July 28, 2025 • 32 mins
In this week’s episode of Tackling Tax, we’ll delve into the Tax Act and more.
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Episode Transcript
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(00:00):
On this episode, we'll take a step back
to consider broader global economic trends
and how developments in the U.S. could impact them.
We welcome George Lagarias, Forvis Mazars'
chief economist From your one stop
for tax updates and analysis. I'm Iris.
And I'm Devin. It's Wednesday, July 9th,
(00:21):
and this is Tackling Tax.
Well, Devin, it's happened. The bill is passed.
(00:44):
So that's HR1, what a lot
of people have been calling the One Big Beautiful Bill Act
and it's now law and
what a journey it has been to get here.
Yeah, no kidding. It feels like it has
taken years to get here.
I mean, it kind of has, right?
Like we've been talking about some of these provisions
and proposals back since, you know, 2023 almost.
(01:05):
Yeah. Well, if you haven't seen it yet,
take a look at our breaking update episode
for a quick recap of what's in the Act.
But that brings us to our first segment today,
the Fast 4 stories of the week.
As I sure you would expect all
of our stories today revolve around the Act.
So let's get into it.
(01:26):
For our first story, we're gonna talk about one
of the more unique provisions in the Act.
This one allows for a hundred percent bonus depreciation
on non-residential real property for manufacturers.
So remember, normal real property would not be eligible
for bonus depreciation,
that it has a life over 20 years.
(01:47):
So that would sort of break that availability.
However, the Act does stipulate that if the property is used
for manufacturing, production,
or refining, the taxpayer could qualify.
There are some other requirements, so things like the
taxpayer has to be the first one to use the property.
It also must be used as an integral part
(02:07):
of the taxpayer's production activity.
And the construction of the property must begin
after January 19th, 2025, and
before January 1st, 2029.
So I remember back in the days of DPAD when there was a lot
of questions about who was a qualified manufacturer.
So, are we gonna run into that here?
(02:27):
I mean, probably; the provision does look
to substantial transformation, right, Devin?
So, when you're defining what would qualify
as manufacturing activities, we are looking at
that. With that in mind,
you know, a widget factory, probably more straightforward,
but would a restaurant qualify?
Those are the kinds of things we'll be looking at,
(02:49):
here to come.
For our second story, let's discuss Section 174.
So, prior to the Act, research
and experimental expenditures had
to be capitalized and amortized.
Now, a current deduction
for domestic R&E expenses is restored.
The kicker is that for businesses
that have previously capitalized domestic
R&E expenses under the current rules can now recognize the
(03:11):
unamortized balance as deductions,
either in the first tax year, beginning
after December 31, 2024,
or ratably over a two-year period, beginning
after December 31, 2024.
Even better, if you are a small taxpayer,
you would also be able to amend prior returns
to claim deductions where they otherwise were capitalized
(03:31):
expenses subject to some conditions.
So if you qualify as a small taxpayer
or not, for this purpose, depends on your gross receipts
for the first taxable year, beginning
after December 31, again, of 2024.
So, personal note,
before I joined Washington National Tax Office, I was part
of our professional standards group
(03:52):
where we looked at administrative adjustments
requests, or AARs,
so those are basically partnership amended returns.
And I can tell you just from experience, Devin,
this could get really messy if you are a partnership looking
to do that amended route,
so I would really recommend sort of taking a beat
and talking to your trusted advisor
(04:13):
before moving forward with that.
Absolutely agree with you on that point.
For our third story, let's talk a bit about clean energy.
To put it bluntly, y'all,
the Act dramatically impacted clean energy incentives.
Outside of repealing most EV and residential credits,
the Act included provisions limiting involvement
(04:33):
of certain foreign entities of concern.
So if you read the Act, it does get really specific about
what these entities are, sort of how they can
or can't be involved and so on.
But the interesting piece here is,
if you think practically, it's going to be how purchasers
of transferred credits can feel comfortable
(04:54):
that their credit does not run afoul of these new rules.
They're insurance for credits though, right?
I mean, yes. So that could be one solution,
but you know, we're gonna have
to be really careful
when you're purchasing these credits to make sure
that they're in compliance.
Otherwise the big elephant in the room when it comes
(05:15):
to clean energy and the Act is what happened
to solar and wind.
So the investment in production credits
for these properties are no longer available
for projects placed in service after December 31st, 2027.
Working with clients and
talking with folks in the industry,
I know a lot of developers
and investors have already planned
(05:36):
and possibly funded some projects throughout that time.
So, we'll be working through how best
to pivot given this development.
And last, but certainly not least, we have the state
and local tax deduction cap, or as we call it, the SALT cap.
Now, this is certainly one
of the most controversial topics in the Act,
and one that has evolved
throughout the various versions
(05:57):
of the bill in both the House and the Senate.
So what we ended up landing on was a $40,000 cap for 2025.
That's going to increase by 1% through 2029,
and then it's going to revert back to $10,000 permanently.
There's also a modified AGI phase out
that starts at $500,000.
That will also increase by 1% through 2029.
(06:19):
Now, one of the biggest concerns was whether
or not Congress is going to limit the state PTE
workarounds for the SALT cap.
Although the house had originally included a limitation
for these workarounds, the Act ultimately did not end up
incorporating it.
Thanks, Devin. And with that, let's transition
to the main part of today's show.
Words from Washington.
(06:46):
We call this segment Words from Washington.
As a look into what's happening on Capitol Hill, today
we're gonna take a step back to look at the broader
economic trends and how the tax bill tariffs
and other goings on in D.C. affect
economies around the globe.
