A Hidden Tax Hike for the Middle Class

A December rate hike is still on the table... Trump makes it official... Don't expect big changes from the Fed next year... The latest on tax reform... A hidden tax hike for the middle class?... 'The most financially disruptive event in 25 years'...

Last week, the Federal Reserve wrapped up its latest monetary policy meeting...

On Wednesday, the Fed kept interest rates unchanged this month, as expected. But it also suggested it still expects to raise rates when it meets again in December. As news service Reuters reported at the time...

"The labor market has continued to strengthen and ... economic activity has been rising at a solid rate despite hurricane-related disruptions," the Fed's rate-setting committee said in a statement after its unanimous policy decision.

In keeping with that encouraging tone, the central bank's policymakers acknowledged that inflation remained soft but did not downgrade their assessment of pricing expectations.

U.S. Treasury yields and short-term interest rate futures were little changed after the release of the statement, while federal fund futures put the odds of a December rate hike at about 98%, according to CME Group's FedWatch program.

In related news, it's now official...

On Thursday afternoon, President Donald Trump announced he had finally chosen a replacement for current Fed Chair Janet Yellen, whose term ends in February.

Trump said he would nominate current Fed Governor Jerome Powell for the job, citing his "wisdom and leadership."

As we discussed, Trump had initially favored some potentially more "hawkish" candidates, including former Fed Governor Kevin Warsh and Stanford University economist John Taylor. But in the end, he chose the more "dovish" Powell. As Reuters noted...

Powell, who has been a Fed governor since 2012, has yet to cast a dissenting vote against the Federal Open Market Committee's decisions on monetary policy. His views are seen as in line with current Fed Chair Janet Yellen, so his appointment appears to offer investors more certainty on the Fed's likely policy path...

Importantly, Powell is viewed as unafraid of reversing the current plan to sharply reduce the Fed's $4.5 trillion balance sheet if the economic or market outlook were to change.

In short, Powell likely represents a continuation of the same easy-money policies of Yellen, and Ben Bernanke before her. Nothing to see here...

Last week also brought some big potential news on tax reform...

The Republican-led House of Representatives released the details of its proposed tax plan – the Tax Cuts and Jobs Act – on Thursday morning. It includes a number of anticipated cuts, as well as a few surprising changes.

As expected, it would slash the corporate tax rate from 35% to 20%. And it would leave it there indefinitely, versus earlier talk of phasing this cut out over time. It would also reduce the so-called "pass-through rate" – what unincorporated business owners pay – from 39.6% to 25%.

On the individual side, it would leave the maximum rate at 39.6%, but it would reduce the number of individual income tax brackets from seven to four, and increase the income threshold for each relative level. It would nearly double the standard deduction, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples. And it would expand the child tax credit from $1,000 to $1,600, and provide a $300 credit for each parent and non-child dependent.

The plan would reduce or eliminate several special-interest deductions and exemptions. Most notably, it would cap the mortgage interest deduction for newly purchased homes at $500,000, versus $1 million today.

It would also repeal the controversial alternative minimum tax ("AMT"), continue to allow individuals to deduct state and local property taxes up to $10,000, and phase out the estate tax within six years.

On the surface, at least, the plan appears to be a net positive for individuals and businesses alike...

However, we have a couple of concerns. First, a closer look shows the plan would actually raise the top marginal rate to nearly 50% for the highest earners. As a Wall Street Journal editorial explained on Friday (emphasis added)...

The GOP's tax bill released Thursday collapses seven brackets into four – 12%, 25%, 35% and 39.6%. But the 12% rate applies to a large range of income, up to $45,000 for individuals and $90,000 for married couples. This means more of a person's income is taxed at a lower rate, even for folks who earn enough to reach into higher brackets.

But wait. The Ways and Means bill analysis notes that for high-income taxpayers the benefit of the 12% rate "would phase out." For a single person earning $1 million, and couples who make $1.2 million, the benefit is phased out by $6 on every $100 of income, until the 12% rate relief has been clawed back. A married couple would thus face a 45.6% marginal rate on earnings between $1.2 million and about $1.6 million. Then the rate returns to 39.6%...

The Reagan reform of 1986 lowered the top rate to 28% from 50%, but that has steadily crept back up, including the 3.8% Obamacare investment tax the party failed to repeal earlier this year. With its new bubble bracket, the GOP is repudiating Reagan's reform and bringing the top income-tax rate back to 50%. Voters might as well have elected Hillary Clinton.

Now, we suspect most folks won't lose sleep over a 'stealth' tax increase on the richest Americans...

But the bill also appears to include a hidden tax increase on the middle class, as well.

It includes a change to how income thresholds are adjusted for inflation. Under today's tax code, inflation is indexed via the consumer price index ("CPI"). This new plan would use what's called "chained CPI."

Now, as longtime readers know, the CPI is a poor measure of real inflation. This is because it only tracks the prices of a specific basket of goods and services. It ignores the prices of assets like housing, stocks, bonds, etc.

This is how the Fed and other central banks can print trillions of dollars of new money, while consumer prices remain relatively subdued. There has been massive inflation... It simply hasn't (yet) flowed into the areas that the CPI is tracking.

Still, as bad a measure as the CPI is, chained CPI is even worse. You see, it measures the same specific basket of goods and services. But it then adjusts for what the government calls "substitution bias."

