The Ghost of Christmas Future

Continuing my summer reading at the beach, I made some notes on a provocative article in the August edition of Stocks, Futures, & Options magazine. In “I want you to pay higher taxes!”– an article with an intro graphic of Obama dressed as a finger-pointing Uncle Sam — writer/trader Matt Blackman delves into the President’s plan to raise taxes and, if adopted, what might be some of the ramifications.

To pay for the President’s proposed spending initiatives, the author contends that taxes would have to be increased by some 40% during the next five years which would add an estimated $6.5 TRILLION to the already burgeoning federal budget. According to a Stanford economist, this sum translates into an additional $200,000 in taxes that the average family would have to pay over a ten year period–and that doesn’t include Obama’s planned changes to Medicare and Social Security. I don’t know about you, but those figures scare the Dickens out of me!

The Obama tax plan seems to be all-encompassing. One way the administration plans to pay for all of this is to close perceived loopholes in the way US multinational corporations are taxed.

The impact on US multinationals
As of today, the United States ranks a close second to Japan in terms of combined corporate income tax rates (both are over 39%). This is almost 50% higher than the average of 26.6% for the thirty most industrialized nations and, if the President has his way, it’s going higher.

One thought is to limit expense deductions against foreign profits. Currently, taxes are deferred if the money is used to invest in foreign operations, a practice that is allowed pretty much everywhere else. Another plan is to eliminate the benefits of recent legislation to offset the disadvantages of a citizenship-based tax system. The author contends that the consequences of these proposals, among others, on US multinationals would be the following:

1. It would limit investment not only abroad but here in the US as well. Which means…

2. …that a slowdown in investment abroad would actually decrease the number of jobs here. (Economists have shown that the hiring of off-shore workers by US firms actually increases the number of jobs in the US, apparently because off-shore workers are supplying component parts to the final, higher value-added products finished here.)

3. It would weaken our ability to compete in the global marketplace. Sensing weakness, investors will dump these beached whales causing their stock prices (and the indices they prop up) to drop.

Lower valuations will make them ripe for foreign take-overs. As the author says, ” It does not take an accounting genius to appreciate the benefit of buying a company with higher costs and moving it to a lower-tax jurisdiction, especially when one considers that any other jurisdiction would have lower tax rates on multinationals than the US.”

The impact on the rest of us
For sure the administration is planning on raising tax rates on high-income earners but many feel that those in lower tax brackets will feel pain, too. Options for reducing one’s tax burden will be limited, but there will be a few.

One way is to work overseas. By doing so, an individual can exclude $87,600 of his or her income (double that per couple). Certain foreign housing costs can also be excluded. These are pretty decent incentives to learn another language. (I can hear folks dusting off their suitcases now.) How’s that for a brain-drain? (If this scenario pans out, I’d buy stock in Rosetta Stone and Louis Vuitton.)

Obama also wants to tax capital gains and dividend income at much higher rates. History has repeatedly shown that this is a phenomenally bad idea. It leads to decreased investment, lower stock prices, and guess what? A lower net gain for the government! Dow 10,000 may soon become a distant memory.

Is this why Munis have been making new highs?
Uncle Barry seems to want to tax everything, including lowering the limits on the home mortgage deduction.  Gasp! (Buh-bye homebuilders!) But one thing that has a good chance of remaining sacrosanct is the tax-free status of municipal bonds. Considering the sorry fiscal condition of many local governments (especially my home state of Caleeforneeya), many might consider secession if the Fed were to slap a tax on their munis.

What would Tiny Tim do?
So far, this grim specter is only the ghost of Christmas future. We need to open our eyes to what might be so that we can do something about it before it’s too late. If not, then we deserve what we get and in that case, “God bless us, everyone.”

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