Opinion: Trump’s tax reform looks like just another of his many tweets [MarketWatch]

Although Donald Trump claims that his forthcoming tax plan will be “phenomenal,” he is in truth not likely to propose something really new.

Before the election, Trump put forth a broad tax plan and then a narrower plan.  But even the narrower plan created a budget deficit of roughly $3 trillion to $4 trillion over 10 years, according to the dynamic scoring of the independent researcher Tax Foundation.  That steep increase in the national debt would present major challenges, given rising interest rates and much larger budget pressures from entitlement programs.

Soon after the election, President Trump lambasted the border adjustment tax ( BAT ) plan of the House Republicans. Then he began to be more favorable to the BAT because he believed — wrongly — that it would impose a large tariff on Mexican imports to pay for the wall.  In fact, the BAT would effectively impose a tax on all imports, which would probably be absorbed by importing companies and their customers.

So there are three main questions about what type of tax plan Trump could propose.

Read the rest at marketwatch.com…

What will happen to Dodd-Frank under Trump’s executive order? [Brookings Institution]

On Friday, February 3, President Trump issued an executive order directing the Secretary of Treasury to report, within 120 days, on whether governmental rules and policies promote or inhibit the order’s Core Principles for Financial Regulation. These generally stated Principles stress investor choice, economic growth and international competition as well as the more traditional goals of financial regulation such as preventing bailouts, analyzing risk and increasing accountability.

Although the executive order did not mention Dodd-Frank by name, President Trump made clear: “We expect to be cutting a lot of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.” By contrast, the Federal Reserve data show that total loans and leases by banks grew by almost 7% per year during the last three years.

Paul Ryan preps bold corporate tax plan [Boston Herald]

While almost everyone agrees that the current U.S. system for taxing foreign profits of American corporations is counterproductive, there has been heated partisan debate about what should be done. Now, with Republican dominance of Congress and the White House, we should look carefully at House Speaker Paul Ryan’s path-breaking plan for corporate tax reform

Under current law, foreign profits of American corporations are legally subject to a 35 percent U.S. tax — the highest corporate tax rate among industrialized countries. In fact, American corporations do not pay this tax unless and until they bring these foreign profits back to the U.S.

Thus, the current system mainly benefits tax lawyers and accountants.

U.S. companies hold abroad approximately $2.5 trillion in past foreign profits. The U.S. Treasury collects little revenue from foreign profits, and U.S. corporations are discouraged from investing those profits back in this country.

Read the rest at bostonherald.com…

Trump’s tax: one budget buster and one revenue raiser [Financial Times]

Donald Trump’s campaign to become the next president of the U.S. has thrown up two far-reaching proposals to reform the taxation of corporate profits: reducing the tax rate on domestic profits to 15 per cent, and taxing foreign profits of U.S. corporations at 15 per cent each year.

The first proposal, a budget buster, is a poorly designed way to tax business; the second proposal, a revenue raiser, is a reasonable way to fix the current system for taxing foreign profits.

The current tax rate of 35 per cent is almost the highest in the world, so it should be lowered to make the U.S. a more competitive location for corporate facilities and jobs.

Read the rest at brookings.edu…

A Nobel Idea to Pay CEOs What They’re Actually Worth [Wall Street Journal]

Next month, Bengt Holmstrom, a professor at MIT, is slated to accept a Nobel Prize in Economics for his pathbreaking contributions to contract theory. Congressmen and corporate boards might want to take note: Mr. Holmstrom’s innovative proposal for indexed stock options, which aren’t yet widely used, could be one solution in the running political debate over whether CEOs are fairly paid for performance.

Almost all stock options today have a fixed exercise price: The holder buys the company’s stock at the market price on the day the options were granted. The idea is to align the interests of CEOs and their shareholders. If the stock rises, the executive buys at the old price and makes a profit. On the other hand, if the company’s stock is flat or down, the options become worthless.

Unfortunately, as Mr. Holmstrom pointed out in 1979, fixed-price options can easily reward poorly performing executives during times of rising markets. Suppose a drug company grants 50,000 options to its CEO with an exercise price of $100 a share. If in three years the stock rises by 30%—to $130 a share—the CEO exercising his options would make a profit of $1.5 million.

Sure, sometimes this profit might reflect the outstanding work of this CEO. But suppose the stock prices of comparable drug companies rose by 60% on average during the same three years. Suddenly the CEO’s options look like a windfall instead of a reward for his superior managerial skills.

Read the rest at brookings.edu…

Corporate Boards Need to Abolish Mandatory Retirement [Real Clear Markets]

The resignation under duress of the CEO of Wells Fargo, after being pummeled in a Congressional hearing, raises a fundamental question: how can corporate boards hold management accountable for performance problems? One trendy answer from several governance mavens — limit the terms of independent directors so they do not become unduly deferential to the CEO.

The most typical limit on independent directors is mandatory retirement at age 72. This is the tenure limit for the Wells Fargo board. It is a significant limit because most directors do not join large company boards until age 60.

The tenure limit for independent directors is even stricter in UK. After serving for 9 years, a director of a UK public company will not be considered independent unless the company makes a special disclosure justifying longer service for that director

However, I believe that these uniform limits on director tenure are counter-productive. By relying on these automatic rules, boards may get stuck with a relatively young director who is not making a significant contribution to managerial oversight. Meanwhile, these many directors with valuable expertise and real independence are forced to leave boards at age 72 or after 9 years.

Read the rest at realclearmarkets.com…

In defense of corporate quarterly reports

Executives, fund managers and even politicians have criticised publicly traded companies’ undue focus on generating profits in the next quarter instead of making investments with good five-year prospects.

To encourage these companies to take a longer-term perspective, several regulators have shifted corporate reporting requirements from quarterly to semi-annually.

Most prominently, in 2013 the European Commission amended its Transparency Directive to abolish the requirement for quarterly reports by publicly traded companies in favour of semi-annual reports.

After an impact assessment, the commission concluded that “quarterly financial information is not necessary for investor protection”.

But a recent study severely undermines the commission’s conclusions.

Read the rest at brookings.edu…

Is the Bond Market in a Bubble? [Wall Street Journal]

Bonds issued by governments and companies are priced high these days. In the seesaw relation of bond prices to their yields, prices are up, and yields are smacking hard against the ground, at record lows.

Investors, wary of stock valuations and looking desperately for yield, have poured money into bonds and bond funds.

There was a brief scare in September when bond prices suddenly fell over concerns that the Federal Reserve and other central banks might end their “easy money” policies.

But that pullback quickly vanished, with investors convinced that the Fed will move slowly in eventually raising rates. Bond prices recovered.

So, are we left with a valuation bubble that will burst, as tech-stock investors experienced more than 15 years ago? Or are the worries merely another false alarm, which bond investors have heard before for many years?

Robert C. Pozen, a senior lecturer at MIT Sloan School of Management and former mutual-fund executive, argues that the situation is verging on a bubble as yield-hungry investors are gravitating toward riskier bonds. Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia, says he doesn’t see the credit excesses that would qualify this market as a bubble.

Read the rest at wsj.com….