Washington Insider - Wednesday

Possibly Phasing in Tax Cuts

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Commerce Department Memo Backs Up US View That China Is Not a Market Economy

China's economy continues to be one that is not a market economy, according to a 205-page memo released by the U.S. Commerce Department Monday. The memo was in conjunction with last Friday's preliminary finding by the Commerce Department that Chinese aluminum foil is being dumped on the U.S. market. China has argued that under its terms of joining the WTO 15 years ago, countries are required to change their methodologies for calculating antidumping duties as non-market economy status usually results in higher antidumping duties.

"At its core, the framework of China's economy is set by the Chinese government and the Chinese Communist Party, which exercise control directly and indirectly over the allocation of resources through instruments such as government ownership and control of key economic actors and government directives," Commerce said. This figures to potentially be a key discussion point between President Donald Trump and Chinese President Xi Jinping when Trump heads to China in November.

Soybean Group: Trump Positioning For NAFTA Withdrawal

Based on the last four rounds of NAFTA talks, the U.S. agricultural industry’s top concern is that the Trump administration is positioning itself in a way that leaves withdrawal from the trade deal as the only path forward, the American Soybean Association (ASA) said during a roundtable on Monday.

The negotiations among Canada, Mexico and the U.S. don’t seem to be headed toward a NAFTA 2.0, the industry group said, given proposals from the U.S. Trade Representative (USTR) that are unpalatable both to the other NAFTA members and to the U.S.'s own agricultural industry and business sectors. If the Trump administration is not negotiating in good faith toward a trade deal that all parties can agree to, and keeping NAFTA as it stands now is not an option — which Trump has warned — then the only path forward is pulling out, ASA said.

Washington Insider: Possibly Phasing in Tax Cuts

Well, nobody thought the tax-reform deal would go entirely smoothly. But news that the House Panel is taking about phased in cuts seems to run counter to the president’s preference. Bloomberg is reporting that Treasury Secretary Steven “Mnuchin wants an immediate cut” but ‘will see how that goes.’

Bloomberg thinks that House tax writers are discussing a gradual phase-in for the president’s and Republican leaders’ proposed corporate tax-rate cut--on a schedule that would put the rate at 20 percent in 2022, according to a member of the chamber’s tax-writing committee.

The phase-in plan being discussed is not final, a member of the House Ways and Means Committee, told Bloomberg. House Ways and Means Chairman Kevin Brady, R-Texas, told reporters Monday that there hasn’t been a decision yet. When asked whether a phase in was being considered, he said only: “We want to get the growth up front.”

The phase-in proposal would reduce the rate from its current 35 percent rate by three percentage points a year starting in 2018. If adopted, it would delay some of the economic effects the President and his advisers have sought to emphasize from their tax cuts. U.S. stocks fell to session lows and Treasuries pushed higher on the news.

President Trump wants to immediately cut the rate, White House Press Secretary Sarah Huckabee Sanders said during a press briefing Monday. “The president laid out his principles and it doesn’t include the phasing in, so we’re still committed to that moving forward,” She said. “I don’t have any reason to believe we have changes on that front at this point.”

Mnuchin emphasized that stance during an interview while traveling in the Middle East. “The objective is not to have that phase in – but we will see how that goes,” he said. Mnuchin added he’s been talking to Brady and Senate members throughout his trip, including calls in the middle of the night to discuss tax efforts.

The Ways and Means panel plans to release the text of a bill this afternoon, ending a secretive drafting process that has had corporate lobbyists on edge. The broad framework that Trump and congressional Republican leaders released last month called for the 20% corporate rate as one of several tax-rate cuts for businesses and individuals.

Two GOP members of the Ways and Means committee--Representative David Schweikert, R-Ariz., and Representative Devin Nunes, R-Calif., - said Monday that they wanted to see how the math worked out before taking a position on the phase-in proposal.The corporate cut was estimated to cost $1.6 trillion over a decade, according to estimates from the Tax Foundation, a Washington policy group--but it would be less costly under a phased-in schedule.

Under the budget rules Republican leaders have said they plan to follow, tax cuts that aren’t offset with enough revenue-enhancing provisions to avoid adding to the long-term deficit would have to expire.

Trump had argued for cutting the corporate rate to 15%, though in September as the GOP framework emerged, he quickly embraced the 20% target, calling it “a perfect number.”

His White House has since argued that cutting the rate to 20% would speed up economic growth enough to eventually make the U.S. economy grow at a 3% to 5% rate. However, that analysis also found that cutting the corporate rate would increase average household income by at least $4,000. Other economists have questioned that claim.

A possible phase-in for the corporate rate has been rumored for weeks, according to people close to the debate. GOP tax writers are looking for ways to limit their bill’s net revenue loss to $1.5 trillion to satisfy the parameters of the budget resolution that the House and Senate have adopted.

Brady told some of his panel members about the phase-in proposal Sunday night, Bloomberg said. During a meeting at the White House as recently as last week, although the phase-in idea wasn’t mentioned, a lobbyist told Bloomberg.

Conservative tax lobbyist Ryan Ellis said a proposed phase-in for the corporate rate would be “very disappointing if true.” He said it would “delay business allocation of capital by the same five years.”

Some anti-tax activists, including Grover Norquist, the head of Americans for Tax Reform, have urged Republicans to frontload the tax cuts in order to deliver economic benefits immediately. They say that delaying them would mean Republicans couldn’t tout them by the 2018 midterm elections.

Lloyd Greif, the chief executive officer of Greif & Co., an investment bank in Los Angeles, said phasing in the corporate tax cut would cause “plain havoc” in corporate executive offices nationwide and mute the potential growth effects.

So, we will see. Thus, while the guessing game about the proposal is expected to end now, the horse trading is just beginning, and should be watched closely by producers as it evolves, Washington Insider believes.

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