More of the Same?

Uncertainty upsets markets and consumers, who become cautious. Wage-earners who have become worried about losing their source of income save money and don’t spend as freely as before 2008. They try to pay down debt which eats into disposable income. Result: the banks won’t lend to businesses because sales are down

The current economic climate is riddled with uncertainty for businesses and individuals. Going into 2011, people do not know if the Bush tax cut will remain in place or what health care costs will be due to the Republican pledge to repeal Obamacare. Corn prices are exploding. Throw in energy costs, increasing due to the decline of the dollar’s buying power, and the outlook remains grim. The following two articles confirm this forecast.

Planning hung up over Bush-era relief

Sunday, October 31, 2010 03:00 AM
By Joe Taschler
MILWAUKEE JOURNAL SENTINEL

MILWAUKEE — With about nine weeks left in the year, it is increasingly likely that the Bush tax cuts will expire without Congress taking action, business owners and tax advisers say.

That has people fuming, not because the tax cuts will go away, but because elected leaders failed to provide clear direction as to how companies and people ought to prepare to do business in the coming year.

“It’s amateur hour in Washington,” said Cliff Anglewicz, CEO of Wisconsin material-handling and construction-equipment businesses Yes Equipment and Services Inc. and its JCB division.

“They keep talking about jobs, jobs, jobs,” Anglewicz said. “They have no empathy for what it takes to hire people and what it takes to pay for all the benefits and the taxes and what little bit is left over for the person who takes the risk.”

He’s not alone in his dissatisfaction with Washington politicians.

“People in manufacturing, the owners, are not only scared because the economy is so crappy, they’re furious with the politicians,” said Michael Retzer, executive director of the Milwaukee chapter of the National Tooling and Machining Association.

“You get the talk, but they’re not walking the walk.”

Retzer is controller at Strohwig Industries Inc. in Richfield, Wis., an engineering and tool-and-die company.

“If you think a politician is representing the best interest of the country, you’re very naive,” Retzer added. “What they’re representing is the best interest of getting re-elected.” [emphasis added]

No one ever thought it would come to this, tax professionals say.

“The best I can tell people is, ‘Here’s what we know right now, and if this comes to pass, here’s what you should do.’ But the rules could change after it’s too late to do anything about it,” said Tim Steffen, senior vice president and financial- and estate-planning director for Robert W. Baird & Co.

In his nearly 20 years of working on tax issues, Steffen said, he’s never seen anything like the current situation in Washington.

“I’m less optimistic that something will happen between now and year end” to resolve the tax issue, Steffen added. “My personal feeling is that there’s too much disagreement as to what should happen. Heading into a lame-duck session (of Congress), there’s not going to be the agreement necessary to get anything passed.”

The 2001 and 2003 tax cuts changed tax brackets, lowering the rate for those who pay taxes. The cuts also did several other things, including lowering the estate tax — all the way to zero in 2010. The changes also doubled the deduction taxpayers can take for each of their children and reduced the tax rates on dividends and capital gains.

Nearly all of that goes away on Dec. 31.

“There’s at least something in there that impacts every single person, and that is the change in the overall tax brackets,” Steffen said. “The lowest bracket today is 10 percent. That bracket would disappear, and it would go to 15 percent. Everybody from the bottom income levels up would feel that.”

The situation has made financial planning involving taxes all but impossible.

“It’s hard to plan when you don’t know what the rules or the laws are going to be a year from now,” said Keith Rode, a CPA and tax partner for accounting firm Clifton Gunderson.

Here’s generally how major players in the debate stand on the tax issue, according to Mark Robyn, staff economist for the Tax Foundation, a nonpartisan tax-research organization based in Washington.

• President Barack Obama wants to extend the tax cuts for people making less than $200,000, or $250,000 for married couples.

• Congressional Democrats have a similar proposal.

• Congressional Republicans want to extend all of the Bush tax cuts.

If the tax cuts are allowed to expire, many think it will create conditions that will hammer small businesses.

Some businesses, particularly those set up as S corporations, would be affected. According to the IRS, S corporations are those that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes.

“Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates,” the IRS says.

Gridlock in Congress no help for economy

Tuesday, November 2, 2010 02:51 AM
By Paul Wiseman
ASSOCIATED PRESS

WASHINGTON– Political gridlock is supposed to be good for business. If bickering lawmakers can’t agree, the thinking goes, they can’t pass laws and regulations that make the economy worse.

So, will the midterm elections, which are expected to leave Congress at least partially controlled by Republicans and squaring off against a Democratic White House, help the economy?

Don’t count on it.

A standoff between the Obama administration and emboldened Republicans will probably block any new help for an economy squeezed by slow growth and high unemployment. Congress might also create paralyzing uncertainty for investors and businesses by fighting over taxes, deficits, health care and financial regulation.

“We expect massive gridlock and little cooperation,” writes Brian Gardner, Washington analyst for the financial firm Keefe, Bruyette & Woods.

If times were good, gridlock wouldn’t matter so much. The sparring between a Republican Congress and Democratic White House in the middle and late ’90s did nothing to derail a strong economy.

But now, nearly a year and a half after the official end of the recession, the economy isn’t growing fast enough to bring down free-trade agreement with South Korea..

“Very few believe the government should sit on its hands,” said Jacob Hacker, a Yale University political scientist. “But right now, we’re facing a period of drift.”

The GOP has vowed to oppose additional spending to stimulate the economy. President Barack Obama’s plan to spend $50 billion on roads, railways and airports is probably dead. And the new Congress might resist extending benefits to the 6.1 million long-term unemployed, at least without budget cuts elsewhere.

Federal Reserve Chairman Ben Bernanke has said lawmakers need to do more to jump-start the economy. Otherwise, more pressure will fall on the Fed to help, Gardner writes. But the Fed has already pushed short-term interest rates to zero. Its remaining option – buying Treasury bonds to pump cash into the economy – is risky and unproven.

Republicans have promised to repeal Obama’s massive health-care law and are likely to try to scale back the overhaul of financial regulation that the Democratic Congress passed last summer. Health-care companies, insurers and banks would welcome relief from regulation. But Republicans probably won’t have enough votes to overcome a presidential veto.

Wall Street research also disputes the notion that gridlock is good for the stock market: Stocks do just as well, or better, when one party runs both the White House and Congress.

William Galston, senior fellow at the Brookings Institution and a domestic policy adviser in the Clinton administration, said lawmakers in both parties might support a grand tax bargain that would trade lower corporate rates for fewer loopholes. And Obama might get more support from Republicans than Democrats for a free-trade agreement with South Korea.

Joseph Quinlan, chief market strategist at U.S. Trust, expects the government to “kick the can down the road” with a deal to extend all of President George W. Bush’s tax breaks for one year. Even so, renewing the tax cuts doesn’t do anything new for the economy. They have been in place since before the recession and throughout its dismal aftermath.

More of the Same?