Wednesday, July 15, 2009

US Federal receipts.

Interesting chart from Zero Hedge showing past and projected individual and corporate federal receipts. Looks like either the economy is going to boom, or individual taxes are going up, A LOT.

Raising taxes (or interest rates for that matter) will dampen any incipient recovery. Well, looks like we're already headed there. From WSJ: Small Business Faces Big Bite.

The House bill would place new taxes on the wealthiest people to help expand insurance coverage to the nation's 46 million uninsured people. The legislation calls for a 5.4% surtax on those with annual gross incomes exceeding $1 million.

Households with annual income between $500,000 a year and $1 million would be hit with a 1.5% surtax, and those earning between $350,000 and $500,000 would face a 1% surtax. Those rates could eventually increase to 3% and 2%, respectively, if the government doesn't achieve certain health-cost savings.

Greg Mankiw reports that once sales tax is factored in, the top earner would be facing a marginal tax rate of 55%.

Why is this important for markets? The bull market of the 1980s and 1990s coincided with tax reforms and tax cuts. Taxes, instead of being a tailwind, will actually hamper profitability and economic growth going forward. (I'm not suggesting that raising taxes is a wrong idea. I realize higher taxes is the price we have to pay for the excesses of the past few years.) Taxes are a very important determinant of market sentiment and the economy. Apart from healthcare, the cost of cap and trade is effectively a tax. Corporate taxes should be headed higher as well. (For instance, by taxing employer health insurance, removing the deduction of expenses from foreign operations, etc). This Economist article has more.

I don't think the markets have priced this in yet. Definitely not great news going forward.

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