Category: US business

John Torinus adds up what is starting to be known as “Taxmageddon,” the upcoming end of the George W. Bush tax cuts after this year:

Without Congressional action and a presidential signature, many tax breaks for individuals and businesses expire at the end of 2012, and the combination of all those expirations could jack combined rates above the 50% mark.

Further, rates would rise for all taxpayers, not just the “one percenters.”

You’d think the negative effects on a struggling economy might scare the bejeesus out of congressmen seeking reelection this fall, but the level of dysfunction in our polarized capitol suggests the expirations could happen. It could be complete gridlock prior to the November elections and then paralysis in the lame duck session prior to new members taking office in January.

Here’s how a high earner could get to the magic 50% bracket:

• A married couple with income of $250,000 (they could own an LLC or an S Corp. where the business income flows through to them) would see their federal rate go from 33% or 35% to 39.6% on Jan. 1. For comparison, President Obama paid 20.5% to the IRS last year and Mitt Romney paid 14%. Some 40% of the population paid zip.

• Add on another 3.8% for a couple with mostly passive income (interest, dividends), a new tax come 2013 to pay for Obamacare.

• Add on the maximum 7.75% rate in state taxes in Wisconsin or 7.95% in Minnesota, meaning a net of about five add-on points after deduction from federal taxation.

• Add on 1.45% for the Medicare tax for each earner.

• Assuming the current two-point tax break goes away Jan. 1, add on 7.65% for the employee share of Social Security for income up to $110,000, or up to $220,000 if both spouses make more than that base amount or more. (You could argue that the employer share of 7.65% is also really a tax on the employee.)

Without the employer share of the Social Security tax, the stack-up in state and federal income-based taxes can accumulate to as much as 55%.

The same couple also pays a 5.6% sales tax in Southeastern Wisconsin. So if they spend half of their income on consumables, that adds another 2.8 points in state taxes.

And, at the local level, let’s assume they pay $5000 in property taxes, another two points before state and federal deductions, or at least one point on a net basis.

Add it all up, and our “rich” couple could be paying nearly 60% in taxes at all three levels. …

Suffice to say that the level of uncertainty about where the nation’s tax policies are going could be at an all-time high. That takes some of the perceived upside out of a lot of investments.

Every economist and business person would agree that such uncertainty curtails investment — just what we don’t need as a nation amidst a painfully slow recovery.

Every financial advisor is sending out red alerts to their clients, urging them to take defensive action on what could happen in 2013. Said one, “We’re all playing a wait and see game until the elections.”

Investors Business Daily channels its inner Ronald Reagan, who famously asked before the 1980 presidential election:

A Bloomberg poll out this week purports to find that “Americans say they’re better off since Obama took office.” Don’t believe it. Fact is that by most measures, Americans have fallen behind under Obama. …

Here are the facts:

More unemployed: As of May, there were almost 700,000 more people out of work than in January 2009, and the unemployment rate is higher — 8.2% vs. 7.8%. There are also 2.7 million more long-term unemployed — those who’ve been out of work for 27 weeks or more, according to the Bureau of Labor Statistics.

More discouraged workers: The number of “discouraged workers” — people who believe no job is available — is still 100,000 bigger than when Obama took office. There are also more people working part-time because they can’t find full-time jobs, and millions more who aren’t in the labor force at all.

Lower weekly earnings: BLS data also show that real median weekly earnings have dropped 3% during Obama’s time in the White House.

Less household income: Aside from a few upward blips along the way, real median household income has declined steadily under Obama, and is almost 10% below where it stood in January 2009, according to the latest report from Sentier Research.

Lower home prices: The price of existing-home sales has dropped 2.5% in real terms, according to the National Association of Realtors.

More misery: This index — which combines inflation and unemployment — is up 26% under Obama.

Greater income inequality: Obama likes to talk endlessly about fairness and complain about the growing income gap. But to the extent that it matters, income inequality has gotten much worse under Obama. …

And this is to say nothing of the massive debt that Obama has piled up which, as we pointed out Wednesday, could hamper growth for years to come.

Now, of course, Obama likes to blame President Bush for these lousy results. But the truth is that the recession ended five short months after Obama was sworn in — and long before most of his “stimulus” had been spent.

Plus, if history is any guide, the deep 2007-09 recession should have been followed by an even more powerful recovery. Had Obama’s recovery been merely average, there would be millions more with jobs today.

The problem is that Obama’s growth-choking policies have produced the worst economic recovery on record. And the sluggish growth over the past three years hasn’t been enough to lift most people’s boats, but has caused them to sink even further.

