The economy has taken a serious turn since the first
of the year. January has seen the Wilshire 5000 drop 4.9%, unemployment tick
up, and write-downs and write-offs increase in size. Fortunately, the news is
finally reaching the campaign trail. Problem is no one can quite agree on
whether these problems are short-term or long, good or bad, recessionary or
just simply the result of a poor calculation done months, perhaps years ago. So
what happened when we turned the calendar?
If the Federal Reserve’s stance is any
indication, they are not the ones to ask. Fed Vice Chairman Donald Kohn has
gone on the record with the following quote: “We cannot say more that
we know and we should strive to avoid giving the impression that we know more
than we do.” Okay. Mr. Bernanke was much more upfront with his view of
the economy falling just this side of saying “I dunno know”. Now
the markets are optimistically calling for a 750 basis point cut!
But it is an election year and despite the
incredibly good television the candidates are providing, the economy has made
itself an issue. John McCain claims to know little about the economy. Mike
Huckabee has taken the cut taxes for the rich approach while giving the
middle class some typical GOP lip service about it will benefit them. Mitt
Romney simply says he’s a better choice than the Democrats.
And the Dems, the party of the taxpayer see the
economy as a much more complicated mechanism that needs to be fixed by
reassuring the populace that A, it is not their fault and B, it can be fixed.
Their focus has been on giving the states relief (John Edwards and Hillary
Clinton), which sends a message to all Americans that the mess we are in will
not be an easy fix to Barack Obama, who seems to have taken the GOP side
– slash taxes and call it incentive.
While the candidates are still acting like moths to
a porch light, chasing each voter’s whim and many doing so without much
more than generalizations, the economy swoons under the weight of
bad-to-worse decisions.
Businesses, left to deal with their own poor
mistakes have been crying for relief as well. Investors, who may have turned
a blind eye to risk over the past year or two, reeling from the fallout are
also standing in the same line. Everyone wants to be stimulated, revitalized,
and rescued. Here’s my plan.
I have read numerous proposals for economic
stimulus. Most recently, the Wall Street Journal harkened back to a simpler
time when the tax code was much less democratic and the economy was less
global. When John Kennedy took office, this country was feeling much the same
as it is today. Deficits were looming,
an un-winnable war was being waged, unemployment was rising and the economy
was not feeling the love or the benefits that only Washington could
bestow.
The JKF
Stimulus Plan or as it was referred to at the time, the New Frontier, offered
the American people a more optimistic and hopeful look at a world. Many
remember the New Frontier as little more than a promise to be the first in
space rather than the economic stimulus package it actually was.
Kennedy’s plan focused on short-term stimulus, much like what is being
discussed today but with much longer-range goals.
Question is can
his ideas still work in this economy four decades removed. His focus on
expensing was the right thing to do at the time. To many investors, the word
expensing suggests an underhanded accounting technique used by more than a
few large public corporations to hide compensation for its senior executives
tucked away in stock options. But the idea of expensing, as it relates to
equipment purchases has some solid footing among businesses, large and
small.
For those that
may not know how this works, expensing allows a business to write off the
cost a buying a piece of equipment in the first year rather than deducting it
from their taxes over the course of its usefulness (usually five
years).
In 2002, the
limits for expensing deductions in the first year of purchase was limited to
$24,000. With the Small Business and Work Opportunity Tax Act of 2007, that
amount was increased to $125,000 and was indexed for inflation until 2010.
This is an incredibly deep discount for businesses that might be hesitant
about making a major purchase. To a small business (depending on the owners
tax bracket), this can amount to a savings of 25% or more on the cost of
equipment. Purchased equipment creates jobs on both ends of the deal.
But as a
short-term stimulus, it lacks teeth. Yes it does allow businesses to make
forecasts further ahead than if such an accounting technique was not used but
it also assumes that the business will still be “in business”
five years down the road.
Expensing has a
downside and this may make the very companies that might use it, think twice.
If the equipment purchased today is no longer viable in the near future or
the business sells, the IRS can recapture the savings from that first year
depreciation and the tax savings will be given back.
While that
penalty might be hiding under the surface and in the back of the minds of
many businesses, some problems are much more clear. The ability to borrow
money for these types of capital expenditures will be the most difficult
hurdle for any business in the coming year. Not only will purchases be more
difficult to finance, many companies are faced with the additional cost of
refinancing current debt.
Additional
ideas being floated by experts vary widely in whom they help and how much
they will stimulate the economy. The cries for making permanent the tax cuts
set to expire in 2010 have been raised a decibel or two. Political
opportunists, who see this as the best kind of stimulus, rely on the
psychological nature of those cuts. They didn’t help much when they
were first enacted and making them permanent will only serve to enrich the
same folks that benefited from them previously.
Former Treasury
Secretary Larry Summers has been touting the benefits of a Keynesian-type
stimulus package. But it didn’t work when the President tried it
several years ago and it won’t work now. Summer’s idea might help
the average taxpayer with this month’s grocery bills or buy enough gas
to get to and from work for a couple of weeks but the extended effects of
such a move would be felt only briefly. One candidate has advocated a
short-term bump. Hillary Clinton has offered heating relief package that
would be spent, not saved but by the time she or anyone currently campaigning
reach office, it will be too late.
To hear the
current Treasury Secretary Henry Paulson speak about the economy leaves one
with little hope that he has a bead on the right target. Not two months ago,
Paulson was suggesting that the economy was strong enough to withstand some
credit woes. Now, "There are risks to the downside" and, he is
quick to add, because the Democrats now control the Congress, any potential
help that the White House might suggest to fix the problem will be stalled
due to partisanship.
I believe that
three things can be done right now that would help get the economy out of the
breakdown lane and back on the road. First: As I mentioned earlier, do away
with the “give back” provision on all equipment depreciation.
This would have the net effect of creating the potential for more jobs but it
will not work as well without a much more lenient credit market.
As much as Ben
Bernanke’s swift rate cut stimulus might look good on paper and would
definitely sound good for the media and the stock market, truth be told,
lenders are still not convinced that borrowers can – or will, pay them
back. Nor are they convinced that the loans they issue will be market-able.
You can cut all you want Mr. Bernanke, the borrowers are just not there.
Removing that provision might create enough of a risk/reward scenario that
businesses might just jump.
Second: Reduce
or eliminate the unemployment tax that businesses pay to the federal
government. Let the states collect the taxes the way they currently do and
allow them to make individual decisions on how long unemployment insurance
should last based on their own economic needs.
The third and
last suggestion – candidates, are you listening – involves making
the some tax cuts permanent – just not the ones set to expire in 2010.
I believe that if the following provisions were made to the tax bill, some
are actually complimentary to the current relief bill, it would have the
potential to provide enough stimuli to assure the right of taxpayers that the
government is looking out for them.
Freeze the
current income tax rates for 95% of the taxpayers. For some, this would be a
tax increase but those taxpayers failed to provide the spending that would
drive the economy and the job creation as was more or less promised they
would do.
The government
could lower corporate taxes for all businesses, which would have the net
effect of making the US more competitive and could be done without removing
important shareholder regulations. This particular move could be offset with
a return to the 20% capital gains and dividend tax.
And lastly,
eliminate portions of the Alternative Minimum Tax that would have the
greatest impact on small businesses. Allow businesses to retain two portions
of the current law: allow tax deductions to continue in states with the
highest state and local taxes, including income, property, personal property
and sales taxes and allow small businesses to take the miscellaneous itemized
deductions that are so vital to cash flow.
Paul Petillo
www.BlueCollarDollar.com
|