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Trump widens trade fight to include global taxes, regulation

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President Donald Trump is embarking on what may be his most disruptive action yet for the global economy by broadening his grievances to how other countries choose to tax and regulate.

Trump on Thursday ordered top economic officials to calculate new U.S. tariffs based on the total tariffs and tax, regulatory, currency and any other barriers that U.S. exports face. The new “reciprocal” duties would be calculated country by country. They will be laid out in a series of reports due by April 1 that officials said would first examine the economies with which the U.S. has the largest trade deficits.

“The numbers are going to be very fair but staggering. They’re going to be large,” Trump told reporters in the Oval Office as he signed a memorandum ordering up the new tariffs.

The move, which Trump said would replace his campaign plan for a universal tariff on imports, immediately puts the European Union and countries including China, India, Mexico and Vietnam in the potential firing line, based on U.S. trade data.

European Commission President Ursula von der Leyen on Friday called Trump’s plan a “step in the wrong direction” and an act of self-harm. By raising tariffs, the U.S. “is taxing its own citizens, raising costs for business, stifling growth and fueling inflation,” she said.

Reaction was swift from other major U.S. trading partners. During a joint conference with Indian Prime Minister Narendra Modi on Thursday, Trump said the two countries would start trade negotiations. Indian officials Friday said they’re looking to boost oil and gas imports from the U.S. — a vow that countries from Japan to Vietnam have already made.

Asian exporters

In Tokyo on Friday, Japan also said it’s reaching out to Washington to start discussions. Taiwanese President Lai Ching-te pledged to boost military spending in a sign of further cooperation with the US against China. South Korea— which along with Japan was singled out by a White House official on a call with reporters — released a statement highlighting the low effective tariff rate on U.S. goods.

Trump’s plan would, if implemented, mark a departure from how the U.S. has approached tariffs for almost a century and deal a major blow to global trading rules now based on countries granting each other what are known as “most favored nation” tariffs unless they sign special trade deals. It would also turn the definition on its head — reciprocity has up until now referred to lower tariffs on goods.

“Trump is essentially trying to create a justification to impose high tariffs on whoever he wants,” said Sam Lowe, a partner at Flint Global in London, where he heads their trade and market access practice.

Fundamental change, Trump advisers said, is what’s needed. “The idea here is historic and it’s really about a revolution in how the international trading system is organized,” Peter Navarro, a senior trade adviser, told Bloomberg Television.  

With his order Trump is also reaching beyond the usual boundaries of his trade fights to how countries collect taxes, apply regulations and standards, and other so-called non-tariff barriers. 

Trump singled out the use of value-added taxes, which he and his advisors argue give exporters from other countries an unfair advantage over U.S. ones. More than 160 countries in the world use VAT or similar consumption levies, according to the International Monetary Fund. The U.S., however, bases its national taxes on income.

In the EU and other economies that use them, Trump and his advisors argue, the ability to claim a VAT rebate when products are exported gives European companies an unfair advantage as imports from the U.S. are charged VAT of 15-20% or higher depending on the member country. 

“A VAT tax is a tariff,” Trump told reporters Thursday. 

Many economists disagree. “Defining a VAT to be a trade barrier isn’t just questionable economics (the VAT is the same on imports and domestic production), it also basically forecloses negotiation, as the EU and others aren’t in a fiscal position to negotiate away its tax base,” Brad Setser, a senior fellow at the Council on Foreign Relations and a former US Treasury official, wrote on X. 

In a note to clients, Paul Ashworth, chief North America economist at Capital Economics, said Trump’s plan was likely to have a more damaging impact on the U.S. economy than his previous universal tariff idea.

Just adding the average most-favored nation tariff rate of countries to their VATs would lead to significant reciprocal U.S. tariffs on some of the U.S.’s top trading partners, he wrote. If the U.S. imposes reciprocal tariffs that add VAT rates and MFN tariff rates together, the countries most hit would be India with a rate of 29%, Brazil and the EU. 