Let me introduce our guest, George Lagarias.
He's the chief economist for Forvis
(07:08):
Mazars. George has 20 years
of experience in financial markets, nine in Athens, Greece,
and 11 in London.
He's worked for a number of private banks
and asset managers as an investment officer, portfolio
and fund manager, economist, and investment strategist.
Just so that our listeners know,
we are recording this on the morning of July 3rd.
(07:30):
The bill is currently on the house floor for vote.
It is looking like it might pass based on some
of our intel from our consultants there in D.C.,
but we did want to give you some context
for the conversation today.
Thanks for being here, George.
You know, George, we have heard you talk
before, so I'm gonna be pulling some topics from
(07:51):
that for our listeners.
But you did start off that presentation with the reset
of the dollar-based system.
Can you provide maybe some background for us on
what you mean and, and sort of the importance
around the events around that?
Okay. So, basically, what we are living
(08:11):
through is the fourth potential major
dollar devaluation since the 1970s.
So, the system was reset in 1971 in
what was called the Nixon Shock
after Richard Nixon removed the U.S. from the
gold standards,
(08:32):
which means he reneged on the obligation to convert
dollars into gold.
So, this happened in 1971.
Since then, we have seen three major devaluations,
one in the seventies, around 40%, one in the 1980s,
around 50%,
(08:54):
and one in the early 2000s,
around 34%.
So this is where we are at, at present.
The present U.S. administration is attempting the fourth
major dollar devaluation on a trade weight basis.
The dollar is already down 10% versus previous peak
(09:16):
around the beginning of the year.
The White House seems pretty comfortable with that.
It's a time-tested tactic.
If you want to boost your manufacturing,
reduce your real debt,
and improve your, well, reduce your trade deficit,
then currency devaluation is definitely the way to go.
(09:39):
That's great background, Devin.
I think you might have had a follow up for him.
Yeah, so thank you, George.
I know in some of your presentations you've spoken about
the five D's of our time.
I think it'd be really helpful if you could
maybe talk about that concept.
I found it very interesting. What are those five D's?
And then how are they,
how are they factoring into everything?
(10:01):
So the first two, which they're actually one,
is debt
and it's a sibling, which is devaluation,
which we already spoke about.
If you have a lot of debt, then it's not uncommon
to devalue your currency,
and that's how you reduce your real debt.
The second one is disruption.
That means economic but also geopolitical disruption.
(10:25):
This to go hand in hand.
And also, divergence.
If you, whether it's disruption,
then countries begin to, you know, close off their borders,
they begin to cooperate less with each other.
And that's where you have economic, financial,
(10:48):
political, and geopolitical divergence.
And the last D is deregulation.
If you, if you want to boost growth,
it is a very common thing to say, well,
I'm just going to cut red tape.
Red tape exists for a reason, by the way.
And it is usually what has been imposed
(11:11):
after previous misdeeds.
And you know, when something like the global financial
crisis happens, you put steep rules
and you say, no, we're never going to do this again.
But 20 years down the line, you don't call this
protecting regulations.
You call it red tape.
So there is a regulatory deregulatory cycle,
(11:33):
and I think that we are at the beginning
of a deregulatory part of that cycle.
It's very fascinating.
I want to kind of dive in a little bit into debt
and devaluation and how they impact the growth of GDP.
Yeah. So look, there are, not all debt is bad,
(11:53):
and it kind of depends.
At which point do you acquire debt?
So at the early stages of debt,
debt buildup, you know, when your debt to GDP is 30,
40%, first, you can acquire a lot of it.
And second, the interest payments are not that high.
(12:14):
So, that is good
because you can acquire a lot
of it without limiting your fiscal space.
And, also usually it doesn't impact your,
it doesn't impact your lending.
It doesn't affect your lending capabilities.
(12:39):
Now we are at the more mature part of the cycle, however,
and usually that means an accelerated, that build up.
And also we are at a point where
interest costs have risen.
This is sort of the more interesting part.
You see, you could get, acquire a lot more debt about five
(13:00):
or six years ago because the central banks
through vising was suppressing short
and long-term rates, which meant, you know,
you can acquire debt and you'd be paying 1%, 2% for it,
but then inflation happened,
and the central bank can't suppress rates anymore
because they need higher rates to combat inflation.
(13:20):
And that leads you to higher interest payments on your debt.
The U.S. specifically has a problem.
It's paying fee, uh, sorry,
yeah, about three quarters, of its
nominal GDP, it's paying
(13:42):
into interest payments, which is a lot of money.
Okay. So, we are at this point
where debt acquiring more debt can become toxic.
Now, one can argue, yeah,
but we can grow our way out
of it if we just spend the debt wisely.
This can happen in theory; in practice,
(14:04):
we have an Asian demographic,
and a lot of that debt goes into
what Americans call entitlements.
I'm not sure I really like the word,
but it's very common in
American financial lingo.
So, you know, social security
(14:25):
benefits, what have you,
the more your population grows,
all the more demands are for entitlements.
There are. Mm-hmm. Okay.
And, you know, you reach a point
where this is just not, not sustainable.
And the U.S. is definitely
rushing headlong into this direction.
(14:46):
They, the general belief is
that if you have the global reserve currency, well,
in essence, you can, you can acquire as much debt
as you want, which is not necessarily true.
So, I mean, that pretty much plays into the bill
and my perspective, right?
They're taking on all of this debt in the hopes that
(15:07):
what they're implementing will help businesses
that will in turn grow the economy.
So, are you saying that that's historically been proven
to be possible, or not as much
over the short term?
