G&G Associates - Your Taxes Are Likely Going Down (For Now)

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Your Taxes Are Likely Going Down (For Now)

Hotep (Peace) G&G Readers,

Tax "reform" is finally here.  Last week, Congress passed the most significant changes to the U.S. tax code in more than 30 years.

Why do I write ‘reform’?

Because as expected, the bill falls short of the dramatic improvements many had hoped for. It won't simplify the tax code in any meaningful way. It won't make it any less time-consuming or expensive for most folks to file their annual returns. And it won't significantly ease the tax burden for most Americans over the long term. But it isn't all bad.

According to non-partisan think tank the Tax Policy Center ("TPC"), most Americans should expect to see a modest reduction in their tax bill next year. The TPC reports 143 million will pay lower federal income taxes in 2018, compared with just 8.5 million who will pay more.

Overall, it found taxes will fall for all income groups on average. Folks earning $10,000 or less should expect to keep an extra 0.1% on average, while those earning $500,000 or more will see an extra 4%. Folks in the middle – those who earn between $50,000 and $75,000 per year – should expect to a see an extra 1.5% on average.

Congress' own independent auditor, the Joint Committee on Taxation, reported similar results. It found the average tax rate would fall from 20.7% to 19% under the law, including a drop from 14.8% to 13.5% for those in the middle tax bracket.

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Unfortunately, these cuts may not last long

Under the current bill, these individual tax cuts will expire in 2025. If no change is made before then, today's tax cuts will become tomorrow's tax hikes. Under this scenario, the TPC estimates a majority of Americans – including 69.7% of those in the middle – would pay even higher taxes than what they pay under our current law.

To be fair, Republicans say they won't allow these tax cuts to expire. But if they weren't able to pass a permanent tax cut today – under nearly ideal circumstances – how certain is it they'll be able to extend these cuts in the future?

The news is better for many companies...

The plan will permanently slash the corporate tax rate from 35% today to 21%. It will also repeal the current 20% corporate alternative minimum tax, exempt companies from paying taxes on money earned overseas, and lower the "repatriation tax" on overseas earnings from 35% to between 8%-15.5%.

These changes could drive higher earnings for a huge number of firms – particularly those based in the U.S. – across a range of industries.

But not every company will benefit...

In fact, the plan could create even bigger problems for those carrying large debt loads. As the Journal reported this morning (emphasis added)...

Full deductibility of interest has long made borrowing more attractive for companies when they needed money, instead of raising capital through selling equity...

The tax overhaul would essentially limit the net interest payments a company can deduct to 30% of its EBITDA, or earnings before interest, taxes, depreciation, and amortization. Any amount above that level would be taxable.

So if a company borrowed $1 billion at an interest rate of 5%, and its existing interest payments were already above the 30% threshold, it would have to pay an extra $10.5 million a year in taxes – $50 million in interest, taxed at the new corporate tax rate of 21%

In other words, heavily indebted companies that are already struggling could soon see the costs to carry those debts soar even higher. More from the Journal...

J.C. Penney (JCP) which has speculative credit ratings and more than $4 billion in debt, said in its third-quarter Securities and Exchange Commission filing in November that disallowing tax deductions on interest "could have a material adverse effect on our results of operations and liquidity."

Regular GGIS Portfolio Subscriber readers know weak corporate credits like the aforementioned department-store chains are already unlikely to survive the next credit-default cycle. But despite the bullish headlines, the new tax plan could actually accelerate their demise.

Speaking of the next credit-default cycle...

Longtime readers know I've been covering the growing risks in subprime auto lending for years. In fact, Clearly, many private-equity investors weren't paying attention. I hope they are now. As Bloomberg reported the following last week...

Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out...

In the years after the financial crisis, buyout firms poured billions into auto finance, angling for the big profits that come with offering high-interest loans to buyers with the weakest credit. At rates of 11 percent or more, there was plenty to be made as sales boomed. But now, with new car demand waning, they've found the intense competition – and the lax underwriting standards it fostered – are taking a toll on profits.

Delinquencies on subprime loans made by non-bank lenders are soaring toward crisis levels. Fresh investment has dried up and some of the big banks, long seen as potential suitors, have pulled back from the auto lending business.

In short, these firms are getting squeezed from both sides... Losses are rising on existing loans as borrowers fall further and further behind. Meanwhile, banks are tightening credit in response to rising delinquencies and falling auto sales.

Here’s to Good Health, Wealth and Retirement!

Ankh Uja Snb (Life, Health & Strength)
Asar Maa Ra Gray

G&G Associates
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“Philosophers aren’t psychics … they are good historians. Knowing your history will allow you to interpret and understand the present … Knowing how to interpret the present, will allow you to predict the future.” Dr. Kaba Kamene

LEGAL NOTICE: This work is based on what I’ve learned as a financial researcher and analyst based SEC filings, current events, interviews, investment reports, corporate press releases and what I've learned as a financial consultant. It may contain errors and you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Nothing herein should be considered personalized investment advice.