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Taxing Challenges and the Promise of Freedom by: Charles Payne

Well it's tax week and there is going to be much pain felt across the nation. A couple of weeks ago, my accountant told me that he has never had this many extensions as many are trying to push out the pain and moment of truth. Unfortunately, when it comes to taxes the pain is only going to get greater. As it stands now fewer and fewer Americans are actually paying federal income taxes. Of course we are all getting nitpicked to death with higher taxes on everything from renewing licenses to smoking cigarettes. To come will be sugar and soda taxes, that along with a ton of new state taxes and fees. Those things impact all of our lives. In fact, the lesser educated and poorest among us will continue to pay a heavy price for their lifestyles.

I once had a friend tell me that "it's expensive to be poor" and he was right. But, it's also more and more expensive to try not to be poor. The mountain facing people desiring to climb out of ordinary involves dealing with a world that is increasingly unfair. According to the non-partisan Tax Foundation the percentage of Americans not paying federal income tax continues to soar and stood at 46.9% in 2009. This is troubling in the sense that we have a government with an insatiable appetite and willingness to write a rubber check to gain short-term political favor. Considering the demonization of hard work and success there is no doubt after a dip this year there will be an even smaller pool of Americans paying federal income taxes.

Something has to give.

* The nation's debt is $12.83 trillion
* The 2009 deficit was $1.42 trillion
* The 2010 deficit will be $1.65 trillion

I've been writing about a future civil war between private and public workers as the former cannot be expected to work longer, receive less pay for the same jobs, receive no defined pension benefits but have to pay for such benefits for the latter group. Well, as much as we are told to hate the "rich" the trend is unsustainable. By the way, there is a moral issue here as well. When our democracy was formed it was thought wise to allow only land owners the right to vote. These days people with no skin in the game get to call the shots. Sure, we are all paying higher taxes in a variety of forms but federal income tax receipts are the largest source of revenue for the government. Is it fair for people not putting anything in that pile of funds get to dictate how it's spent?

Moreover, is a line ever to be drawn so the masses aren't whipped
 
into an envious frenzy and vote to take all of the money from all of the so-called rich? These so-called rich taxpayers include many small businesses that create damn near all of the jobs in this nation. These so-called rich people are family members and friends and people that took advantage of being Americans. They are carrying the load, more than they should have. Plus, cutting taxes would generate more net revenue for the government through greater economic activity. Even the much maligned Bush tax cuts saw a bump in revenue to the government. The rich paid 37% of overall taxes but would have paid 31% without the tax cuts, while the top 10% of taxpayers paid 68% of the total instead of 63% without the cut. While politics of envy can work, politically it creates economic vulnerability.

So, if the government doesn't have the will or guts to stop spending the nation into a hole where is the money coming from?

Oh, VAT is where we can get the money.

Last week Paul Volker, former Chairman of the Federal Reserve and current Obama Administration economic advisor, let it slip that a Value Added Tax is on the way. This is a tax added at each stage of production. Initially introduced on April 10, 1954 by the director of the French Tax Authority (naturally) the plan is a way to avoid the uproar of a sales tax but in effect is a tax the end user absorbs. But, if there is no end-user then manufacturers bite the bullet. This means more cautious production...just what the economy needs right now. The tax means higher prices, too. I guess that it can be implemented without technically violating campaign promises. There are more taxes coming down the pike. At least $2.5 trillion, but probably much more over the next decade.

In this era of "shared sacrifice" it is odd that more and more people are escaping federal income tax obligations. I think that more people need to pay lower rates but contribute. Taxes have become (more) punitive instead of a necessary thing for the function of the nation. I agree that we all benefit from our military, police, and firemen but the fact is that people that don't pay taxes use these resources much more than those that pay boatloads. Still, there is this notion that people only get rich through deception and thus their spoils are ill-gotten and up for grabs. It's like it's time to divvy up the cash, so everyone line up, starting with those that didn't generate the cash in the first place. This whole thing is nuts. Americans must stop fighting each other and direct their ire at the government intent on turning the nation into a European country complete with debt, deficits, and wildly expensive promises to government workers.

