Thursday, November 23, 2017

Think Strategically: 47 days and 47 nights – Puerto Rico in the dark

By on November 6, 2017

US House has released its Tax Reform Bill Proposal

As we noted in previous columns, the House released its Tax Reform Bill Proposal, and it’s a 429-page document for which it could take several days to digest the full impact of this proposal on individuals and businesses. The bill’s provisions may be subject to many changes before the House acting on it over the next couple of weeks. However, we thought relevant to summarize some of the significant areas of the bill.

Tax Rates & Other Provisions

  • Corporate Tax Rate of 20% after 2017
  • Repatriation – 12% for liquid assets and 5% of ill-liquid assets paid over eight years in equal annual installments
  • Territorial tax system for overseas corporate earnings
  • Limitation of corporate interest deductibility; disallowance of a deduction for net interest more than 30 percent of the business’ adjustable taxable income
  • 100% immediate expensing from September 27, 2017, to January 1, 2023
  • Preserves Research and Development tax credit
  • Rate on pass-through entities S-Corps, LLCs and sole proprietorships reduced to 25%
  • New tax brackets for individuals: 12%, 25%, 35%, and 39.6%
  • Repeal of corporate and individual alternative minimum tax (AMT)
  • Almost doubles the standard deduction, $24,000, for couples and, $12,000, for individuals
  • Estate Tax phased out and eliminated in 2024
  • State and local tax deduction (SALT) – taxpayers may continue to deduct property taxes up to $10,000
  • Mortgage interest deduction unchanged for existing homeowners; newly purchased homes get a deduction for up to $500,000 and no deduction for second homes
  • No changes to pre-tax contributions to 401(k) plans
  • Obamacare taxes largely remain in place; deduction for high medical costs is eliminated
  • Muni bond tax exemption appears safe; however, still examining text to see if there is a backdoor assault on municipal bonds

New Federal Reserve Bank Chairman Named

As reported by most national media outlets, on Thursday President Trump nominated Jerome H. Powell to chair the Federal Reserve. Like most things Trump he bypassed Janet L. Yellen for a second term and thus broke a four-decade precedent by doing so. President Trump turned to a replacement who is expected to stay the course on monetary policy if the economy continues its steady growth.

Upon presenting Mr. Powell, President Trump stated: “He’s strong, he’s committed, he’s smart, and I am confident that with Jay as a wise steward of the Federal Reserve, it will have the leadership it needs in the years to come.”

Who is Jerome Powell?

Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. He was reappointed and sworn in June 16, 2014, for a term ending January 31, 2028.

Before his appointment to the board, Mr. Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C., where he focused on federal and state fiscal issues. From 1997 through 2005, Mr. Powell was a partner at The Carlyle Group.

Mr. Powell served as assistant secretary and as undersecretary of the Treasury under President George H.W. Bush, responsible for policy on financial institutions, the Treasury debt market, and related areas. Before joining the administration, he worked as a lawyer and investment banker in New York.

Most of the experts interviewed concluded that should the economy falter, Mr. Powell may not be the ideal person to lead the Fed. Mr. Powell, a member of the Fed’s board of governors since 2012, has closely mirrored the views of Ms. Yellen by both voting to raise rates and sell off assets acquired during the financial crisis. Colleagues consider him a centrist voice in the Fed’s internal debates, who prefers to bring up concerns privately.

As a matter of reference on past views, during 2012, when Ben S. Bernanke, the Fed chairman at the time, announced a round of bond buying as part of that program, Mr. Powell sought further clarification of the Fed’s goals, establishing what Mr. Powell called an alternate route for the program.

More recently, Mr. Powell’s comments on monetary policy are interchangeable with those of  Ms. Yellen.

The area Mr. Powell lacks is the broad background in economics, which his predecessors had.

We shall soon find out, as execution is always a better measure than opinions and theory.

U.S. Employment Rose in October

In October, nonfarm payroll employment rose by 261,000, after changing little in September. The unemployment rate edged down to 4.1 percent in October. The increases are due mainly to employment in food services and drinking places, mostly offsetting a decline in September that largely reflected the impact of hurricanes Irma and Harvey. There were also job gains in professional and business services, manufacturing and health care.

Employment in food services and drinking places increased by 89,000. Professional and business services added 50,000 jobs and employment in manufacturing increased by 24,000. It is worth noting that manufacturing has added 156,000 jobs since an employment low in November 2016.

Final Word: 47 Days and 47 Nights – Puerto Rico in the dark

As the past 47 days have gone by the lives of most Puerto Ricans were placed in a sort of time machine. We went from the 21st century to the 19th century in only 24 hours following the impact of Hurricane María.

It would be accurate to say that of all the places in the United States, the one that is suffering the most right now is Puerto Rico, with its 3.4 million U.S. citizens who have experienced for the past 47 days, the most prolonged blackout in American history, and this is just inexcusable.

Imagine any of the 50 states losing 100% of the power grid, 100% of water production, 100% of all communications, 100% of cellphones, 100% of the internet. Add no access to food supplies, 16-hour-long lines for gas, diesel or ATMs and imagine for a second that this goes on for 47 days and counting.

As the initial days blurred by, those with the great fortune of finding supermarkets that were open would often compare them to those in Venezuela or Cuba, with shelves empty and mostly limited to canned foods such as tuna, corned beef, lunch meal (SPAM) and Vienna sausages. However, those less fortunate starved or had to rely on the support of FEMA, the municipalities, Red Cross or other NGOs that have been providing support to most towns.

Cooking was either done on camping stoves with propane gas, impromptu ovens made out of rocks and grates fueled by charcoal, or regular BBQs.

If you have the luxury of access to water, you could bathe and clean your house; however, for a better part of those 47 days Puerto Rico was without access to running water.

In our mountainous inland, towns such as Jayuya, Utuado, Corozal, Orocovis, San Sebastián, Morovis, Villalba, Maricao, Adjuntas and Las Marías had catastrophic damages.

Entire communities were left isolated and had to set up impromptu pulley systems with baskets attached in order to obtain supplies. We have seen people drink from streams and other water sources, and this has caused a leptospirosis epidemic due to water contamination.

Marta Sostre Vázquez reacts as she starts to wade into the San Lorenzo River with her family in Morovis, Puerto Rico, Wednesday, Sept. 27, 2017, after a bridge was swept away by Hurricane Maria. The family was returning to their home after visiting family on the other side. (Gerald Herbert/AP)

Your daily chores can include trying to obtain your next meal, finding water, looking for gas, washing clothes somehow and those still with jobs would attend to these chores while also working full eight-hour shifts.

We have told many of our clients that we wondered how our grandparents or great-grandparents thrived under similar circumstances in the 19th century.

Most Puerto Rican families that are not in San Juan are scared to be outside at night, with most areas in total darkness the scene in Puerto Rico is almost unreal. What were once peaceful, idyllic towns where all one would hear at night was the sound of Puerto Rico’s tiny frogs, the coquí, now has been replaced with the sounds of power generators and military helicopters. This is how 3.4 million U.S. citizens have been living for the past 47 days and 47 nights, in the dark, as we are still off the grid amid a catastrophe that seems to have no end in sight.

As Puerto Ricans suffer the current living conditions, thousands of families have decided to move stateside. We estimate that by the time all is said and done, 600,000 to 750,000 residents could have left the island.

In conclusion, as writer Khalil Gibran often said, “Out of suffering have emerged the strongest souls. The most massive characters are seared with scars.” Our only hope is we all survive this ordeal.

Francisco Rodríguez-Castro is president and CEO of Birling Capital Advisors LLC

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