Obama’s Tax Effect: Prices on Everything Go Up

So the Democrat candidate for President says he wants to raise taxes on the rich in order to “spread the wealth around” because he wants to be “fair” to the poor. As though if we elect Obama to the presidency it means we want him to dictate what’s “fair” or “unfair” in the economy and make the necessary adjustments according to his judgment. He studied Constitutional law at Harvard; is that what they taught the role of President is? Anyway, we won’t talk about the fact that he plans to increase taxes on individuals making $42K per year, or that he plans to redistribute wealth with $1.3 trillion in new spending measures. Let’s just take the fact that his tax increases on “the wealthy” individuals and corporations will directly translate to higher prices for most all goods and services in our economy.

Obama is proposing that taxes return to the rates that we experienced under Bill Clinton in the 1990’s. (Where’s the “Change” there?) This means that the top two tax brackets would go from 33 percent to 36 and 35 percent to 39.6 respectively. [Now just as a side, if the federal government is taxing someone’s income – just income – at a rate of 35 percent and then that person still has to pay state and local taxes, isn’t that enough?!] So anyway, those are individual rates. But that information is important because according to the IRS, half of all business income is taxed at these individual rates with a majority of that income coming from small business owners whose companies net more than $200,000 per year. So small businesses, which create the majority of new jobs, will definitely see their tax rates go up.

In addition, he proposes to raise capital gains taxes on the same tax brackets and increase the double taxation of the dividends tax to equal the rate of the capital gains tax. He also intends to leave the corporate tax rate at 39 percent (the second highest in the world), where McCain proposes a cut in that rate. This means that businesses of all sizes will be paying higher taxes under Barak Obama.

Obama’s tax plan is appealing for many low and middle-income people who don’t really care if “the rich” are taxed more. Many do not think the implementation of this plan will affect them at all. But the reality is that businesses will pass the cost of higher taxes on to consumers.

Businesses usually run as lean as possible at all times. They keep costs low in order to maintain a stable profit margin, which they generally do not allow to go lower. The average profit margin for S&P 500 companies is approximately 8.5 percent. If a company’s taxes are increased, they are not going to let that negatively affect their profit margin. Instead they will pass that additional cost of doing business on to the consumer in the form of higher prices for the goods or services they provide. In short, Obama’s tax plan will lead to massive inflation across all sectors of the economy.

Higher costs on goods and services lead to people having to get by on less. It also has a negative effect on the strength of the dollar. We should not be inviting this kind of policy at a time when growth in the economy is expected to slow. It is a recipe for Jimmy Carter style stagflation.

An alternative to a company raising prices to offset higher taxes would be to keep prices where they are and cut back on employees. Thus, while some see this as a plan geared to help the “little guy”, that little guy could very well lose his job as a direct result of this plan.

So a suggestion to those who would welcome higher taxes on the wealthy and successful in this country as way to punish them; don’t assume these tax cuts will not have a negative effect on you. It is well documented throughout the history of this country that higher taxes are bad for the overall economy, and this increase will be no different. Hating “the rich” for being successful is not going to get anybody anywhere. Focusing on improving one’s own situation is key, and lower taxes will enable us all to do that.

Predatory Politicians Want Your Home

Since the fall of AIG and Lehman happened last week, and especially since the first version of the bailout bill failed in the House, we have heard from financial and economic advisors along with politicians on both sides of the aisle in both houses of Congress that we “need legislation” to free up the credit markets and instill calm in our financial system. We have been told by these people that this bill will be a short-term fix that will allow businesses and individuals to “get the loans they need” to do things like pay for inventories and payroll, or buy that new car. This is what led to the passing and signing of the revised bailout bill on Friday of last week.

However since the passing of the Emergency Economic Stabilization Act of 2008, absolutely no action has been taken by the Treasury Secretary, Hank Paulson, to address the pending doom that they were peddling the entire week before. Congress has been adjourned until after the election and none of the politicians who said that we “need to pass this bill right away” can be found on Capitol Hill.