The Wall Street Journal’s Dan Henninger adds:

If for the next five months the president and Mitt Romney spoke of nothing other than economic growth—on the stump, in their debates, in their sleep—this election would be the best $2 billion “investment” of campaign funds that Citizens United ever enabled. Get the growth choice right, and we’ll be ok. Get it wrong and your kids will be talking Australia emigration.

Right now, with growth stuck below 2%, we’re toast. With strong growth at 3% or better, there will be jobs. With long-term growth, Medicare, debt and the rest of the horribles that keep worrywarts awake at night are solvable. With strong growth, the U.S. will not have to cede world leadership prematurely to whichever Chinese functionary slugs his way to the top of their heap. With strong growth, your college graduate can move out of the house. With normal American growth, Europe may be irrelevant but it won’t die, and a U.S. president won’t look oddly small talking to the Vladimir Putins of the world. …

Put differently, this is a substance election. It’s not about whether one “likes” Barack Obama or can’t warm to Mitt Romney. Voters have to pick two competing growth models, which means paying attention to what the candidates are saying about economic growth. …

It’s true the Obama Cleveland speech had many familiar rhetorical distortions. One of the most revealing, though, is that “Governor Romney and his allies in Congress believe deeply in the theory that . . . the best way to grow the economy is from the top down.”

Whatever that may mean, more interesting is the Obama counter-theory found here, what he calls “our North Star—an economy that’s built not from the top down, but from a growing middle class.”

There is no theory anywhere in non-Marxist economics that says growth’s primary engine is a social class. A middle class is the result of growth, not its cause. Barack Obama not only believes in class-based growth but has built his whole growth strategy around it.

One word appears nowhere in the 53-minute Obama speech on economic growth: “capital.” Human, financial, whatever. Capital dare not speak its name. …

If Mr. Romney hopes to win what Barack Obama is rightly calling a defining growth election, the governor will have to refute in detail the president’s notions of how growth happens and then explain to voters the real-economy alternative.

Albert Einstein famously defined insanity as doing the same thing repeatedly and expecting different results.

Does this mean those who voted for Barack Obama in 2008 and vote for him again in 2012 are insane? No. Only wrong.

U.S. Sen. Ron Johnson (R–Wisconsin) might suggest those who vote for Obama a second time are insane if they expect a different second term from his first:

After adding more than $5 trillion to the national debt, it would be refreshing for Obama just to admit the truth – it didn’t work – and that he will try a fresh approach to strengthen our economy and fix what’s broken in Washington. Instead, he insists on staying the course. Does America really want to double down on his policies and accept four more years mired in the economic doldrums?

When the president was inaugurated, he promised to cut the deficit in half. Instead, government has grown and the deficit has increased. The United States will add $5.3 trillion in debt during Obama’s four-year term, driving our debt to over $16 trillion. Every American’s share of that debt has ballooned from almost $33,000 in 2008 to over $50,000 today. The president calls these trillions of dollars in deficit spending an “investment.” It’s fair to ask what all this borrowing has bought us.

The Federal Reserve just reported that between 2007 and 2010, families’ median net worth fell by nearly 40%. This is a depressing reality. And the Obama administration has no plan to reverse these enormous losses. Unemployment is on the rise. And while the White House boasts of creating 4 million private-sector jobs, the working-age population has grown by 6 million. We’re losing ground. Hard-working Americans are being left behind.

The problem is not a reduction in government payrolls. The federal workforce has grown under this administration. Between 2007 and 2010, total federal wages and benefits increased by about 13%, while wages and benefits in the private sector fell by 6%. Nobody wants to underpay government workers for their efforts, but we simply cannot afford to overpay them. Governments at all levels need to benchmark public-sector compensation against that of the private sector.

My counterpart on Wisconsin Public Radio Friday suggested one reason for the slow recovery was a decrease in public-sector employment. With all due respect to the contributions of police, firefighters, teachers and other government employees, their contributions to the economy are set off by the costs that employing them takes out of the economy in taxes. The only way the economy will improve to a recognizable recovery and noticeable economic growth will be through the  private sector:

Wisconsin and America cannot afford another four years of increasing debt and growing government. Yet that is all Obama knows, and it is all he is able to offer. We need leadership to reduce the rate of growth of government spending and leadership that recognizes that growing government is not the solution; growing the private sector is.

U.S. Sen. Ron Johnson (R–Wisconsin) has advice about job creation — something Johnson knows about but Obama does not:

People who enjoy their work perform far better than those who view their job as drudgery. A salesman that fully believes in the product or service he is selling, will sell more, and at a higher price.

These positive attitudes make a big difference to the individual “economy” of a business organization.

Positive attitudes are crucial in successfully driving a nation’s economy forward as well. Unfortunately, President Obama does not seem to understand that his hostile attitude toward business is undermining America’s entrepreneurial spirit, and as a result, economic growth and job creation.