You can stimulate the economy,
but over the longer term, which means not that long,
(15:27):
three to five years, you know,
those stimulatory effects have passed,
and then you're still stuck
with the higher interest payments, which is why
what I predict going forward is that it's going
to be extremely difficult for the Federal Reserve
to remain truly independent,
because the Federal Reserve will need
(15:50):
to be pushed much like the seventies into lowering
interest rates, which should
allow the things being equal lower interest payments.
Of course, the Catch 22 varies.
That if you do this and follow the mode
of the seventies, then you're going to be stuck
with seventies type of inflation,
(16:11):
which is really not good.
But it's a way to sort of inflate the, that away.
it's a way to monetize your debt.
Okay. You know, we talked a little bit about the bill.
How do tariffs come into play with that?
'cause I know that that's something that has been publicized
as a strategy for raising income for the states.
There is a logic which says
(16:32):
that if I'm running a high debt,
then obviously I need to raise taxes.
And if you can't raise internal taxes,
then you can, you can raise taxes
to imports, which will also shield local producers.
It's a theory of things
(16:54):
that I don't necessarily espouse.
I think, it's an effort that's not very likely
to yield a lot of income.
Okay? Because
if your end goal is higher growth, then,
and you need to remember, tariffs are paid
by important companies.
(17:16):
So if you do this,
then either this becomes inflationary, which means that
real returns and real income fall,
or the companies end up dating the tariffs, which means
that they lower margins, okay?
Which is not, neither of this is very pro-growth,
(17:38):
at least not very pro real growth, you know, as opposed
to nominal growth.
And tariffs are the embodiment
of the idea that
the United States is somehow being,
(17:59):
losing out terms of global trade,
which is not necessarily supported
by literature or by numbers.
Okay? So, I think
what we could say about times is that it's a tool
of uncertain origin with uncertain,
(18:21):
or that certain potential.
Well, that's enlightening.
So we're saying maybe the tax policy
that we have is gonna increase debt,
not necessarily growth tariffs is a hard answer.
It's too painful to do that.
So, is the answer that U.S.' goal is devaluation,
bringing back from the conversation at the beginning, is
(18:44):
that the goal to devalue the U.S. dollar
against major currencies?
Yes. Look, there is a flaw in our
debt rate systems, in our board rating systems,
from your AAA to your CCC,
and that is that credit trading companies trade.
(19:05):
Yeah, great rating agencies,
they give some, they give investors the probability
of an actual default.
But financial literature
and economic literature considers massive valuation also
as afford fault.
Okay? At least the Ryan Car Andro of framework,
published in the Semial work,
(19:28):
this time is different, considers
massive evaluation as a form of default to.
So, it's not such a goal.
It's not a, I'm not sure I agree with the word goal.
It's obvious a goal of the government to allow the dollar
to devalue, but I would argue at the end of the day,
it's a natural consequence of acquiring too much debt
(19:51):
that eventually you're going to have to devalue.
Again, I want to distinguish between the idea
of acquiring too much debt
and the idea of making too fine interest payments.
Okay? The U.S. does have a lot of debt,
but if somehow interest payments were down to 1%,
it could more than well afford that debt then,
and then some, okay?
(20:12):
It's the higher interest payments as a result of inflation
that makes things more,
makes things more difficult.
And the U.S. especially said
to have higher inflation than the rest of the world.
Why? Because everybody's right now benefit from Chinese
overcapacity, which is a completely different story.
By the way. China wanted to restart
(20:36):
its economy after break of the real estate bubble.
So it all banks, you're not going to be letting money
to real estate development anymore,
and you're going to be letting more money
to build industrial capacity.
Hmm. And that means now they're stuck with a lot
of overcapacity,
(20:57):
and the economy isn't really going places.
It's pu trap, and they are acquiring a lot for that.
Still, with all that stimulus, the economy
is not materially picking up the pigs.
So, it's exporting.
China is exporting more and more deflation to the world,
(21:17):
but the United States are not going to take advantage
of it because if they put 40% tariffs on China
that are not going to be taking advantage
of China exporting deflation, which has been the modus
of growth for the last 25 years,
That's, that is very interesting.
I do wanna move on
(21:38):
and talk about a couple of your other D words, disruption
and divergence.
Can you explain what you mean by these words,
what their process is
and how the U.S. is also handling those two items?
Yes. So, it starts, does start with that, okay.
But there's also disruption.
Now, as we said, China
(21:58):
does have its own economic issues,
but China became a challenger to U.S. geopolitical
and economic dominance in the past few decades,
in the past couple of decades.
the, you know, what, what,
what Fed Japan post at some point, China posted
in its own right.
(22:20):
They can go.
And it also has to do with technological advances too.
You know, the race for
a real artificial intelligence is very real.
So the world which was globalizing,
and, you know, one had global cooperation,
(22:41):
which resulted in entire economic growth.
The world started deglobalize.
And that meant divergence economies.
We saw it with COVID.
Each economy at each country dealt with COVID
in its own very different way, okay?
And that resulted in economic divergence.
So, so we don't see more of that
(23:03):
because disruption
is not something that countries can deal with
an cooperative basis they need to deal with on their own.
So if you have a lot of debt, you don't have fiscal space
that, though that is true for many countries.
If you don't have fiscal space, you have angry citizens
and angry citizens demand that you put America first,
(23:27):
Britain first, Holland first, Greece first,
and so on and so forth.
And that creates divergence.
So there is a very real voter demand
to shield off from potential risks.
Of course, that's not how this works
but that's how they feel.
And this increases divergence economic
(23:48):
and political divergence.
