America: Rubbernecking at Euro Pileup But Still Going 1,000 mph to Its Own Crash

Includes: AGG, DIA, SPY
by: Charles Payne

Over the weekend 500,000 people, mostly union members and their supporters, protested in London over the U.K. government's new budget. Their plan is designed to cut the deficit even as it will lower growth. Apparently, 300,000 government union workers will lose their jobs in the next few years. It is medicine the UK must take. Based on increased inflation alone, U.K. interest payments on its national debt will surge to £66.8 billion in the 2015/16 fiscal year from £43.1 billion in 2010/11. What I find amazing is the transfer of wealth under a tax scheme known as "fiscal drag."

There will be a 50% tax bracket for those earning more than £150,000. Because this rate doesn't adjust for inflation, it's estimated an extra 120,000 people will be subject to the tax over the next five years. Currently, the rate will snare 275,000 people.

The 40% tax rate begins at £42,475 and the fiscal drag, a sinister manner of hiking taxes, will net an extra 300,000 people over the next five years.

On the other end of the spectrum, the point at which no income tax is collected was hiked £630 to £8.105. Chancellor of the Exchequer George Osborne acknowledged the 50% tax rate would do "lasting damage" to the U.K. economy if it were to become permanent, so he considers it a temporary measure. Unfortunately, these things are harder to remove once in place, especially in economies where there is minimal growth. This is the first time the 50% rate will be in place since 1988.

I guess it's unbecoming, but those 400,000 people looking at 50% income taxes over the next few years should have held their own protest in London, too. In addition, there will be a windfall profits tax on North Sea oil companies and a 1% decrease on gas prices that will be more than offset by the higher VAT tax, but might be good fodder for the campaign trail. The government will go after people living in the U.K. but officially domiciled elsewhere. Currently, those living in the U.K. more than seven years, but domiciled elsewhere, pay a £30,000 annual fee; the new arrangement is £50,000 for those living in the U.K. over 12 years.

The government proposes cuts of 11.5% for departments over four years. Although billed as a "pro growth" budget, GDP will dip to 1.7% from a previously anticipated 2.1%. Yet, I agree this is an investment that will allow genuine growth down the road. There is pain for everyone, and probably more pain to come because these measures still don't go far enough. But, the U.K. government is well ahead of Washington with respect to the first big steps needed to fix the economy and position future growth.

Selling austerity is a terribly difficult task made harder when there are so many voices saying it's not needed or the easiest thing to do is to tax the rich. The piece on "60 Minutes" last night was so one-sided on U.S. corporate profits abroad I wanted to scream. Even with Cisco (NASDAQ:CSCO) CEO John Chambers providing the other side, Leslie Stahl pushed hard that all U.S. companies domiciled overseas are making more money in the states and only have paperwork and a tiny conference room in their overseas offices. It's true many of the offices are fronts but it's also true that profits, and profit growth, in the future are being driven from overseas operations and to bring that money back as astronomical tax rates is dumb.

Of course, the argument over those profits is often merged with the notion U.S. companies shouldn't be doing business overseas in the first place. U.K. Chancellor Osborne played into that game last week, telling his countrymen there will be stronger by supporting smaller companies and waving the words:

* "Made in Britain"

* "Created in Britain"

* "Designed in Britain"

* "Invented in Britain"

I love the idea of supporting your country and encouraging growth in smaller businesses, but we have to allow our giants to be big players on the world stage, too ... or our guppies will be gobbled up.

Between U.K. protests, Portugal's confusion, Germany's hard bargains with its broke and poor neighbors, Europe is looking sloppy and the Euro is paying a price. America has to be more than a curious onlooker at the meltdown of so many economies in Europe. We are rubbernecking at this pileup, but still going 1,000 miles per hour toward our own crash.