Consumers and business owners/managers need to have confidence in what lies ahead before their economic activity becomes robust.  Even in the best of circumstances, planning for the future is inherently fraught with risk and uncertainty. …

Are taxes going to dramatically increase in 2013? Will we ever get our debt and deficits under control? What is the cost and burden of new rules and regulations on job creators? How expensive will energy be in the future?

Until we have leadership in Washington that begins to answer these questions and brings more certainty to our economy, it will continue to stall.

In Wisconsin, our governor and legislature acknowledged our budget problem. They provided real leadership by making hard decisions, taking tough votes and bringing greater certainty to our state economy.

In addition, Gov. Walker announced very publicly, that “Wisconsin is open for business.” The result? State and local budgets are being balanced, property taxes have declined, and Wisconsin climbed significantly in a recent survey comparing states’ business climate.

That is a dramatically different approach than the one taken by President Obama and members of his administration.

Instead of providing leadership, they are attacking business, punishing success, greatly increasing regulatory burdens, limiting the use of America’s energy resources, and growing government and our nation’s debt and deficits. How can anyone believe rhetoric and policies like this will work?

We need to lift the spirits of America’s entrepreneurs, business managers and consumers — not dispirit them. High marginal tax rates discourage risk-taking, investment and job creation at a time when the need to encourage these activities has never been higher. Increasing layers of regulation are a disincentive to business expansion when we need to incentivize every business to realize its full economic potential.

Demonizing businesses and individuals will have the exact opposite effect. Yet that appears to be the favorite political tool employed by this administration. …

[Obama’s] campaign will try to convince Americans that somehow Gov. Romney’s success in the private sector is a disqualifying factor in becoming president. That is absurd. We need more successful people from the private sector in Washington, not less. Knowledge of, and respect for, our free enterprise system should be a table stakes qualification for president of the United States.

President Obama, Thursday:

The private sector is doing fine. Where we’re seeing weaknesses in our economy have to do with state and local government. …

And so, you know, if Republicans want to be helpful, if they really want to move forward and put people back to work, what they should be thinking about is how do we help state and local governments and how do we help the construction industry? Because the recipes that they’re promoting are basically the kinds of policies that would add weakness to the — to the economy, would result in further layoffs, would not provide relief in the housing market, and would result, I think most economists estimate, in lower growth and fewer jobs, not more.

President Obama, Friday:

The president, in response to a question Friday afternoon in the Oval Office, backtracked somewhat on his comments his morning that “the private sector is doing fine.”

“It is absolutely clear that the economy is not doing fine. That’s why I had a press conference,” Obama said. …

“You know, and what I’m interested in hearing from Congress and Mr. Romney is what steps are they willing to take right now that are going to make an actual difference?” Obama asked. “And so far, all we’ve heard are additional tax cuts to the folks who are doing fine, as opposed to taking steps that would actually help deal with the weaknesses in the economy and promote the kind of economic growth that we would all like to see.”

Tw0 items about the continuing war between the Democratic Party and the source of our nation’s prosperity:

First, James Pethokoukis:

President Obama is never more revealing about himself and his economic cosmology than when he talks off-the-cuff about innovation and market capitalism. Recall his theory that technological advances, such as ATMs, are killers of jobs.

But Obama probably best summed up his views yesterday when he said private equity firms such as Bain Capital have as “their priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers.”

Profitable companies provide jobs, buy equipment, reduce debt, pay taxes, conduct research, and, yes, provide a return to shareholders. But profits, in Obama’s view, seem to be some sort of necessary evil. (Or, as many liberals think, an absolute evil when it comes to companies trying to make money in healthcare.)

Yet for companies to survive and prosper long term, they need to maximize profits over the long term. We want companies to be as profitable as possible, as long as those profits are generated by creating value and not through theft or by manipulating the political system.

Generating honest profits is the sole responsibility of business. …

It’s companies that forget about maximizing profits — or can’t quite figure out how to keep doing it — that really pose a risk to workers and communities and shareholders. Those companies are on the road to failure. And it’s those companies that are in need of a rescue mission from Bain Capital and or some other private equity firm.

I think the president doesn’t fully grasp how dangerous his words are. If he had a true grasp of economic history, he would realize that it was only when business and profits and innovation began to be valued by society that we got the economic takeoff in the West that improved our average standard of living from $3 a day in 1800 to more than $100 a day today.

