisdiction. Voila! The new home country is where the taxes are filed, lowering the tax rate. The merged companies would engage in additional strategies to further lower the tax bill. Within hours of the announcement, Pfizer executives had decided to scupper their $150 billion merger with Allergan, which would have moved Pfizer’s headquarters to Ireland.

It seems out of character for a business-friendly Administration to take this tack. Last year, the Treasury announced some measures intended to curb inversions, which had recently become both visible and controversial. Yet almost immediately after the rule change, the widely-discussed Hortons-Burger King merger took place, which arguably was not driven mainly by tax considerations. That may have been seen as an embarrassment. Moreover, as the planned Pfizer-Allergan deal illustrates, many of the inversions were being done by pharmaceutical companies, which are deservedly unpopular right now. Drug companies overall have been pushing through price increases at rates well in excess of the inflation rate, and the proceeds have gone for stock buybacks, dividends, executive pay, and marketing over R&D. And to add insult to injury, US pharmaceutical companies get considerable subsidies in the form of large amounts of government-funded research. And companies like Valeant represent the McKinsey vision for what the industry should look like: patent trolls who maximize the value of their intellectual property, rather than having any real interest in combatting disease.

So the open question is whether Treasury intended its rule changes last year to be a warning shot, and the parties that should have gotten the message decided to ignore it, or that the Administration was particularly offended or embarrassed by the Pfizer-Allergan merger and decided to rouse itself.

One reason the Administration could act is that countries in advanced economies are coming to the point of view that corporate tax minimization has gone to far. Admittedly, the austerian policies of the Eurozone are no doubt a big driver: countries that are budget-starved and squeezing their own citizens can’t afford to let big corporations be the equivalent of tax scofflaws, even if their moves are kosher under the current tax codes. From a European Commission press release this January:

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Is The Allergan-Pfizer Deal Over? What Wall Street Thinks

Yesterday's stunning announcement by the US Treasury, which released a report titled  "Treasury Announces Additional Action to Curb Inversions, Address Earnings Stripping", and which was clearly aimed at ending not only all tax inversions, but the biggest pharma M&A deal in history, Pfizer's tax-inverting takeover of Allergan (pardon Actavis) hit AGN like a ton of bricks, sending the stock crashing 20%. 

As we previewed last night, we expect numerous M&A arbs to be puking up blood this morning, following the biggest spread blow out in recent history in a $100+ billion deal that involved virtually everyone, from plain vanilla funds to the fastest of the fast money.

But is the deal over? Here are some Wall Street opinions (via BBG).

Citi: "Deal likely to be over"

U.S. ownership of combined Pfizer-Allergan will probably approach and may exceed 80% threshold under new Treasury Dept. regulation, "likely precluding" deal from taking place as an inversion, Citi analyst Liav Abraham says in note.

Even if domestic ownership is in 60%-80% range, Citi says PFE would probably have difficulty importing its offshore cash balances, providing sufficient cause for the deal not to move forward

Expects AGN will see multiple contraction over near term as deal had insulated stock from recent multiple contraction in specialty pharma; says AGN warrants premium to peer group due to earnings quality, growth profile and balance sheet,

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