So this is where we are.
We have this divergence
and we have, you know, multi, I wouldn't say
of isolationism, but definitely the end undoing of the,
global order that was set up
(24:09):
after the fall of the Soviet Union.
Well, we've talked a lot about debt.
What are some scenarios you see for
how we can move for, I mean, where,
where does deregulation come in with that?
So, deregulation is one of the attempts
to boost growth, right?
If you have a lot of debt that tends
(24:30):
to suppress your growth, so you say, look, I'll cut tape
and that should boost growth for pharma, for energy,
and most important for banks.
How do banks, deregulate banks boost growth?
Well, the past 15 years,
banks were very happily regulated,
and they were very well recapitalized, essentially.
Now what we're doing is we're rating the
(24:51):
proverbial piggy bank.
We're taking advantage of all that capital.
We're saying to banks, well, it can lend out all.
The cool thing with credit is
that it's money outta thin air.
If you have a hundred dollars
and you put it in the bank, you still loan
that hundred dollars, but the bank can take that hundred
and turn it into a 5670 loan.
(25:13):
In the past it was up to 120 loan that
of those hundred dollars, okay?
So the more you deregulate, the higher
that percentage goes means the more money you can create
with the basis of a deposit.
And, you know, that's, that's part
of the regulatory deregulatory cycle.
But to answer your broader question,
(25:38):
irregulation is an attempt
to somewhat balance out
the bad effects for growth from tariffs
and from high debt and from inflation.
Say, well, that's, that's what I can
do and that's what I will do.
But, make no mistake
(25:58):
that debt endgame is, is one of devaluation.
And the question is, okay,
the U.S. is not alone in this world.
If it devalues the dollar, will the Europeans attempt
to do that and will the Chinese attempt
to value their mm-hmm.
And then you get currency wars,
you get massive currency base,
(26:18):
but currency wars, you devalue,
but you don't really gain anything
because other countries try to devalue too.
So the only thing that gains is gold
and possibly the Swiss Franklin.
Well, George, you've given us a lot
to think about, especially our listeners.
So my last question is,
what can businesses do given all this macroeconomic outlook?
(26:39):
So, I think, first of all, businesses need
to acknowledge, and that is a very difficult acknowledgement
to make that the last 20 years were the
exception, not the norm.
A period of unfettered globalization that saw,
of the optimization of global supply chains.
And, you know, perpetually lowered
(27:00):
production costs is over, a period where
companies would borrow, you know,
and CFOs would borrow money
at very low cost pay dividends,
because that, that worked with their capital structure.
That period is also over,
so we're in a period of disruption
(27:21):
and divergence a period of high debt
and currency devaluation.
So companies need to be resilient
and this is number one,
and it's, it's a, it's a big word, resilience,
and really, you know, who knows what,
what it means in practice.
It means something different for each company.
(27:47):
For some companies it means having
redundancies in supply chains.
For other companies, it means
maintaining key staff even when they are abroad.
For other companies,
it means maintaining access to cheap labor.
(28:07):
For others it means maintaining access technology.
In a world where technology might not be as abundant
as in the past, you know, if you disrupt global trade, then
that means that a batch of laptops you ordered
for your workers might not arrive until three months
after you really need them, and so on and so forth.
So, resilience, it's something different for everyone.
(28:29):
At Forest Mazars, we often run
tests.
So the idea is that we pretend one of us
or a couple of us can't show up for work.
What will the rest of the team do?
We run stress tests. Can we deliver on time?
We're going to have problems with our clients,
(28:51):
and so on and so forth.
Because we're service business, our stress test,
our resilience test is pretend that key people
don't make it to work.
Resilience means something different
for all companies.
In terms of capital structure,
I would caution CFOs against acquiring too much debt,
(29:14):
especially for frivolous purposes,
because interest rates could remain high for some time.
Having said that, if we're in inflationary environment,
if we find ourselves in an environment
where inflation has run off, uh, then
actually maybe they should be acquiring that
(29:36):
because that debt will be very, very quickly,
devalued.
So they're going to end up paying less.
I would suggest that businesses
wisely manage their treasuries.
Treasury departments, especially
for bigger businesses, are important.
So imagine if you're an aluminum importer,
part of your exposure when you're trading
(29:58):
with different countries is in different currencies.
So you need to think about everything in terms
of a dollar devaluation or potentially even currency wars.
Okay? That could mean
that your treasury department might
make or break your business.
So these are just some examples of resilience of
how companies need to think about things.
(30:20):
And obviously the last big point is, they need to,
in a world where we have the divergence, then we need
to think also in terms of local expertise
where the world did not diverge.
You could have a global conglomerate
with very strict orders coming from headquarters,
and they should be implemented across all regions.
(30:41):
But where you have global political divergence,
that means local expertise is probably going
to play a much bigger role.
So you need local agility, and you need local knowledge,
and you need local empowerment.
All wonderful points. Thank you so much, George.
I think that's actionable for our clients
and super helpful.
(31:01):
Your perspective has been great.
We would really love to have you back on the show
sometime if you would have us.
But for that, for now, we will just say thank you
and stay tuned for our Focused FORsight of the week.
(31:22):
Each episode, we will bring you
what we call a Focused FORsight of the week.
Now with all the action going on with the Act, instead
of calling attention to one specific FORsight,
instead, we'd like to direct you
to our Washington National Tax Office website.
There you're gonna find a one stop
for all FORsights about the topic, as well
as upcoming webinars, breaking news, episodes
(31:43):
of Tackling Tax, and much more.
And that's our show. Thanks for joining.
