October 30, 2012
John Paulson’s $100 million gift to New York’s Central Park Conservancy was a stunning “thank-you” from the hedge fund titan to the city where he made his fortune. It is also yet another example of how uncertainty is distorting economic decision-making.
President Obama, who has already raised taxes on the rich by 3.8 percent through Obamacare, has vowed to raise tax rates on the rich even more. If Obama is reelected, Mr. Paulson (and others) might be marginally better off making large charitable deductions next year. On the other hand, Mitt Romney has proposed reducing the tax rate on high earners, capping deductions, and making the twin moves “revenue neutral.” In the October 6 debate, he alluded to a possible $25,000 limit on tax-offsets.
A Romney victory could therefore cost Mr. Paulson tens of millions of dollars in income tax deductions. Bottom line: we have no idea if these calculations entered Mr. Paulson’s head, but if he wants to receive substantial tax benefits from his $100 million donation, better to make the gift this year.
Charitable giving isn’t the only behavior being impacted by uncertainty. Between the looming election and the massive “fiscal cliff,” investors and business managers are scrambling to hedge their bets. Small business owners, concerned about the probable drop in the estate or gift tax exemption from $5.12 million to $1.1 million, and a tax hike on such gifts above that cut-off, are reshuffling ownership ahead of schedule. Estate planners say giving will soar towards year-end.
Companies of all sizes are considering making large payments to shareholders in advance of a prospective rise in dividend tax rates to 43.4 percent from 15 percent scheduled for year-end. HCA Holdings and Lyondell Basell Industries have both announced billion-dollar-plus one-time payouts, and more are expected to follow.
Confusion is distorting economic activity and hurting the country. The economic gurus at ISI Group report that their company surveys have recently been trending lower, reversing improvement see earlier in the third quarter. Consumer activity has also slipped, with decelerating retail sales, softer credit card activity and a reversal in improving homebuilders surveys.
The National Association of Manufacturers released a report last week saying that uncertainty over the expiration of the Bush tax cuts, proposed new taxes and spending reductions mandated by the deal struck with Congress to raise the debt limit is already dampening output.
They estimate the cost to GDP growth at 0.6 percent by the end of this year. This is an appalling penalty Americans are paying because of the failure of our elected officials to resolve our nation’s fiscal challenges. Think of the jobs lost to that uncertainty, the projects put on “hold.” It is unconscionable.
However, the damage already done is nothing compared to what could lie ahead. The Center on Budget and Policy Priorities warns that sequestration – the mandated spending reductions dictated by Congress in return for increasing the debt limit-- will mean cuts of 7 percent to 8 percent next year for most non-defense discretionary spending, many defense programs, and all mandatory programs except Medicare. It will include a 2 percent cut in Medicare payments made to providers.
Fidelity Investments warns that the $600 billion pudding of tax hikes and reduced spending could cost the economy as much as “4 percent to 5 percent of GDP.” With growth now hovering at around 2 percent, that means recession.
The NAM is even more pessimistic, forecasting that falling off the fiscal cliff will mean the loss of more than 6 million jobs, unemployment of more than 11 percent, a 13 percent drop in GDP and a 10 percent loss in household income. Not only would the economic shock be horrific; the drastic loss of confidence would be profound, undermining consumer spending and investment.
Is anyone else appalled that our elected officials have driven us into this fog of uncertainty? No company should make dividend decisions based on theoretical tax changes. No small business owner should have to hand over his property to an unprepared heir because of shifts in how such transactions are taxed. This is unacceptable – and it stems from a lack of leadership.
Voters should ask themselves: who is more likely to guide the nation through these challenges -- President Obama or GOP candidate Mitt Romney? On the one hand, we have a president who, in the most important negotiations of his tenure, badly stumbled.
Instead of accepting an imperfect “Grand Bargain” offered by House leader John Boehner, Obama foolishly pushed for extra advantage -- more taxes -- and then staged a hissy fit over the breakdown in talks and unreturned phone calls. The result? Utter failure to reach a reasonable compromise, leaving the nation to face this terrible threat.
Avoiding recession will require cajoling Congress into a middle ground – a test the president has clearly failed from the moment he crowed, “We won,” instead of negotiating with the other team. The president is sticking fast to his refusal to extend the Bush tax cuts for top earners, in spite of GOP opposition and claims that the hikes could hurt small businesses.
On other crucial issues, he can’t even keep his own team in line. Democrats in Congress are now seeking to extend the $95-$120 billion payroll tax relief that both parties had agreed to let lapse. That does not bode well.
Mitt Romney has campaigned on his record of bipartisanship as governor of a blue state. The Obama campaign considers Romney’s claims weak, citing 800 vetoes issued by the governor during his four-year tenure. Nonetheless, Romney managed to cut spending in Massachusetts, produce a budget surplus, adopt healthcare reform by collaborating with—brace yourself—Ted Kennedy, restructure state government and replenish a “rainy day” fund.
All of this was done by working with a legislature that was 85 percent Democrat. Until his announcement that he would not seek a second term, and his plunge into national politics, his approval ratings were at or above 50 percent.
Should voters trust President Obama more than Mitt Romney to conclude urgent deal making in the months ahead? Only if they still believe in the tooth fairy.