FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 21, 2017
1. Heritage Foundation US Economic Freedom Index Explained
2. Economic Freedom Index Plunged Under President Obama
3. The US Economy is Quietly Gaining Momentum – That’s Good
4. How Upcoming Tax Reform Proposals Could Affect Americans
5. Summary of Major Tax Reform Proposals Under Consideration
We touch on several bases today. We begin with the Heritage Foundation’s annual Economic Freedom Index, which plunged during the eight years of the Obama presidency. From there, we look at some recent economic data which is quite encouraging overall.
Following that, we take a look at some of the major tax reform proposals under consideration, both those proposed by Congress and those espoused by President Donald Trump. It should make for an interesting E-Letter. Let’s get started.
Heritage Foundation US Economic Freedom Index Explained
The Heritage Foundation is a conservative think-tank based in Washington, DC, founded in 1973. Since 1995, Heritage has published an annual ranking of developed nations based on their level of economic freedom – or put differently, the ease of doing business in these countries.
The Economic Freedom Index is based on such variables as the rule of law doctrine, property rights, fiscal health, business freedom, tax burdens, government spending and other indicators of economic freedom in 186 countries. Based on these criteria, each country gets an overall freedom index score, which then can be ranked against other countries.
As Heritage points out, there is good reason to focus on these measures of economic freedom, since they directly correlate with a country’s growth and prosperity. The latest report notes, “The affirmative link between economic freedom and long-term development is unmistakable and robust. The higher a country’s level of economic freedom is, the higher its income per capita also is.”
The good news is that economic freedom worldwide has been inching up for the past two decades. It went from a low of 57.1 in 1996 to 60.9 today, as of the latest report. But the US has been falling in the rankings since the late 1990s and precipitously in the last eight years.
That’s what we’ll talk about below.
US Economic Freedom Index Plunged From #6 to #17 Under Obama
The Heritage Foundation Economic Freedom Index for 2016 was released last week, and the US continued to fall in the rankings. The US currently ranks a dispiriting 17th on the Heritage Foundation’s Index of Economic Freedom of 186 developed nations.
What’s important to know is that the US is down from 6th when President Obama took office in 2009. So in just eight years, the US has plunged from 6th in the world to number 17. The question is, why?
The bad news is that it’s been on the decline in the US since 2008, when it stood at 80.7. Since then, it has dropped every year but one under Obama, and now measures 75.1. That’s the lowest score for the US since Heritage started this index 22 years ago.
As a result, the US now ranks behind Hong Kong, Singapore, New Zealand, Canada, Taiwan, the U.K., Luxembourg and the Netherlands, among others. Even Lithuania currently has more economic freedom than the US. The Heritage report explains:
“The substantial expansion of government’s size and scope, increased regulatory and tax burdens, and the loss of confidence that has accompanied a growing perception of cronyism, elite privilege, and corruption have severely undermined America’s global competitiveness.”
In other words, the US Economic Freedom Index was dragged down largely by Obama’s anti-growth war on businesses, investors and other productive elements of the economy.
Not surprisingly, the past eight years have also been characterized by historically low economic growth rates, with annual US GDP growth never once hitting 3% under Obama.
Turning this around should be a priority in Washington – for both Republicans and Democrats. Faster economic growth is desperately needed, not only to create jobs and increase prosperity, but also to reduce the federal government’s huge budget deficits and mountain of debt.
Unfortunately, Democrats and the mainstream press are entirely focused on destroying the Trump administration before it has the chance to put forward any of its pro-growth proposals, including tax cuts for individuals and corporations.
If the US continues to slide down the scale of economic freedom and the economy continues to struggle, the blame will rest on the shoulders of these obstructionists. Of course, the liberal mainstream media will never admit these truths, but now you know.
The US Economy is Quietly Gaining Momentum – That’s Good
For the last couple of months, I have been reporting that the US economy is improving, perhaps on hopes for President Trump’s campaign promises of lower taxes, deregulation and infrastructure spending, among others.
Whether you like Trump or loathe him, consumer confidence has soared to the highest level in years over the past few months. With that in mind, let’s take a look at the latest economic numbers.
Retail sales rose a better than expected 0.4% in January, the Commerce Department reported last week, and a booming 0.8% when volatile auto sales are excluded. American consumers are powering ahead in the eighth year of the economic expansion.
Housing starts in January were 1.25 million, beating the pre-report consensus of 1.22 million. While January starts were slightly below December’s pace, homebuilding was up 10.5% over the same period last year.
The number of building permits issued for new housing units rose 4.6% in January, the Census Bureau said last Thursday, and is up 8.2% from a year ago, as the housing recovery kicks into a higher gear.
Manufacturing output rose 0.5% in January. To cap off all the good data pointing to an economic surge, the Federal Reserve Bank of New York said its survey of business activity soared to its highest level in two years last month.