Remember to subscribe and listen in for the next episode
of the show on July 22nd.
Until next time.
On this episode, we'll take a step back
to consider broader global economic trends
and how developments in the U.S. could impact them.
We welcome George Lagarias, Forvis Mazars'
chief economist From your one stop
for tax updates and analysis. I'm Iris.
And I'm Devin. It's Wednesday, July 9th,
(00:21):
and this is Tackling Tax.
Well, Devin, it's happened. The bill is passed.
(00:44):
So that's HR1, what a lot
of people have been calling the One Big Beautiful Bill Act
and it's now law and
what a journey it has been to get here.
Yeah, no kidding. It feels like it has
taken years to get here.
I mean, it kind of has, right?
Like we've been talking about some of these provisions
and proposals back since, you know, 2023 almost.
(01:05):
Yeah. Well, if you haven't seen it yet,
take a look at our breaking update episode
for a quick recap of what's in the Act.
But that brings us to our first segment today,
the Fast 4 stories of the week.
As I sure you would expect all
of our stories today revolve around the Act.
So let's get into it.
(01:26):
For our first story, we're gonna talk about one
of the more unique provisions in the Act.
This one allows for a hundred percent bonus depreciation
on non-residential real property for manufacturers.
So remember, normal real property would not be eligible
for bonus depreciation,
that it has a life over 20 years.
(01:47):
So that would sort of break that availability.
However, the Act does stipulate that if the property is used
for manufacturing, production,
or refining, the taxpayer could qualify.
There are some other requirements, so things like the
taxpayer has to be the first one to use the property.
It also must be used as an integral part
(02:07):
of the taxpayer's production activity.
And the construction of the property must begin
after January 19th, 2025, and
before January 1st, 2029.
So I remember back in the days of DPAD when there was a lot
of questions about who was a qualified manufacturer.
So, are we gonna run into that here?
(02:27):
I mean, probably; the provision does look
to substantial transformation, right, Devin?
So, when you're defining what would qualify
as manufacturing activities, we are looking at
that. With that in mind,
you know, a widget factory, probably more straightforward,
but would a restaurant qualify?
Those are the kinds of things we'll be looking at,
(02:49):
here to come.
For our second story, let's discuss Section 174.
So, prior to the Act, research
and experimental expenditures had
to be capitalized and amortized.
Now, a current deduction
for domestic R&E expenses is restored.
The kicker is that for businesses
that have previously capitalized domestic
R&E expenses under the current rules can now recognize the
(03:11):
unamortized balance as deductions,
either in the first tax year, beginning
after December 31, 2024,
or ratably over a two-year period, beginning
after December 31, 2024.
Even better, if you are a small taxpayer,
you would also be able to amend prior returns
to claim deductions where they otherwise were capitalized
(03:31):
expenses subject to some conditions.
So if you qualify as a small taxpayer
or not, for this purpose, depends on your gross receipts
for the first taxable year, beginning
after December 31, again, of 2024.
So, personal note,
before I joined Washington National Tax Office, I was part
of our professional standards group
(03:52):
where we looked at administrative adjustments
requests, or AARs,
so those are basically partnership amended returns.
And I can tell you just from experience, Devin,
this could get really messy if you are a partnership looking
to do that amended route,
so I would really recommend sort of taking a beat
and talking to your trusted advisor
(04:13):
before moving forward with that.
Absolutely agree with you on that point.
For our third story, let's talk a bit about clean energy.
To put it bluntly, y'all,
the Act dramatically impacted clean energy incentives.
Outside of repealing most EV and residential credits,
the Act included provisions limiting involvement
(04:33):
of certain foreign entities of concern.
So if you read the Act, it does get really specific about
what these entities are, sort of how they can
or can't be involved and so on.
But the interesting piece here is,
if you think practically, it's going to be how purchasers
of transferred credits can feel comfortable
(04:54):
that their credit does not run afoul of these new rules.
They're insurance for credits though, right?
I mean, yes. So that could be one solution,
but you know, we're gonna have
to be really careful
when you're purchasing these credits to make sure
that they're in compliance.
Otherwise the big elephant in the room when it comes
(05:15):
to clean energy and the Act is what happened
to solar and wind.
So the investment in production credits
for these properties are no longer available
for projects placed in service after December 31st, 2027.
Working with clients and
talking with folks in the industry,
I know a lot of developers
and investors have already planned
(05:36):
and possibly funded some projects throughout that time.
So, we'll be working through how best
to pivot given this development.
And last, but certainly not least, we have the state
and local tax deduction cap, or as we call it, the SALT cap.
Now, this is certainly one
of the most controversial topics in the Act,
and one that has evolved
throughout the various versions
(05:57):
of the bill in both the House and the Senate.
So what we ended up landing on was a $40,000 cap for 2025.
That's going to increase by 1% through 2029,
and then it's going to revert back to $10,000 permanently.
There's also a modified AGI phase out
that starts at $500,000.
That will also increase by 1% through 2029.
(06:19):
Now, one of the biggest concerns was whether
or not Congress is going to limit the state PTE
workarounds for the SALT cap.
Although the house had originally included a limitation
for these workarounds, the Act ultimately did not end up
incorporating it.
Thanks, Devin. And with that, let's transition
to the main part of today's show.
Words from Washington.
(06:46):
We call this segment Words from Washington.
As a look into what's happening on Capitol Hill, today
we're gonna take a step back to look at the broader
economic trends and how the tax bill tariffs
and other goings on in D.C. affect
economies around the globe.
Let me introduce our guest, George Lagarias.
