·The thoughts outlined below are perhaps more appropriate for the beginning of next year, but we feel compelled to share them now.  We have a little over six weeks remaining in the “political season” and a lot will be said by the candidates.  For those of you who are politically active and who get the opportunity to speak with candidates, you might want to consider the following:  Just what the heck is wrong with our economy and the markets?  Could the U.S. be headed for a double-dip?  What about the rest of the world and a global recession?  Our comments will be more about our own economy and some thoughts as to what is needed to just get things started.  With 65% to 70% of our economy directly tied to the consumer, the “simple” answer is that there is not enough consumer demand.  Well…duh…given the fact that almost 10% of Americans who want a job can’t find one, and arguably, there may be another 8% or so who don’t have any interest in getting a job or have simply given up looking, what else would you expect?  It should not be too surprising that the demand is soft.  But what about the 90% of people who are working?  Why aren’t they spending?  Frankly, they’re hunkering down and attempting to reduce their debt and/or build up savings.  Either way, it helps their net worth.  Perhaps as importantly, they are not adding to their debt by running up credit card bills.  In fact, as we have mentioned previously, credit card debt is at one of the lowest levels in history.  Given all the capital that businesses, (whether small, medium, or large) have, why aren’t they hiring more workers?  They need to do something with this capital; and they are not getting any better interest on their cash than investors are in general.

First, let’s look at small businesses – they have no idea exactly how they’re going to be taxed after December 31st because Congress has been unable to come to grips with extending the Bush tax cuts.  When you don’t know how you are going to be taxed on the capital that you intend to invest in your business, it’s just as easy to “sit tight”.  There has also been a move afoot to suddenly make Sub-Chapter S distributions subject to Social Security and Medicare taxes.  Let’s not forget that small businesses (the heartbeat of America’s employment engine), will be fined if they have 50 or more employees and they don’t offer health insurance.  What’s the motivation for businesses with 45 to 49 employees to hire more workers if they currently don’t offer health insurance?  Won’t that be a deterrent to expanding the workforce?  We are not arguing whether it’s morally right or wrong to offer health insurance, we’re simply stating the facts. 

Banks made more profit in the second quarter of the year than they did in the first quarter, but outstanding loans were down about 1.4%.  If businesses aren’t borrowing money and/or can’t get loans, how are they possibly going to expand?  Banks seem to be talking a good game, but talking and doing are two different things.   Larger corporations, especially the largest, have not had balance sheets with as much cash in a long time, if ever.  They need to do something with the cash.  They can’t simply continually earn 1% or 2% on that cash, as their shareholders won’t stand for it.  They need to deploy the cash by hiring, buying equipment, making acquisitions, etc..  If companies are not planning on using the cash to improve their businesses, Congress could help by continuing to give qualified dividends favorable treatment - perhaps very favorable treatment for some time - which would encourage companies to declare dividends and give the cash to shareholders.  If a company isn’t going to deploy the cash, it should let shareholders do something with it.

Let’s not forget the Federal Reserve, which has done a great deal to stimulate the economy.  President Obama is taking a lot of heat for the “lack of success” of the stimulus bill.  However, we would argue that, while it hasn’t helped as much as was promised, it has certainly helped.  By keeping interest rates so low, the Fed has certainly made it economically feasible for people to borrow money at either the consumer or business level.  Recently, one of our employees bought a new car and was offered 2.9% financing for four years.  It certainly isn’t the 0% financing of many years ago, but it is a very attractive interest rate.  Mortgage rates are at the lowest they’ve been in history, yet people are still not buying homes.  The Federal Reserve can do more, but they need to be careful that doing more isn’t more harmful than helpful. 

Right now there is talk about another stimulus bill either in the form of increased spending or tax cuts.  The President seems convinced that taxing the so-called “rich” is the best answer to raising taxes while protecting “middle America”.  He, along with other members of Congress, may be waiting for the Deficit Commission to come forward so that everyone can have political cover for the tough decisions that need to be made.  The Commission’s report is due out in December, but even then, questions remain as to what will be embraced and what will be rejected.  That which is embraced will obviously take some period of time to work its way through a very partisan Congress.