The Consumer Price Index rose 0.6% in January, above expectations, the Labor Department reported. The Index is now up 2.5 over the last year, suggesting that inflation is now in the ballpark of the 2% mark that the Federal Reserve aims for.
This all continues a recent theme. The economy added 227,000 jobs in January despite an unemployment rate that is already low. The number of people filing new claims for jobless benefits each week keeps hitting lows not seen since the 1970s. This is all good news.
An unusually warm winter is probably a factor in some of the good numbers, as people who in a normal year would have hunkered down amid snowstorms, but instead went shopping. Yet the positive slant of the latest data has been building for months, and includes some data sets that shouldn’t be too affected by the weather.
Not surprisingly, in light of the recent encouraging economic data, Fed Chair Janet Yellen warned in her congressional testimony last week that the Fed is now serious about raising short-term interest rates three times this year. I discussed this at length in my BLOG last Thursday. It now looks as though the next rate hike could come as early as March 15.
How Upcoming Tax Reform Proposals Could Affect Americans
Candidate Donald Trump repeatedly promised to cut income taxes for most Americans and for US corporations. He also promised to simplify the US tax code significantly, suggesting that his changes could put H&R Block out of business.
But tax simplification isn’t a simple task, and changing the tax code isn’t something he can do by himself. The tax law, which has thousands of sections and subsections, is just that: law. A new law, or a change to an existing one, must be passed by both houses of Congress before it is signed by the president.
The House Republican leadership released a tax reform plan last year, which remains on the table although it has yet to get much traction in Washington. Mr. Trump has said that he will work with Congress to pass what he calls the “Middle Class Tax Relief and Simplification Act,” the provisions of which he proposed in September.
In his press conference last Thursday, Trump said that “tax reform is going to happen fairly quickly” but that dealing with the Affordable Care Act had to come first. He said that would happen next month.
The House tax proposal and Trump’s plan differ – for instance, on whether to limit deductions for real estate taxes and mortgage interest. The changes that may actually result are still a mystery. However, it is unlikely that changes in the tax code would affect tax returns that must be filed this year, which cover last year’s income and deductions.
Summary of Major Tax Reform Proposals Under Consideration
With the caveat that any list of forthcoming tax changes is speculative, here is a summary of some of the major items that are under discussion and that may affect your tax returns:
Income Tax Rates. The Trump plan and the House plan would both cut the top rate to 33% percent from 39.6%, raise the lowest rate to 12% from 10% and collapse the number of brackets – different tax rates at different income levels – to three from seven.
Itemized Deductions. The Trump plan would cap itemized deductions at $200,000 a year for married couples filing jointly and $100,000 for single filers. To take an itemized deduction, you subtract the specific item from your income, which reduces your taxes. But under the Trump plan, the standard deduction would increase, so many people who file itemized returns now may not find it in their interest to do so in the future.
Capital Gains Tax Rates. The Trump plan does not call for lowering the rates on long-term capital gains, which now top out at 20% for the highest earners – single filers with adjusted gross incomes above $415,050, and couples with incomes above $466,950. Taxpayers in the 10% and 15% brackets pay no capital gains taxes. The House plan would lower capital gains rates.
Mortgage Interest & Real Estate Tax Deductions. The itemized-deductions cap proposed by Mr. Trump would effectively limit interest and real estate tax deductions for the owners of expensive homes – a backdoor way of curtailing them. There has been talk in Congress for years about limiting or eliminating itemized deductions for mortgage interest (interest payments on up to $1 million in mortgage debt are now deductible), usually in conjunction with raising the standard deduction, although these changes are not part of the current House plan.
Filing Status. The president’s plan would eliminate the head-of-household filing category, which gives more favorable rates to some unmarried people who can claim dependents than to single taxpayers.
Standard Deduction. Mr. Trump would increase the standard deduction to $30,000 from $12,700 for married couples and to $15,000 from $6,350 for single filers.
Personal Exemptions. Mr. Trump has also proposed doing away with exemptions for taxpayers and their dependents, which are worth $4,050 each. (An exemption is like a deduction; you can subtract the amount of the exemption from your income and cut your tax bill.) Those exemptions now begin to phase out at an adjusted gross income of $259,400 for single taxpayers and $311,300 for married couples, and disappear completely for incomes above $381,900 for single filers and $433,800 for couples.
Medical Deduction. Taxpayers who itemize can currently deduct medical expenses that amount to more than 10 percent of their adjusted gross income. That amount rose from 7.5 percent (where it remains for people over 65) as part of the Affordable Care Act. If the act is repealed, will the rate go back down? That’s uncertain.
Again, these are just highlights of the current tax reform proposals. It will be interesting to see how these proposals change and morph as the debate goes on. I’ll keep you posted.
Franklin Square Investment Company Webinar – February 24
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You can also call us at 800-348-3601 to reserve your spot, or if you want to learn more about FSIC III before then.
Best personal regards,
Gary D. Halbert
Article by Gary D. Halbert