He's the chief economist for Forvis
(07:08):
Mazars. George has 20 years
of experience in financial markets, nine in Athens, Greece,
and 11 in London.
He's worked for a number of private banks
and asset managers as an investment officer, portfolio
and fund manager, economist, and investment strategist.
Just so that our listeners know,
we are recording this on the morning of July 3rd.
(07:30):
The bill is currently on the house floor for vote.
It is looking like it might pass based on some
of our intel from our consultants there in D.C.,
but we did want to give you some context
for the conversation today.
Thanks for being here, George.
You know, George, we have heard you talk
before, so I'm gonna be pulling some topics from
(07:51):
that for our listeners.
But you did start off that presentation with the reset
of the dollar-based system.
Can you provide maybe some background for us on
what you mean and, and sort of the importance
around the events around that?
Okay. So, basically, what we are living
(08:11):
through is the fourth potential major
dollar devaluation since the 1970s.
So, the system was reset in 1971 in
what was called the Nixon Shock
after Richard Nixon removed the U.S. from the
gold standards,
(08:32):
which means he reneged on the obligation to convert
dollars into gold.
So, this happened in 1971.
Since then, we have seen three major devaluations,
one in the seventies, around 40%, one in the 1980s,
around 50%,
(08:54):
and one in the early 2000s,
around 34%.
So this is where we are at, at present.
The present U.S. administration is attempting the fourth
major dollar devaluation on a trade weight basis.
The dollar is already down 10% versus previous peak
(09:16):
around the beginning of the year.
The White House seems pretty comfortable with that.
It's a time-tested tactic.
If you want to boost your manufacturing,
reduce your real debt,
and improve your, well, reduce your trade deficit,
then currency devaluation is definitely the way to go.
(09:39):
That's great background, Devin.
I think you might have had a follow up for him.
Yeah, so thank you, George.
I know in some of your presentations you've spoken about
the five D's of our time.
I think it'd be really helpful if you could
maybe talk about that concept.
I found it very interesting. What are those five D's?
And then how are they,
how are they factoring into everything?
(10:01):
So the first two, which they're actually one,
is debt
and it's a sibling, which is devaluation,
which we already spoke about.
If you have a lot of debt, then it's not uncommon
to devalue your currency,
and that's how you reduce your real debt.
The second one is disruption.
That means economic but also geopolitical disruption.
(10:25):
This to go hand in hand.
And also, divergence.
If you, whether it's disruption,
then countries begin to, you know, close off their borders,
they begin to cooperate less with each other.
And that's where you have economic, financial,
(10:48):
political, and geopolitical divergence.
And the last D is deregulation.
If you, if you want to boost growth,
it is a very common thing to say, well,
I'm just going to cut red tape.
Red tape exists for a reason, by the way.
And it is usually what has been imposed
(11:11):
after previous misdeeds.
And you know, when something like the global financial
crisis happens, you put steep rules
and you say, no, we're never going to do this again.
But 20 years down the line, you don't call this
protecting regulations.
You call it red tape.
So there is a regulatory deregulatory cycle,
(11:33):
and I think that we are at the beginning
of a deregulatory part of that cycle.
It's very fascinating.
I want to kind of dive in a little bit into debt
and devaluation and how they impact the growth of GDP.
Yeah. So look, there are, not all debt is bad,
(11:53):
and it kind of depends.
At which point do you acquire debt?
So at the early stages of debt,
debt buildup, you know, when your debt to GDP is 30,
40%, first, you can acquire a lot of it.
And second, the interest payments are not that high.
(12:14):
So, that is good
because you can acquire a lot
of it without limiting your fiscal space.
And, also usually it doesn't impact your,
it doesn't impact your lending.
It doesn't affect your lending capabilities.
(12:39):
Now we are at the more mature part of the cycle, however,
and usually that means an accelerated, that build up.
And also we are at a point where
interest costs have risen.
This is sort of the more interesting part.
You see, you could get, acquire a lot more debt about five
(13:00):
or six years ago because the central banks
through vising was suppressing short
and long-term rates, which meant, you know,
you can acquire debt and you'd be paying 1%, 2% for it,
but then inflation happened,
and the central bank can't suppress rates anymore
because they need higher rates to combat inflation.
(13:20):
And that leads you to higher interest payments on your debt.
The U.S. specifically has a problem.
It's paying fee, uh, sorry,
yeah, about three quarters, of its
nominal GDP, it's paying
(13:42):
into interest payments, which is a lot of money.
Okay. So, we are at this point
where debt acquiring more debt can become toxic.
Now, one can argue, yeah,
but we can grow our way out
of it if we just spend the debt wisely.
This can happen in theory; in practice,
(14:04):
we have an Asian demographic,
and a lot of that debt goes into
what Americans call entitlements.
I'm not sure I really like the word,
but it's very common in
American financial lingo.
So, you know, social security
(14:25):
benefits, what have you,
the more your population grows,
all the more demands are for entitlements.
There are. Mm-hmm. Okay.
And, you know, you reach a point
where this is just not, not sustainable.
And the U.S. is definitely
rushing headlong into this direction.
(14:46):
They, the general belief is
that if you have the global reserve currency, well,
in essence, you can, you can acquire as much debt
as you want, which is not necessarily true.
So, I mean, that pretty much plays into the bill
and my perspective, right?
They're taking on all of this debt in the hopes that
(15:07):
what they're implementing will help businesses
that will in turn grow the economy.
So, are you saying that that's historically been proven
to be possible, or not as much
over the short term?
