Month: November 2017

The markets follow him. He’s a Wall Street man from D.C. His business card says “I’ll Call You.” The Holy Grail is looking for him. He is the most influential man in the world. Jerome Powell.

Many of you are probably wondering who is Jerome Powell. He is Donald Trump’s nomination for the Federal Reserve Chairman. Wait, what’s that? The Federal Reserve Chairman is responsible is to carry out the dual mandate, which is maximum employment and stable prices.

The Chairman fulfills the dual mandate by determining the federal funds rate in Federal Open Markets Committee (FOMC). The FOMC determines the monetary policy of the United States by establishing the federal funds rate, discount rate, and transaction of government securities.

The federal funds rate is the interest rate at which banks and other financial institutions lend each other when borrowing monetary funds. This is the most important interest rate in the nation because it is the base rate that determines the level for all other interest rates. For instance, a higher federal funds rate makes it more expensive to borrow money. As a result, families that are looking to buy houses will have to pay more money towards their mortgage.

Since the United States has the largest economy and the federal funds rate basically determines other interest rates are the driving reasons why the the Chairman of the Federal Reserve has so much influence. Jerome Powell can literally decide how much people pay for a car, rate of return on a mutual fund, and how much college students pay on their loan.

Many economists predict that there will be few differences in the monetary policy between Jerome Powell and former Chairwoman Janet Yellen. The main change will be Powell would be less aggressive towards financial regulation. This is mainly due to Powell coming from a Wall Street background. Economists also believe Powell will be a dove just like Yellen. If you remember from previous blogs, a dove is someone who does not aggressively react to increase in inflation.  

Omg I hate how a quarter of my paycheck goes towards taxes! I worked hard for the money! It is not fair the government takes so much money away from me!

Well if you have been watching the news lately, the Republican party finally passed their tax reform plan. Like always, there are supporters and opponents against this new tax plan. Manufacturers, retailers, wholesalers, and conservatives are ecstatic by the newly proposed plan. On the other hand, home builders and real-estate agents raise concerns to the GOP because the Tax Cuts and Jobs Act reduces benefits for homeownership.

Republican congressmen and senators view their tax bill to be essential in their political futures and legislative agenda. With over $300 billion in tax reductions for individuals, a $172 billion estate tax cut, and $1 trillion in tax savings for businesses might be enough to stimulate the economy and continue job growth. Let’s further inspect where these tax cuts are coming from.

The Republican party has simplified the income-tax code, which affects nearly every working American. The Tax Cuts and Jobs Acts suggests the current seven individual tax brackets into only four. These new tax brackets have new rates and thresholds for where higher taxes kick in. From the images below, the new bottom tax rate covers more income than the current 10% and 15% brackets do. As a result, the GOP is striving to lower taxes for many middle-class households. However, the wealthy are expected to face same tax rate, so their income tax will be unaffected by the newly proposed tax plan.

The Tax Cuts and Jobs Act also projects to lower taxes for various businesses. The Republican lawmakers plan to reduce corporate tax rates from ridiculously high 35% to 20%. This could be huge for the United States as multinational corporations will keep more jobs in the country instead of outsourcing to developing nations for cheaper labor. The corporate tax code also includes 30% deductibility of cash flows, immediate deductibility in capital investments and removal of taxes on active foreign profits. If the bill becomes successful, the United States could enforce one of the lowest corporate tax policy in major developed nations.

Many will be confused from reading the above tax policy changes and asking yourself why do I care about this? This Tax Cuts and Jobs Act can put MORE MONEY into YOUR pockets. As fewer dollar are taken out of your paychecks for taxes, you will have more disposable income to spend on things whatever you like. Consequently, the extra “income” can lead to more consumption and investments, which can greatly stimulate the economy. This is mathematically shown by the tax multiplier formula, which represents the multiple by which GDP increases in response to a decrease in taxes charged by governments.

The tax multiplier formula is basically dividing the marginal propensity to consume (MPC) by the marginal propensity to save (MPS). When you have your disposable income, you have to decide what percent of your income you want to spend and save. The percent you want to spend is the MPC, while the percent you want to save is the MPS.