President Barack Obama’s tax proposal is changing the debate in Washington about corporate and personal taxes. Reaction is, so far, less partisan (though still very partisan) than much that has taken place in Washington since Obama took office in 2009.
Extending the cuts for the middle class–defined as the 98% of families earning less than $250,000 a year–would add $2.3 trillion to the Office of Management and Budget's (OMB) projected $10 trillion deficit in 2020, according to Tim Speiss, partner and chairman of EisnerAmper Personal Wealth Advisors. Extending the cuts to the 2% remaining, and highest-income, earners would add about another $1 trillion over 10 years, for a total deficit projection of $13.3 trillion.
The President proposed:
- Tax breaks for companies that create jobs in America rather than overseas
- A corporate write off for companies that invest in "plants and equipment" in 2011
- Additional infrastructure projects, and
- Making permanent the tax cuts (for those earning up to $250,000 a year (households)
Remarks by House Minority Leader John Boehner, R-Ohio, on Sunday, on "Face the Nation," were noted by media and politicians alike: "If the only option I have is to vote for those at 250 and below, of course I'm going to do that," he said, adding, "But I'm going to do everything I can to fight to make sure that we extend the current tax rates for all Americans."
Senate Minority Leader Mitch McConnell, R-Ky., on Monday,though, opposed any compromise, saying he would only support extending the tax cuts for everyone.
Boehner's comments led The New York Timesto opine on Tuesday that it was "refreshing to hear a Republican leader say that he could conceivably vote for any bill supported by President Obama." But The Wall Street Journalskewered the Republican leader on its Opinion page for his remark, saying he had "blundered into the tax trap" that Obama had set for him.
But the White House undoubtedly recognizes that any tax hikes will be met with opposition in a mid-term election year, with unemployment at 9.6% and the specter of a double-dip recession still looming. So what is the impact of this for advisors and their clients?
Andrew Rice, vice president and CFO with Money Management Services, Inc., in Birmingham, Ala., told WealthManagerWeb.comthat "if the Obama proposal allows businesses to write off 100% of equipment as a permanent tax break feature instead of just till end 2011, then we have different situation," than if the cut is only for 2011.
"Any time you give tax cuts to businesses on depreciation it's going to prompt at least some form of spending level on new equipment, new machinery," Rice says. My only concern is that I don't see it adding new jobs," although businesses may make investments that they might not have planned. It's "short-term." It doesn't necessarily, he says, create jobs.
A permanent equipment tax break, Rice added in an e-mail, could have "a good possible impact on the economy both short and long term. Business owners might not be worried about the 2011 tax increase as much if they could continuously mitigate their income based on continuous purchases of equipment and machinery. This in turn would continuously increase turnover of money at a rapid pace." The velocity of money is cited as a crucial driver of economic growth.
"The biggest thing," Rice explained in his e-mail, "is small businesses have to plan continuously but the sooner we mitigate the continuous changing hurdles businesses are having to deal with in regulation, Obama care, and tax laws, then the sooner those businesses will spend their money, which everyone needs to happen."
But can the proposed capital expenditure cuts grab the imagination of corporate leaders?
"The demand doesn't seem to be there with regard to capital acquisitions by businesses, says Speiss. "The sentiment appears to be, while it's definitely favorable to purchase equipment, we don't know the parameters yet," meaning, what would qualify for "100% expensing." He uses the example of a business borrowing $1 million, (rather than spending its own cash). They'd currently get "favorable interest rates–and they could deduct the interest." However, "all in, they're only getting about a $350,000 tax savings," because at a 35% corporate tax rate, "they're getting a $350,000 deduction…they still [have] to pay $650,000" for their expenditure. Executives may still think this is a good deal, according to Speiss.
The question becomes, "is the demand there for people to buy my goods or services if I've now built or acquired this capital equipment?" Speiss asks. "That's where I think this still has yet to really be evaluated. Because if consumer confidence and spending right now, which is very tepid–would remain the same," he posits, "why would you go ahead and undertake this expense right now?" That said, it may be "that they expect sales to increase two years out or three years out. Maybe they're willing to bite the bullet and make the expenditure now."