Such duties alone, Ashworth wrote, would lead to an increase in the average effective tariffs rate on all U.S. imports from 3% currently to around 20%. It would also lead to a temporary rebound in U.S. inflation to around 4% later this year.

The EU stipulates that countries must apply a VAT rate of no less than 15% on most goods and services, though it leaves decisions on actual levels and exemptions to member states. According to ING calculations, the VAT across the 27-nation bloc averaged 21.5% in 2023.

By targeting VAT the U.S. is relaunching a long-running trade fight. 

The U.S. and Europe have battled over the treatment of VAT and income taxes in global trading rules since the 1960s with the EU challenging multiple mechanisms the U.S. set up in the 1970s and ’80s to offer a similar export rebate on U.S. corporate taxes levied against revenues. The EU eventually won a World Trade Organization challenge to those mechanisms in the 1990s and since then the U.S. has had no similar export rebates. 

Erica York, vice president of federal tax policy at the nonpartisan Tax Foundation, said the Trump administration’s view of VAT reflects a fundamental misunderstanding of how the tax works. VATs don’t discriminate against foreign goods since domestically produced ones face the same taxes in the countries they are sold, she said.

Consumption taxes

“The goal of a value-added tax is to tax domestic consumption,” York said. “There’s no discrimination based on where something was made. It’s just a tax on the stuff that people in a country are buying.”

But Trump’s grievances with other countries go beyond that by targeting regulations and other non-tariff barriers that U.S. goods face overseas. 

“We’re going to look at everything,” Jamieson Greer, who is due to become U.S. Trade Representative, told reporters on Thursday, including what he called “fake” anti-trust regimes. 

The EU has for years targeted U.S. tech giants like Apple Inc. and Alphabet Inc.’s Google for scrutiny in competition investigations that have led to hefty fines. The U.S. has also long complained about how the EU and other countries like Japan regulate food imports such as beef and chicken, as well as other U.S. exports like chemicals and genetically modified crop seeds.

In the memorandum signed Thursday, Trump ordered officials to include in their tariff calculations “any other practice that” they conclude “imposes any unfair limitation on market access or any structural impediment to fair competition with the market economy of the United States.” 

As with many of Trump’s trade actions, optimists believe that they could lead to trade agreements that will avoid the disruptive economic impact of tariffs likely to provoke retaliation by other countries and lead to higher prices and slower growth. 

John Veroneau, a partner at law firm Covington & Burling LLP who served as a senior trade official in the administration of President George W. Bush, said Trump’s latest move represents a significant broadening out of his trade conflicts. 

“He has raised the stakes. This is now a global enterprise,” Veroneau said, calling it a “huge step” away from the global trading rules first laid out in the 1947 General Agreement on Tariffs and Trade. 

‘New phase’

The U.S. is signaling “the start of a new phase in global trade” in which the U.S. uses its power not to influence global rules but the bilateral trade in goods, he said. The best hope, Veroneau said, is that the U.S. can negotiate new deals that don’t lead to escalating trade wars over tariffs.

Equities rose in Asia and Europe on Friday, with traders optimistic that the timeline for reciprocal tariffs provided enough room to negotiate. Setser said that shouldn’t last long as investors “will eventually realize that this is a path to real tariff hikes,” he wrote on X. 

Jennifer Hillman, who served as both a senior U.S. trade official and a member of the WTO’s highest court, said the plan laid out by Trump and his advisors would be immensely complex to implement, would likely to lead to chaos and require more funding for border authorities

Interfering in how other countries collect taxes and impose regulations would also inevitably lead to a backlash against the U.S., said Hillman, now a senior fellow at the Council of Foreign Relations.

“We’re just going to make America hated again,” she said. “At some level, for these other countries, it’s just like ‘who are you to tell us that we can’t regulate our own economy?'”

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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