You can stimulate the economy,
but over the longer term, which means not that long,
(15:27):
three to five years, you know,
those stimulatory effects have passed,
and then you're still stuck
with the higher interest payments, which is why
what I predict going forward is that it's going
to be extremely difficult for the Federal Reserve
to remain truly independent,
because the Federal Reserve will need
(15:50):
to be pushed much like the seventies into lowering
interest rates, which should
allow the things being equal lower interest payments.
Of course, the Catch 22 varies.
That if you do this and follow the mode
of the seventies, then you're going to be stuck
with seventies type of inflation,
(16:11):
which is really not good.
But it's a way to sort of inflate the, that away.
it's a way to monetize your debt.
Okay. You know, we talked a little bit about the bill.
How do tariffs come into play with that?
'cause I know that that's something that has been publicized
as a strategy for raising income for the states.
There is a logic which says
(16:32):
that if I'm running a high debt,
then obviously I need to raise taxes.
And if you can't raise internal taxes,
then you can, you can raise taxes
to imports, which will also shield local producers.
It's a theory of things
(16:54):
that I don't necessarily espouse.
I think, it's an effort that's not very likely
to yield a lot of income.
Okay? Because
if your end goal is higher growth, then,
and you need to remember, tariffs are paid
by important companies.
(17:16):
So if you do this,
then either this becomes inflationary, which means that
real returns and real income fall,
or the companies end up dating the tariffs, which means
that they lower margins, okay?
Which is not, neither of this is very pro-growth,
(17:38):
at least not very pro real growth, you know, as opposed
to nominal growth.
And tariffs are the embodiment
of the idea that
the United States is somehow being,
(17:59):
losing out terms of global trade,
which is not necessarily supported
by literature or by numbers.
Okay? So, I think
what we could say about times is that it's a tool
of uncertain origin with uncertain,
(18:21):
or that certain potential.
Well, that's enlightening.
So we're saying maybe the tax policy
that we have is gonna increase debt,
not necessarily growth tariffs is a hard answer.
It's too painful to do that.
So, is the answer that U.S.' goal is devaluation,
bringing back from the conversation at the beginning, is
(18:44):
that the goal to devalue the U.S. dollar
against major currencies?
Yes. Look, there is a flaw in our
debt rate systems, in our board rating systems,
from your AAA to your CCC,
and that is that credit trading companies trade.
(19:05):
Yeah, great rating agencies,
they give some, they give investors the probability
of an actual default.
But financial literature
and economic literature considers massive valuation also
as afford fault.
Okay? At least the Ryan Car Andro of framework,
published in the Semial work,
(19:28):
this time is different, considers
massive evaluation as a form of default to.
So, it's not such a goal.
It's not a, I'm not sure I agree with the word goal.
It's obvious a goal of the government to allow the dollar
to devalue, but I would argue at the end of the day,
it's a natural consequence of acquiring too much debt
(19:51):
that eventually you're going to have to devalue.
Again, I want to distinguish between the idea
of acquiring too much debt
and the idea of making too fine interest payments.
Okay? The U.S. does have a lot of debt,
but if somehow interest payments were down to 1%,
it could more than well afford that debt then,
and then some, okay?
(20:12):
It's the higher interest payments as a result of inflation
that makes things more,
makes things more difficult.
And the U.S. especially said
to have higher inflation than the rest of the world.
Why? Because everybody's right now benefit from Chinese
overcapacity, which is a completely different story.
By the way. China wanted to restart
(20:36):
its economy after break of the real estate bubble.
So it all banks, you're not going to be letting money
to real estate development anymore,
and you're going to be letting more money
to build industrial capacity.
Hmm. And that means now they're stuck with a lot
of overcapacity,
(20:57):
and the economy isn't really going places.
It's pu trap, and they are acquiring a lot for that.
Still, with all that stimulus, the economy
is not materially picking up the pigs.
So, it's exporting.
China is exporting more and more deflation to the world,
(21:17):
but the United States are not going to take advantage
of it because if they put 40% tariffs on China
that are not going to be taking advantage
of China exporting deflation, which has been the modus
of growth for the last 25 years,
That's, that is very interesting.
I do wanna move on
(21:38):
and talk about a couple of your other D words, disruption
and divergence.
Can you explain what you mean by these words,
what their process is
and how the U.S. is also handling those two items?
Yes. So, it starts, does start with that, okay.
But there's also disruption.
Now, as we said, China
(21:58):
does have its own economic issues,
but China became a challenger to U.S. geopolitical
and economic dominance in the past few decades,
in the past couple of decades.
the, you know, what, what,
what Fed Japan post at some point, China posted
in its own right.
(22:20):
They can go.
And it also has to do with technological advances too.
You know, the race for
a real artificial intelligence is very real.
So the world which was globalizing,
and, you know, one had global cooperation,
(22:41):
which resulted in entire economic growth.
The world started deglobalize.
And that meant divergence economies.
We saw it with COVID.
Each economy at each country dealt with COVID
in its own very different way, okay?
And that resulted in economic divergence.
So, so we don't see more of that
(23:03):
because disruption
is not something that countries can deal with
an cooperative basis they need to deal with on their own.
So if you have a lot of debt, you don't have fiscal space
that, though that is true for many countries.
If you don't have fiscal space, you have angry citizens
and angry citizens demand that you put America first,
(23:27):
Britain first, Holland first, Greece first,
and so on and so forth.
And that creates divergence.
So there is a very real voter demand
to shield off from potential risks.
Of course, that's not how this works
but that's how they feel.
And this increases divergence economic
(23:48):
and political divergence.
So this is where we are.
