Monday, October 17, 2016

Make Wall Street Great Again: I❤WallStreet

With a heated Presidential race on the way this year, the choice is between a populist (Donald Trump) and a career politician (Hillary Clinton). Regardless of who is going to win the race, the winning candidate must address the issues of over-regulation facing Wall Street firms and tax reform in general:

Over-regulation is a burden on American financial firms

The diminishing role American firms play on the world financial stage is due to regulatory constrains a burden placed by the Dodd Frank Act of 2010, specifically the 'Volker Rule' § 619 (12 U.S.C. § 1851) which grew too complex and restrictive, possibly effecting market liquidity and efficiency. As a consequence, market players are decamping to overseas financial hubs which translates into a loss of revenue and jobs in America. 

 New York City has lost 25,000 financial Services jobs from 2010-2015 (and during the recession, nearly 200,000 finance professionals lost their jobs, 500,000 nationwide)

Reforming the Tax Code: Implications

The US has the highest corporate income tax rate among OECD countries, 39.1%, and is one of only two countries that reach beyond its borders to tax overseas income earned by nonresident citizens. (Eritrea is the other country.) To familiarize yourself with tax law considerations, it is a good idea to get familiar with the Joint Committee on Taxation overview  publication.

There are some that have proposed limiting the corporate interest tax reduction in return to reducing the statutory tax rate to 25% on a 'revenue neutral basis'- Capping the Deductibility of Corporate Interest Expense By Robert C. Pozen and Lucas W. Goodman .

Regulation 365 of the IRS Code that has to do with re-characterize debt instruments issued between affiliates as stock for U.S. federal income tax purposes (as it stands, the stock is viewed as preferred equity for U.S. tax purposes).

'The proposal to eliminate the interest deduction may have a material adverse impact on U.S. middle-market companies.' ( @ Pepper Hamilton LLP )

Questions (from tax advisory firm KPMG 'House Republican tax reform “blueprint”—initial observations' )

  • "Would the corporate tax rate gradually be reduced to the flat 20% corporate tax rate? 
  • Would the rules influencing the deductibility of interest be implemented in Year One (and would certain debt instruments be grandfathered)? 
  • Would a corporation’s existing tax attributes continue to be utilizable in the revised regime? For example, the blueprint would repeal the corporate AMT, but is silent as to whether a taxpayer with AMT credit carry-forwards would be able to use them in future years. Similarly, the blueprint would not subject foreign-source income to tax in the United States, but is silent as to whether taxpayers with foreign tax credit carry-forwards could use their carryovers in future years."

If you liked this post, I❤#WallStreet to show your support for keeping the American investment sector healthy and competitive.

Recommended reading: Venture Capital Journal, Nov. 2016

In a future post, I will explore the regulatory burden on the Alternative Investment Management Industry, where businesses such as U.S, hedge funds have to spend 5-10% of their operating budgets on compliance, including technology, headcount and third-party vendors.

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