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Tax Day: Laugh or Cry?

April 18, 2011 Leave a comment

I never know if it’s most appropriate to laugh or to cry on tax day. Here are two articles to make you do both:

This Is What Tax “Austerity” Does

April 4, 2011 Leave a comment

So Barclays threatened to leave the UK (probably just a political tactic without any real teeth), and Statoil put on hold a $10 billion plan to further develop energy assets tied to a UK-initiated tax hike on so-called “windfall” taxes. Mind you, the reason Statoil says it isn’t doing the projects isn’t because their profits would be diminished, but because now those new projects are explicitly NOT profitable because of the tax. Not good.

This is not the kind of thing you want to see from a country struggling to recover. You want to see an inviting, welcoming business environment—a place that wants to encourage more and new commerce. I’m all for trimming the government budget fat (particularly when it comes to entitlements), but the concept that tax raises is a worthy way to help get your economy out of debt trouble and on firmer footing is asinine.

Even the Government Pays Up for Talent

March 24, 2011 Leave a comment

Ah ha! So, the government feels it must pay up for certain employees for “talent retention,” while justifying layoffs or furloughs of ostensibly less valuable human capital: Cities Find Cash for Managers’ Raises.

And yet, private industry is consistently and constantly vilified for such practices.  

P.S. Don’t miss my recent post about six mistakes investors are likely to make this year from a Fisher Investments employee’s perspective.  You can follow me on Twitter @Investing_IQ.

Deficit Reduction; Higher Taxes?

June 23, 2010 Leave a comment

Why is it that reaction to high deficits generally leads to more confiscation of private property? In this case, cash money in the form of taxes. It’s never been clear to me why more taxation would get a country out of debt woes (assuming there are truly sovereign debt woes. There are, to be sure, but it’s taken as given far too often these days to my view).

After all, if you tax an economy you effectively limit—or create a disincentive for—potential for economic growth. Well, economic growth is the name of the game when it comes to digging out of deficit trouble. Headlines will be dominated with “austerity measures”, and “painful” or “unavoidable” measures. But through history, the best way to solve budget/deficit problems is to fuel a dynamic, diverse economic engine to serve as a growing tax base to service said debt. (Don’t get me wrong, for the Greece ’s of the world austerity probably can’t be avoided—they’re just too small and their economies too narrow.)

What’s “painful” is cutting benefits. Painful, that is, for politicians. The last thing they want to do (as they value their political lives) is hugely cut programs and entitlements. It leads to unrest and protests and weakens their power (just ask Germany ’s Angela Merkel). So they limit that (I’d bet that that most economies, at best, will end up cutting a few percent off their budget when it’s all said and done), but they’ll gladly raise taxes the first opening they get.

For now, these measures seem small enough not to knock the global economic recovery. But this is a topic to keep a close eye on.

The Law of Unintended Consequences

June 17, 2010 Leave a comment

“…banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules…” (From today’s Wall Street Journal, End Is Seen to Free Checking)

I think it was Princess Leia in Star Wars who said, “The more you tighten your grip, the more banks will slip through your fingers.” Or something like that. At any rate, this is a classic instance of regulation causing consequences that end up hurting the folks who were—ostensibly—being “helped”.

Instead, what we get is tantamount to a new regressive tax. I’m willing to guess rich folks with big deposits will continue to get free checking while lesser account sizes will pay fees. Not sure that’s exactly what they set out to accomplish.

In the meantime, don’t hold your breath on an apology from Barney Frank.

Euro’s Tax Base is the Key

April 29, 2010 Comments off

It’s a certainty that Greece is going to have to get leaner from a government perspective—rein in costs and keep fighting unions. That’s just a reality of their situation.

But when it comes to thinking about the future of the European Union and its broader debt woes, and whether or not this becomes a “contagion”, paring back expenses isn’t everything.

Debt for gigantic sovereign nations or groups is a different thing than debt for individuals. We tend to think about them as equals, but that’s wrong. If you have too much credit card or mortgage debt, for example, you probably have to focus on paying it down, get frugal, start eating rice and water for every meal, and so on until you dig yourself out. That’s mostly because folks generally can’t increase their earnings significantly enough year over year to otherwise surmount the issue.

That’s not really as important for big governments. What is more important is the tax base from which they get their revenues to fund operations and service their debt. Because that can shift rather radically from year to year, and is most often where the biggest fluctuations in government fiscal health come from. Don’t get me wrong—I’m no proponent of profligate bureaucratic spending binges. Quite the opposite. But debt is something governments of the world are going to use—that’s the world we live in and it ain’t changing. And that’s always been fine (and still is) if those governments are able to meet their recurring payments.

We just went through a big global recession, so tax receipts have been lower. So, why, after the chaos of the last few days, are European stocks rallying? Probably two big reasons:

Europe’s economic recovery has been weaker and slower than much of the rest of the world, but it’s still recovering. Which means tax receipts will grow, which means they can service their debt and pay their expenses easier. This applies for states like California and other municipalities, too. Economic recovery is the thing to focus on right now—increasing the tax base.

Granted, this is one facet of the issue, but it’s a big one. Others include the ability to tap capital markets and the yield a country must pay to do so ( Greece ’s debt costs have spiked lately). But it’s basically always been true that if you increase taxes on something you get less of it. And if you lower taxes on something you’re likely to get more of it. So, lower taxes on your economy—its people and corporations—and you’re likely to get better economic growth, which actually will get you higher tax receipts in the long run. (Thank you, Mr. Art Laffer!)

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