Feelin the Heat

Posted by Jeff Carter
on July 22nd, 2010

Ben Nelson might be more unpopular in Nebraska than Barry Switzer. Anecdotal evidence infers that it’s tough for him to even go out to a restaurant in his home state. If he ran today, he surely would lose his election. Why? His “Yes” vote on Obamacare. There is an old joke about a “woman’s price”, and we found out how much Ben cost in the health care vote!

Ken Conrad is a Senator from South Dakota. Fortunately for him, he is not up for election this year. South Dakota and North Dakota are trending Republican. Senator Conrad might be asking his friend Tom Daschle for a lobbying job in December if his future was up for a vote. Update Senator Conrad was also a beneficiary of sweet loans from Countrywide Financial. He and retiring Senator Chris Dodd (D-Conn) received points off, fees lowered, and other benefits that you and I could not possibly get. Blatantly illegal, and a payoff for friendly regulation and legislation. How do you spell corruption?

Both of them are “thinking meek”.

Amazingly, they have decreed that the Bush tax cuts ought to stand. Not be made permanent mind you. But, as they conferred from their verbiage, you can’t raise taxes in a downturn. However, extension of the Bush tax cuts will not be enough to avoid economic disaster.

The tax code is amazingly complex. Ironically, after the Bush tax cuts, 47% of Americans pay no income taxes! With the economic downturn, that number will grow. There is no doubt that we need to smooth out the tax code. Steve Forbes has advocated for a flat tax, and I think that makes a lot of sense. A flat tax with no write offs would be highly stimulative to the economy.

Currently, quarterly corporate earnings are being reported. They are pretty good so far, but mask underlying cracks in the economic environment. Corporations employ thousands of people that decide where and when to recognize revenue. Earnings are not always a clear picture of what is going on in the macroeconomic world. Companies have cut costs to the bone, and are generating revenue. They also are comparing results to last year, or recent previous quarters, so earnings look better today than they might normally. Guidance going forward is murky.

Scanning US fiscal policy, things look very dismal. Obamacare and a host of other policies put in place by this administration, and this left wing Congress-will put a gigantic cap on any growth. Merely extending the Bush tax cuts until they deem that it is prudent to raise taxes is not enough. The economic environment needs a true “positive shock” to get things started.

Ending the capital gains tax would provide the most bang for the buck. Repealing cap gains would force CFO’s to turn cash into productive assets, raising workers potential to earn money. Otherwise, the money would flow to shareholders, and they would either invest or spend the money.

Many times during times of high unemployment, people get entrepreneurial religion and start up companies. In this downturn, we have not seen that happen. There is a dearth of start up activity. One reason is that the expectations going forward are so poor, no one sees a way to take advantage of it. Secondly, access to credit is so tight, no one can get money to start up anything.

It is time for bold, decisive, leadership. However, merely extending the Bush tax cuts is like joining a herd of sheep. As every sheep knows, eventually it’s time for slaughter.

UPDATE

It’s worse than you think. Here is a link to an Investors Business Daily article that highlights some of the tax changes coming in 2011.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.