So what does this have to do with politics?  Just about everything.  We need leadership in Congress, not dogma.  We need politicians to tell us the truth, not to whisper the “sweet nothings” they think we want to hear in hopes that we will elect them.  We all have to take personal responsibility for the abuses of the past 20 or 30 years and slowly right the ship.  Politically this means dialing down our benefits/expenses and dialing up taxes.  Both must be done with a dimmer switch – neither is easy to do and you are probably wondering if we are crazy to bring it up.  We simply can’t ignore the fact that entitlements have reached the level of crowd hysteria where many Americans believe they are entitled.  Some even go so far as to believe that everyone else should be taking care of them.  Again, it comes down to personal responsibility.  The best thing each of us can do is to vote on November 2nd for whom we believe to be the best candidates to establish a realistic set of priorities and programs.  We must push past all of the negative ads and the speeches without substance, and make each and every candidate accountable for their words.

·Given all the conversations concerning extending the Bush tax cuts, we thought it might be helpful to know about the tax brackets currently in place and those that will be put in place if the tax cuts are not extended.  As you can see from the table below, if the tax cuts expire, there is a substantial difference at all taxable levels.  Keep in mind that President Obama has proposed keeping the current taxable income brackets in place for taxpayers filing jointly who earn less than $250,000 or for single taxpayers who earn less than $200,000.  If you’d like to see what the different scenarios might mean for you, you can go to www.calculator.taxpolicycenter.org to calculate your 2011 income taxes under three different scenarios:  (1) all rates are extended; (2) Obama’s proposed program is passed; and (3) all of the Bush tax cuts go away.  We do not suggest you use this calculator for anything other than fun…it is fun, isn’t it? 

  

	2010 Taxable Income	Tax Rate		2011 Taxable Income	Tax Rate
Married Filing Jointly	$0 – 16,750	10%		N/A	N/A
	$16,750 - $68,000	15%		$0 – 68,000	15%
	$68,000 – 137,300	25%		$68,000 – 137,300	28%
	$137,300 – 209,250	28%		$137,300 – 209,250	31%
	$209,250 – 373,650	33%		$209,250 – 373,650	36%
	Over $373,650	35%		Over $373,650	39.6%
Single	$0 – 8,375	10%		N/A	N/A
	$8,375 - $34,000	15%		$0 – 35,020	15%
	$34,000 – 82,400	25%		$35,000 – 84,872	25%
	$82,400 – 171,850	28%		$84,872 – 177,006	28%
	$171,850 – 373,650	33%		$177,006 – 384,860	36%
	Over $373,650	35%		Over $384,860	39.6%

·There are also other items under consideration on the tax front.  For example, Rep. Christopher Carney (D-PA) has introduced a bill that would give caregivers, whose incomes don’t exceed a certain amount, a tax credit of $2,500.  There are several other bills in Congress that provide further tax deductions on long-term care insurance premiums.

Because of the popularity of the automatic enrollment process in 401(k) Plans, both the Senate and House have introduced bills that would require employers who do not have a retirement plan to automatically deduct money for IRAs for their employees.  The bills under consideration generally require that the company have 10 or more employees.  An employee would have to “opt out”, or they would automatically be enrolled.  Another proposal that exists in both the House and Senate in a slightly different version would create Lifetime Savings Accounts which would be started at birth.  Essentially, it uses public money for people under certain income limits by putting $500 in at birth and then will match up to $500 each year.  Again, all this is based on income.  Essentially, the money can be withdrawn to pay for higher education.  Any money not used for that purpose, beginning at age 18, could be used for the purchase of a home, or rolled into a retirement account at the child’s age 25.  No one knows where these ideas come from, let alone how far they will actually get, but it does show that there are more things going on than what is being reported in the popular press.

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©9/15/10 ProVise Management Group, LLC

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