Politicians Have Done More Harm Than Good

01/11/2012 9:15 am EST

Focus: MARKETS

James Stack

President, Stack Financial Management

Wall Street and Pennsylvania Avenue are inextricably linked,  and while sometimes the combination is a force for greatness, recently it’s been a force for frustration and economic pain, writes James Stack of InvesTech Research.

Some political pundits just don’t get it. They don’t understand the economy, or how business decisions get made and jobs are created.

Spending $600 million or even $1 trillion on “shovel ready” projects does not create jobs. It only creates temporary work—or a demand for labor that instantly ends when the project is completed.

It may ease some short-term pain, but with an offsetting longer-term pain—in increased debt burden. And how to deal with that increasing debt burden has become a major divisive issue in Washington over the past two years.

You either cut spending, or you increase taxes. And if you cut spending, how do you do so without hurting those who are already in a world of hurt? But if you increase taxes, how do you do so without hitting the majority of those who voted you into office?

The only way to do that is to tax the small minority who earn the most, but also already pay the greatest portion of income taxes. [According to the Tax Foundation, the top 10% of income earners already pay over 70% of US income taxes.]

And this last point is what has created the so-called “class warfare” that the current President is leading. In the month following the 2008 Presidential Election, 77% of voters in a CNN poll said they believed Obama would unite the country. Instead, many today would now argue that his tax proposals have done exactly the opposite (admittedly, some would place equal blame on the Republicans).

Chances are you’ve seen or heard the statistic from the Small Business Administration (SBA) that 65% of all new jobs are created by small businesses (fewer than 500 employees). But what you may not know is that 99.7% of companies in the US meet that SBA’s definition as a small business. Most are privately owned in an LLC, S-Corp or sole proprietorship form of business.

I hate to say it, but for the past three years I feel like I’ve had a giant bullseye target painted on my back as a successful business owner. The new national health-care plan will automatically add a 3.8% Medicare tax to most of our S-Corp business income beginning in 2013, even though we already offer optional health insurance to our employees. I’m more fearful about what it’ll do to our insurance rates, and whether we’ll have to change or reduce coverage options for employees.

Yet my greatest concern is about the endless barrage of proposed taxes on income, capital gains, our estate, etc. This is like having a huge dark cloud hanging over every one of our business and tax decisions.

And that’s what political pundits don’t understand or fail to realize. Uncertainty creates retrenchment. Fear of higher taxes dramatically changes the day-to-day decisions by small business owners. If I firmly believe my tax rate is going to be higher in 2012 or 2013, then I’m going to make decisions that squeeze more of my income into today, including:

  • Postponing capital expenditures for new equipment, technology, or software.
  • Delaying or canceling expansion plans (why take the risk if higher income is only going to mean higher taxes?).
  • Forgetting about hiring new employees at this time. Instead, wait until after the tax rate increase.

Any or all of these decisions would move expenses into the future, and income into today under the lower tax rates. And as a business owner, I have that right to make those decisions!

There are 27.5 million small businesses out there, according to the SBA. Not all are successful or even profitable, but the owners of the more profitable ones make up a significant portion of the top 10% of income earners paying the majority of income taxes.

And we suspect the majority of those are all feeling the same tax anxiety and making those same business decisions outlined above. Chances are this is creating an enormous, invisible drag on the US recovery.

President Obama may have raised the current target threshold to $1 million in income, but everyone earning $200,000 knows they’re still high priority on the radar screen. Ironically, with the economy remaining the No. 1 issue among US voters, the President’s tax policies and proposals may ultimately prove to have been his own worst opponent in next year’s election.

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