Next, National Review’s Reihan Salam:

The Obama campaign’s strategy is starting to crystallize. Many of us have noted that the president and his allies have been careful not to condemn the private equity industry as such, and indeed that they are very happy to raise substantial sums of money from leading private equity investors. The recent attacks on Mitt Romney’s years at Bain Capital are being defended on the grounds that it is Romney who has claimed that his private equity experience will make him a better public sector leader, and so it is essential that the American public understand the “lessons and values” he learned from this experience. …

In a similar vein, Team Obama seems to have concluded that in light of the economic climate, Mitt Romney’s decision to represent himself as a post-ideological economic Mr. Fix-It really does represent a potent threat. It is thus crucial that the Obama campaign, organized labor, and other actors turn Romney’s business experience into a liability. …

They aren’t offering a policy critique of the private equity industry. Rather, they are suggesting that working in private equity dramatically raises the likelihood that one is a terrible person. Moreover, they are making the case that private equity experience is not relevant to public sector experience, as the public sector cannot be rationalized in the same basic ways, public sector leaders need to focus on the short term rather than the long term, and, as one of my interlocutors colorfully put it yesterday, we can’t simply sell Michigan if it has become an underperforming asset. …

One of the challenges in the public sector is that for a variety of reasons, including the sensitivities surrounding the functions being performed, there is a great reluctance to embrace trial-and-error. Instead, there is a desire to get things right in a very consistent, reliable way. Now, this might strike those of you who have had any encounters with the public sector as a set of goals honored mostly in the breach, but that is because bureaucracies that aren’t subject to the competition are vulnerable to the progressive decay of organizational capital and human capital. An ideal public sector bureaucracy is full of public-spirited individuals who care deeply about their work and who suffer more from the “guardian syndrome” than the “commercial syndrome,” as Jane Jacobs put it some years ago. …

Another way of looking at this set of issues is through the sets of managerial tools that are deployed in the private and public sectors, e.g., systematic performance monitoring, setting appropriate targets, and providing incentives for good performance, to draw on the categories identified by Nicholas Bloom and John Van Reenen. Public sector organizations tend to place heavy emphasis on performance monitoring and setting appropriate targets. Yet they tend to have a far more difficult time with providing incentives for good performance in a granular way, e.g., they tend to rely on rigid salary schedules that aren’t well-aligned with productivity. Moreover, the quality of systematic performance monitoring and target-setting is not uniformly high in the public sector for the straightforward reason that a lack of competition dulls the need to apply these tools in a rigorous, ever-improving way. …

This is why I suspect a certain kind of private sector experience is actually very valuable for reforming the U.S. public sector. As Rick Hess often argues, U.S. public schools actually do draw on best practices from the private sector. The trouble is that they draw on best practices established during the first half of the twentieth century, and a series of blocking coalitions have resisted organizational innovation in the decades since. To the extent that private experience teaches one how to think rigorously about the structure of service-delivery organizations, and how they can be made to work better, it might be far more valuable than, say, experience as a legislator.

George S. Will introduces us to the medical device industry:

Bill Cook had no garage, so he launched Cook Medical in a spare bedroom in an apartment in this university town.

Half a century ago, in flight from Chicago’s winters, he settled here and began making cardiovascular catheters and other medical instruments. One thing led to another, as things have a way of doing when the government stays out of the way, and although Cook died last year, Cook Medical, with its subsidiaries, is the world’s largest family-owned medical devices company.

In 2010, however, Congress, ravenous for revenues to fund ObamaCare, included in the legislation a 2.3% tax on gross revenues — which generally amounts to about a 15% tax on most manufacturers’ profits — from U.S. sales of medical devices beginning in 2013.

This will be piled on top of the 35% federal corporate tax, and state and local taxes. The 2.3% tax will be a $20 billion blow to an industry that employs more than 400,000, and $20 billion is almost double the industry’s annual investment in research and development. …

So the 2.3% tax, unless repealed, will mean not only fewer jobs but also fewer pain-reducing and life-extending inventions — stents, implantable defibrillators, etc. — which have reduced health care costs.

The tax might, however, be repealed. The medical device industry is widely dispersed across the country, so numerous members of Congress have constituencies affected by developments such as these:

Cook Medical is no longer planning to open a U.S. factory a year. Boston Scientific, planning for a more than $100 million charge against earnings in 2013, recently built a $35 million research and development facility in Ireland and is building a $150 million factory in China. (Capital goes where it is welcome and stays where it is well-treated.)

Stryker Corp., based in Michigan, blames the tax for 1,000 layoffs. Zimmer, based in Indiana, is laying off 450 and taking a $50 million charge against earnings. Medtronic expects an annual charge against earnings of $175 million. Covidien, now based in Ireland, has cited the tax in explaining 200 layoffs and a decision to move some production to Costa Rica and Mexico. …

The Democrats who imposed this tax on a single manufacturing sector justified this discrimination by saying ObamaCare would be a boon to the medical devices industry because, by expanding insurance coverage, it would stimulate demand for devices. But those insured because of Obama-Care will be disproportionately young and not needing, say, artificial knees.