Paul Volker is an old pro, I saw the man at a restaurant in New York last summer with Henry Kissinger and he exudes confidence. I have a hard time believing that he is 100% behind some of his recent ideas, but he understands this Administration is enamored with wealth redistribution and vote-buying. Vote-buying isn't unique among politicians but few have done it while simultaneously distancing the nation from its economic roots and self-reliance.

Freedom

"Many politicians of our time are in the habit of laying
it down as a self-evident proposition, that no people
ought to be free till they are fit to use their freedom.
The maxim is worthy of the fool in the old story, who
resolved not go into the water till he had learnt to swim.
If men are to wait for liberty till they become wise and good in slavery,
they may indeed wait forever." - Lord Macaulay

Enjoy your freedoms while you still have them.
 
 

My Vacation

I took most of last week off and headed to Boca Raton for a little vacation. It was a fun time especially for the family, so it was a great time for me. I lived vicariously through my son as he surfed and got inspired by all the Bentleys at the resort. I came to the conclusion that if you already have a Bentley there is no need to go wireless. By the same token, it's unlikely you can get a Bentley now unless you are involved in the wireless world. It was frustrating not having wireless internet.

I met some interesting people there including a guy at the gym who owns an IT consulting company. He says business is up and he will probably add 50 employees to his staff of 200. But, he was really worried as the main contract driving growth could get too big and attract competition from Indian firms. Just think about that for a moment; American businesses taking crumbs and hoping not to stir the interest of their Indian rivals. His concern didn't revolve around wages of his staff but the fact that these companies do great work and have deep benches of capable employees. Earlier that day I read where Chinese companies are eager to come to America to teach us how to build high-speed rail fast and economically. The world is changing, and if we keep lying to ourselves about it only being about cheap currency it's going to be too late to get back into the ballgame.

The Business Cycle

I was in Boca Raton a couple of years ago and was shocked at the amount of real estate for sale, specifically offices for lease. This time around I was shocked again, not because the amount of these sightings decreased but because they hadn't dropped anywhere as much as they should have by now. We keep hearing about jobs saved and created (a disingenuous statistic to be sure) and how dollops of good news only happened because of government spending when in fact we have a $14.0 trillion economy that is very dynamic. People fight hard and come back, especially in America. We get down to basic needs and fear dissipates. A scorched earth has limits and maybe that's where we are right now. Hot embers are everywhere and a double-dip isn't out of the realm of possibilities.

Things are getting better, but at this stage of the game things are supposed to be getting better. In 4Q09, closed end loan delinquencies declined in eight of eleven categories. Indirect auto loan delinquencies were unchanged at 3.15%. I think numbers are getting better because so many people have already lost their homes and cars. There is a finite amount of loans that can go belly up and so many have already.
 
 

So, things are getting better, but should be much better. On our last day in Boca Raton we hit the hip Mizner Park outdoor mall and went into a cool store where there was a 50% sale on everything. The sales person explained that the store opened three months earlier but nobody came, hence the massive sale, which got people in the door. Of course last week we saw retail sales numbers that were impressive, the best in years, and yet there are misgivings. How can people be spending so much more money (although much lower than recent years) when they're unemployed and those working are working for less? Then there is the curious case of the resumption of decreased consumer credit. In February, consumer credit for revolving (credit cards) and non-revolving (cars) decreased sharply. I think that people are dipping into savings and doing it too soon.
 
 
The Market

The DJIA is up six straight weeks and more and more people are pressing their noses against the window from the outside looking in. It's very compelling. The only thing now is a good earnings season. I said last time it would take more than green shoots but it didn't as investors are still okay with silver linings and positive spin. This goes back to retail sales numbers last week and other positive data which superseded bad news, like the bounce in initial jobless claims. Investors are still willing to see the good over the bad or foreboding.

Technically, the DJIA is at a pivotal point as 11,000 held as key support back in 2008, and is a psychological barrier coming into this week. I think that the bigger resistance point is 11,300, which means there is more upside provided there are no cracks in those rose-colored glasses.
 
 


Disclosure: None