To use a very simple example, suppose the price of beef surges higher. The traditional CPI would track that price increase as "inflation." However, the chained CPI might assume that many folks would switch to relatively cheaper chicken instead. In this case, your cost of living hasn't really increased (never mind that you can't afford to eat beef anymore).

It's a bizarre and deceitful argument that only a politician or government economist could make. Yet this "adjustment" means the chained CPI consistently lags the traditional CPI.

And if included in this new tax plan, it would likely amount to a stealth tax increase in coming years as real prices rise faster than income thresholds are raised.

Tax reform or not, a big government change is coming on January 1...

And the Stansberry Research analyst who recommended three of our Top 10 Hall of Fame stocks – which are published at the end of every Digest – believes this change could be the catalyst for his next big winner.

We're talking about Dan Ferris, editor of our Extreme Value advisory.

As longtime readers know, Dan has one of the best long-term track records in our business, including some of Stansberry Research's all-time-best recommendations Constellation Brands (STZ), closed for 629%... Prestige Brands (PBH), closed for 406%... and Medis Technologies (MDTL), closed for 333%. And he believes he has now found his next potential "Hall of Famer"...

This company is a true "World Dominator" trading at a great price today. But Dan says shares could soon move sharply higher, thanks to an obscure new law – Section 216 of Medicare bill H.R. 4302, to be precise – which kicks off in less than two months from now on New Year's Day.

The mainstream media have barely written a word about this story. In fact, unless you're a health care professional, you've probably never even heard of this bill. And even if you are, you likely don't understand the implications...

You see, the moment this law takes effect, it will unleash devastating consequences on one critical corner of the health care market. But Dan says it also will legally grant this firm a virtual monopoly in the process.

Dan is famous for finding little-known situations with tremendous upside, just like this.

For example, back in 2002 – when our company originally launched Extreme Value – one of the first opportunities Dan uncovered was what he called "penny real estate." This was a way to buy super-cheap land in places like Florida, Southern California, and Hawaii, through your regular brokerage account... and years before the real estate boom swept America.

Two years after he recommended these six undervalued stocks, they were up an average of 134%. And beginning less than two months from today, Dan believes this latest situation has the potential to be one of his best recommendations of all time.

If you're interested in this urgent opportunity, you must act soon. This information will only be available until midnight Eastern time tonight. Click here to learn more now. (This link does not lead to a long video.)

Jim Rogers Unplugged

We've relaunched Porter's radio show under a new name: Stansberry Investor Hour.

Porter's radio show was one of the most popular things we've ever done. But when he returned as the CEO of Stansberry Research, he set it aside. Now, he's back on the air with co-host Buck Sexton. Buck hosts a nationally syndicated, mega-popular weekday talk-radio show.

In the 24th episode – out last week – Buck and Porter speak with investing legend and bestselling author Jim Rogers about the potential for a "Debt Jubilee." You'll also hear about...

7:10: How a seemingly innocuous Halloween costume may have permanently damaged the reputations of a pair of teenagers.

22:25: The biggest factor behind the last financial crisis has returned... but is worse than before.

36:00: Why Porter just made his largest-ever investment in gold last week.

48:10: How a 2% rise in interest rates could crush Japan's economy and lead to an all-out debt restructuring.

54:00: The next leveraged debt to blow up... and which U.S. state may be leading the charge.

Best of all, Stansberry Investor Hour is totally free of charge. You can subscribe on iTunes right here, or on Google Play right here.

New 52-week highs (as of 11/3/17): Apple (AAPL), Amazon (AMZN), American Express (AXP), Becton Dickinson (BDX), WisdomTree Japan Hedged Equity Fund (DXJ), iShares MSCI Japan Fund (EWJ), Alphabet (GOOGL), Grubhub (GRUB), McDonald's (MCD), Microsoft (MSFT), Nvidia (NVDA), PNC Financial Warrants (PNC-WT), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), Sysco (SYY), Tencent (TCEHY), ProShares Ultra Semiconductors Fund (USD), Wal-Mart (WMT), short position in GGP (GGP), and short position in Interpublic Group of Companies (IPG).

In today's mailbag, a comment on the insane valuation of electric carmaker Tesla... and readers weigh in on Porter's latest Friday Digest. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.

"In Dan Ferris' piece in the Digest Masters Series this Saturday, Dan states: 'So what's the first financial clue I look for? Simply put, I want a business that gushes free cash flow. This is what makes a business valuable: the ability to generate lots of extra cash. Without excess cash, your shares are worthless. Take iPhone maker Apple (AAPL), for example... Apple's free cash flow... equals $50.5 billion.'

"So how can Tesla (TSLA) have a market valuation exceeding $51 BILLION? (Note: Ford $49 Billion, GM $60 Billion). Just asking..." – Paid-up Stansberry Alliance member Tom Sopchak

Brill comment: That's a great question, Tom...

"Porter, I greatly appreciate your report on progress with Alzheimer's. I see myself as part of a Stansberry family, and with this report you again treat us as family. Glad I found you." – Paid-up subscriber George Miller

"Porter, my mother is in the early stages of Alzheimer's disease. I am a bit biased, but I have often told people, 'She is the best person I know.' It is sad, and it really hurts, as many people personally know. Thank you for giving us hope, and for being more than just about money." – Paid-up subscriber R.T.


Justin Brill
Baltimore, Maryland
November 6, 2017