Instead, the Federal Reserve made a move yesterday to thaw the frozen credit markets by buying up commercial paper (short-term corporate loans) through a facility they have designed in order to add liquidity to the commercial paper market and allow companies to raise money to fund their operations. They have set aside as much as $900 billion to address this situation. And today the Fed has collaborated with central banks around the world to reduce interest rates, which will further help the credit crisis by reducing the cost of borrowing.

The central bank’s actions today and yesterday beg an obvious question: If the Fed could have gone in from the beginning and addressed the immediate problem of frozen credit right away, why did we need a $700 billion bailout bill to buy bank assets signed into law last Friday? I listened to the reasoning behind pushing the bailout bill through the entire time and I thought the actions were done too hastily. The reason given for why it needed to be done “right now” was that businesses were unable to get loans to pay for inventory and payroll. Well low and behold, the bailout bill does nothing to address that problem, and even if it did, nothing is going to be implemented until next year. Small and mid-size businesses by and large are having no troubles getting funding with their bank lines of credit right now. The frozen credit issue had to do with publicly traded companies that use commercial paper for short-term liquidity to fund their operations. Commercial paper is backed by investors not banks! So the true purpose of the bailout bill was, as was first thought, to solely buy bad assets (mortgages) from banks, which is a bill that could have waited until the next session of Congress for a vote. Problem is there would be no chance for it to pass without the threat of disaster behind it.

In light of this story, which has played out over the past ten days, and which I am sure many Americans have been unable to follow closely, I feel like the initial instinct of the American people who were against this bailout has been proven correct. That is, whenever you are being told that something absolutely must be done right now, without having the ability to gather all of the necessary information to make a good decision, it is almost always going to be a scam. In this case, the most liberal Congress in the history of the United States was able to trick enough of it’s own members to vote for a bill that will bailout irresponsible people and institutions who created the original problems while nationalizing the U.S. mortgage industry to further a socialist agenda. These predatory politicians should be held accountable. Hopefully they will be on November 4^th.

Here’s An Idea…Let the People Fix It!

It was not too long ago when I saw radio talk show host Dennis Prager on Fox News discussing the then yet to be passed Emergency Economic Stabilization Act of 2008. Of course Prager is intelligent so he was against the passing of the bill. When asked what the bill should include so as not to be a bailout by the federal government, I was struck by one of Prager’s ideas. He said that part of the solution should be to allow individuals to take money out of their IRAs and 401Ks without taxes and penalties as long as the money they are taking out is going to buy real estate.

Now of course this idea was ignored, I don’t even think anyone else on the show – including the host – paid attention to what Dennis said. But immediately I thought this was a great idea. Especially now since, the supply of homes on the market has been exceeding demand for some time, driving housing prices down consistently (10% nationally just in the last 12 months). In some markets housing prices have fallen 35% – 40%, according to Zillow.com. In most housing markets across the nation residential real estate prices are lower than they have been in 20 years or more. This has created a huge buying opportunity for many Americans who happen to be liquid right now, but imagine all of the people who do not have access to their illiquid retirement accounts.  

As of 2006, as many as 50 million Americans have 401K plans in this country, and millions more have IRAs (individual retirement accounts) according to the L.A. Times. Average value of these retirement accounts as of 2006 is estimated at more than $120,000. With the current conditions in the market, why would people continue to contribute to their retirement accounts if they had the opportunity to pull some of that money out and put it in a hard asset like real estate? If a measure was put in place that would allow these retirement savers to take money out of retirement and use it to invest in real estate, they could single-handedly put a bottom in on housing prices that would stabilize the overall market much better than any plan we have seen come out of the Treasury or the Fed yet.

This is just one idea. There is no more proof that this would work than the Paulson plan or the Fed plan. However, this is an idea that would most definitely be of interest to millions of Americans who would like to actually get something for their money. The same Americans who will likely be footing much of the federal tax dollars going toward implementing the Treasury and Fed plans that will yield them nothing in the long run. This is also an idea that could have been addressed had the Congressional leadership not betrayed the American people with the bailout bill panic festival, and had serious deliberations on a comprehensive, pro-growth plan that did not include Socialism.