What to Watch for this Week
The Senate finally passed a tax bill by a slim margin with a vote of 51 – 49. Not surprisingly, the coalition built for this bill went right down party lines. The next step in the process is to reconcile the differences between the House and Senate versions of the legislation. Once complete both houses will vote on the reconciled bill. If passed the bill will move along to President Trump where he will most likely sign it into law. This law will complete one of his many campaign promises. Tax law is a complicated matter and typically unfair to those unrepresented by a lobbyist. There are 3 groups of people who like income taxes. (1) Politicians who get to spend your money and use it as a bargaining chip election time. (2) People and corporations who get tax credits and subsidies that offset their tax liability (i.e. people/companies that take out more than they put in). (3) People who believe they benefit in some way or the believe the government helps people in need with the revenue collected. Given these competing interests, nobody is ever happy with the tax code or changes thereto.
“We’ll be able to get to an agreement,” McConnell said Sunday on ABC’s “This Week.” “I’m very optimistic about it. And we think this will make a big difference in getting our economy moving again and providing jobs and opportunity for the American people.”
We think the biggest pro-growth element of the tax bill is the reduction in the corporate tax rate. Since the current corporate tax rate in the US is higher than in most other countries, there is a strong incentive for US companies to move their headquarters overseas, or at least move their manufacturing operations overseas, then ship the products to the US. With these new rates, there will be an incentive for both US and foreign companies to build factories in the US to serve the US market. Just in case you think this analysis is incorrect, take a look at what German companies are doing. They are now pressuring the German government to lower the corporate income tax rate. When this tax bill passes, it will be a better deal to manufacture in the US, so German manufacturers recognize that they are sure to lose business to the US.
Last Friday, the Meuller investigation of Michael Flynn hit a milestone where Flynn pleaded guilty to lying to the FBI. This situation sounds more severe that it is. Most people think that this will empower Meuller to continue with the collusion probe. We think that the collusion case has lost merit as the special prosecutor cannot find evidence of wrongdoing. They only cornered Flynn because he liked to the FBI. The investigation will now go towards obstruction of an investigation, which can lead to impeachment (just ask Richard Nixon). A goal of the Democrats all along, starting with Hillery Clinton’s defeat in the presidential race.
According to Andrew McCarthy, “Justice Department policy calls for prosecutors to indict a defendant on the most serious readily provable charge, not to plead out a case on minor charges to obtain cooperation.” If the FBI had a case for collusion, the crimes that Flynn and Papadopoulos pleaded to would have been much more severe. It is important to remember, the pleas and the indictment have nothing to do with conspiring with the Russian government because there is still no evidence of collusion during the election process or any other illegal activity.
Getting the facts right is important. When news hit that Flynn was ordered o talk to the Russians during the campaign, this looked like the proverbial smoking gun. This caused the equity markets to take a dive and it threw uncertainty into the tax cur and governance picture. But once the story was clarified that Flynn, as part of the transition team (i.e. Trump already won the elections), the story became a nothing burger as it is standard, operating procedure for the President-elect and his team to contact foreign governments and begin to build lines of communication and working relationships. Upon this correction to the story, the stock market recovered most of its losses. Now that this story has all but gone away, the equity markets are up strongly in pre-market trading.
Global Spotlight
- Increased Activity on the Korean Peninsula. After 75 days of relative quiet, North Korea fired off another intercontinental ballistic missile last week.
- Iran Policy Shake Up? U.S. Middle East policy faces a shake-up if a rumored personnel replacement is true.
- Reshaping the Eurozone. A debate led by France on one side and Germany on the other to revamp the eurozone will kick into gear this week when the EU Commission presents its reform proposals.
- Military Takes Over Petroleos de Venezuela. Venezuela’s military is taking a bigger role in the country’s energy policies in exchange for continued loyalty.
- U.S. Pushes Pakistan Toward China. The United States is planning to cut aid allocations to Pakistan in the coming fiscal year by more than $180 million.
Economic Calendar
Here is a list of the U.S. economic events happening this week. The news keeps on beating or meeting expectations. Employment news will always be top of mind, but this week pundits will focus on the tax legislation that passed early Saturday morning.
Last Weeks Numbers
Review Last weeks numbers here.