We have this divergence
and we have, you know, multi, I wouldn't say
of isolationism, but definitely the end undoing of the,
global order that was set up
(24:09):
after the fall of the Soviet Union.
Well, we've talked a lot about debt.
What are some scenarios you see for
how we can move for, I mean, where,
where does deregulation come in with that?
So, deregulation is one of the attempts
to boost growth, right?
If you have a lot of debt that tends
(24:30):
to suppress your growth, so you say, look, I'll cut tape
and that should boost growth for pharma, for energy,
and most important for banks.
How do banks, deregulate banks boost growth?
Well, the past 15 years,
banks were very happily regulated,
and they were very well recapitalized, essentially.
Now what we're doing is we're rating the
(24:51):
proverbial piggy bank.
We're taking advantage of all that capital.
We're saying to banks, well, it can lend out all.
The cool thing with credit is
that it's money outta thin air.
If you have a hundred dollars
and you put it in the bank, you still loan
that hundred dollars, but the bank can take that hundred
and turn it into a 5670 loan.
(25:13):
In the past it was up to 120 loan that
of those hundred dollars, okay?
So the more you deregulate, the higher
that percentage goes means the more money you can create
with the basis of a deposit.
And, you know, that's, that's part
of the regulatory deregulatory cycle.
But to answer your broader question,
(25:38):
irregulation is an attempt
to somewhat balance out
the bad effects for growth from tariffs
and from high debt and from inflation.
Say, well, that's, that's what I can
do and that's what I will do.
But, make no mistake
(25:58):
that debt endgame is, is one of devaluation.
And the question is, okay,
the U.S. is not alone in this world.
If it devalues the dollar, will the Europeans attempt
to do that and will the Chinese attempt
to value their mm-hmm.
And then you get currency wars,
you get massive currency base,
(26:18):
but currency wars, you devalue,
but you don't really gain anything
because other countries try to devalue too.
So the only thing that gains is gold
and possibly the Swiss Franklin.
Well, George, you've given us a lot
to think about, especially our listeners.
So my last question is,
what can businesses do given all this macroeconomic outlook?
(26:39):
So, I think, first of all, businesses need
to acknowledge, and that is a very difficult acknowledgement
to make that the last 20 years were the
exception, not the norm.
A period of unfettered globalization that saw,
of the optimization of global supply chains.
And, you know, perpetually lowered
(27:00):
production costs is over, a period where
companies would borrow, you know,
and CFOs would borrow money
at very low cost pay dividends,
because that, that worked with their capital structure.
That period is also over,
so we're in a period of disruption
(27:21):
and divergence a period of high debt
and currency devaluation.
So companies need to be resilient
and this is number one,
and it's, it's a, it's a big word, resilience,
and really, you know, who knows what,
what it means in practice.
It means something different for each company.
(27:47):
For some companies it means having
redundancies in supply chains.
For other companies, it means
maintaining key staff even when they are abroad.
For other companies,
it means maintaining access to cheap labor.
(28:07):
For others it means maintaining access technology.
In a world where technology might not be as abundant
as in the past, you know, if you disrupt global trade, then
that means that a batch of laptops you ordered
for your workers might not arrive until three months
after you really need them, and so on and so forth.
So, resilience, it's something different for everyone.
(28:29):
At Forest Mazars, we often run
tests.
So the idea is that we pretend one of us
or a couple of us can't show up for work.
What will the rest of the team do?
We run stress tests. Can we deliver on time?
We're going to have problems with our clients,
(28:51):
and so on and so forth.
Because we're service business, our stress test,
our resilience test is pretend that key people
don't make it to work.
Resilience means something different
for all companies.
In terms of capital structure,
I would caution CFOs against acquiring too much debt,
(29:14):
especially for frivolous purposes,
because interest rates could remain high for some time.
Having said that, if we're in inflationary environment,
if we find ourselves in an environment
where inflation has run off, uh, then
actually maybe they should be acquiring that
(29:36):
because that debt will be very, very quickly,
devalued.
So they're going to end up paying less.
I would suggest that businesses
wisely manage their treasuries.
Treasury departments, especially
for bigger businesses, are important.
So imagine if you're an aluminum importer,
part of your exposure when you're trading
(29:58):
with different countries is in different currencies.
So you need to think about everything in terms
of a dollar devaluation or potentially even currency wars.
Okay? That could mean
that your treasury department might
make or break your business.
So these are just some examples of resilience of
how companies need to think about things.
(30:20):
And obviously the last big point is, they need to,
in a world where we have the divergence, then we need
to think also in terms of local expertise
where the world did not diverge.
You could have a global conglomerate
with very strict orders coming from headquarters,
and they should be implemented across all regions.
(30:41):
But where you have global political divergence,
that means local expertise is probably going
to play a much bigger role.
So you need local agility, and you need local knowledge,
and you need local empowerment.
All wonderful points. Thank you so much, George.
I think that's actionable for our clients
and super helpful.
(31:01):
Your perspective has been great.
We would really love to have you back on the show
sometime if you would have us.
But for that, for now, we will just say thank you
and stay tuned for our Focused FORsight of the week.
(31:22):
Each episode, we will bring you
what we call a Focused FORsight of the week.
Now with all the action going on with the Act, instead
of calling attention to one specific FORsight,
instead, we'd like to direct you
to our Washington National Tax Office website.
There you're gonna find a one stop
for all FORsights about the topic, as well
as upcoming webinars, breaking news, episodes
(31:43):
of Tackling Tax, and much more.
And that's our show. Thanks for joining.
Remember to subscribe and listen in for the next episode
of the show on July 22nd.
Until next time.
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