CORRUPTION WATCH-Trump sent out the world’s least charismatic person, Secretary of Treasury Stephen Mnuchin, to sell his tax plan and Mnuchin began in Los Angeles. Let’s remember that Mnuchin made a fortune by taking advantage of people’s misery. He is the guy who started a business to target elderly widows and evict them from their Reverse Mortgage homes. One 90-year old widow mistakenly underpaid her mortgage by 27 cents prompting her eviction. These business tactics are what Trump calls “smart”, much like his repeatedly going bankrupt to avoid paying his workers.
Appearing on KNBC’s Channel 4 News Conference last Sunday, November 5, 2017, Mnuchin explained that “when we move from a worldwide system to a territorial system, we bring back trillions of dollars.” Duh? Huh? Mnuchin provided no clarification about worldwide vs. territorial systems.
We know this: The government’s function is to set and then enforce the rules of the game for society. By declaring murder a crime and prosecuting murderers, the government sets the rules. Similarly, driving laws (like not being permitted to run red lights) also set the rules. The government also has the duty to set the rules for the economic system, so deciding whether we have a worldwide or a territorial system falls within its purview. But all this does not answer the question, “What’s Mnuchin talking about?”
What is a Territorial Tax System?
In a territorial taxation system, the government taxes only the income earned within its borders. The U. S., however, has a worldwide system, in which income earned by Americans anywhere in the world is taxed. There is nothing inherently wrong or right with either tax system. So why change? In reality, the U.S. system is a hybrid world-wide-territorial system; changing to a territorial system only would bring us more into alignment with rest of the industrialized world. There is certainly a benefit for all when the industrialized world operates according to non-conflicting tax systems. Bringing us more in line with other nations is a good idea, although if everyone else were to use a worldwide system, then it would be smart to eliminate the territorial aspects of our tax system.
All tax systems are complicated, but most experts believe that a territorial tax system favors free trade; this explains why the rest of the world has responded to the global economy by changing from a worldwide to a territorial system. As a major West Coast port, LA should benefit because free trade means more shipping into and out of the country.
Territorial Tax System Tied to Reducing Corporate Rate
Since other industrial nations have a lower corporate tax rate than the U.S., if we give up taxing income on a worldwide basis, then we need to lower our corporate tax rate to attract foreign companies. We want them to set up shop here in the U.S. so we can tax them. All things considered, standardization of tax systems and tax rates on an international level should facilitate free trade. And didn’t Trump promise “More Free Trade for Everyone”?
Two More Aspects of the Trump Tax Plan Which Will Impact LA
(1) Cap on Mortgage Deduction
The Trump Plan caps the deduction of interest on home mortgages at $500,000 and that cap might retard the rise in housing costs in Los Angeles. The price of an average detached home in LA is $633,000, which means new homeowners will exceed the $500K mortgage limit. While they can still deduct the interest on the first $500K, any additional interest payments will not be deductible.
New home buyers will quickly realize that the total cost of a new home has just increased. If you pay $1.2 million for a home and your mortgage is $900,000, you cannot deduct the interest on $400,000…or can you? I suspect that the day after the tax plan becomes law, everyone with mortgages significantly above $500K will refinance their homes using two mortgages – one mortgage at $500K with a high interest rate and a second mortgage with a very low interest rate. Of course, the same lender will make both loans. Carrying two mortgages will shift most, if not all, the interest to the $500K mortgage. Thus, the impact on detached home prices may not be as significant as it first appears.
(2) Disallowance of State Tax Deduction on Form 1040
This disallowance should have California Democrats jumping with joy. California’s few Republican House members will be supporting a HUGE tax increase on Californians. Good bye Kevin McCarthy! As House Majority Leader, Rep. McCarthy is a major cheerleader for increasing our taxes. It is possible that enough California GOP Congressmen could lose their seats thereby tipping the House to the Democrats – unless Donna Brazile writes another book.
(1) Completing the U.S. change to a territorial tax system is beyond most voters’ ability to comprehend. The world championship in Buzz Word Formation will go to whoever reduces this international tax-economics issue to a meme which Donald can tweet along with MAGA.
(2) The cap on mortgage deductions should be easily avoided.
(3) Californians will retaliate against California GOP for raising their taxes.
(Richard Lee Abrams is a Los Angeles attorney and a CityWatch contributor. He can be reached at: Rickleeabrams@Gmail.com. Abrams views are his own and do not necessarily reflect the views of CityWatch.) Edited for CityWatch by Linda Abrams.