Labor Statistics for July…Surprise!
Well, the labor statistics for July have been released, and there seems to be some surprise in Washington that employment dropped by a net 131,000 people in July. There was also little mention that the newly unemployed number for June was “revised” downward by another 100,000.
However, the “official” unemployment rate of 9.5% remained unchanged. It always amazes me how so many jobs can be lost each month while the unemployment rate improves or remains unchanged. Of course the numbers are “seasonally adjusted.” I doubt that anyone knows what the formula is for seasonally adjusting the numbers, so I always stick with actual numbers.
Which, by the way, are much more representative of reality when we look at the Bureau of Labor Statistics U-6 numbers instead of the U-3 numbers. U-6 includes all unemployed people whether they said they looked for a job in the last 4 weeks or not. The U-6 number puts the unemployment rate at 16.8%.
But, don’t forget, this still does not include those people who did not report that they looked for work during the past 12 months; those who would like to enter the workforce but cannot find a job (new graduates and new immigrants); and those who do not report looking for work because they are in the country illegally. Some studies have put the real number of unemployed closer to 30%. Detroit has reported their actual unemployment rate at around 50%.
The point is; that Washington needs to quit their petty political bickering and get busy working on free enterprise job creation by supporting new businesses, new R&D, new expansions, new capital resources…and stop regulating and taxing businesses—and jobs—into oblivion.
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It’s Got to Stop
Steve Wynn is the most active and successful real estate and Casino operator in Las Vegas. He is concerned about the direction Washington is headed in and how it will affect businesses across the country. Part of his personal solution is to redirect his interests (and money) outside the U.S. Watch an interview he did with CNBC a few weeks ago…if you’re a business person you will find it interesting:
Is Wynn full of it…or is he right when he says “It’s got to stop.”
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Term Limits
I recently ran across a short mention of something we have heard little about in the mainstream media lately–term limits. A bill was introduced a while back by Senator Jim DeMint (R-S.C.) that would reduce term limits. This is something that must be done before there will ever be any real change or progress coming out of Washington.
Senator DeMint’s amendment would limit House members to three terms and senators to two terms. Every lawmaker then could serve no longer than six years in Congress.
“Americans know real change in Washington will never happen until we end the era of permanent politicians,” said DeMint in a statement. “As long as members have the chance to spend their lives in Washington, their interests will always skew toward…amassing their own power.”
Two thirds of the House and Senate as well as three quarters of the states would need to vote for DeMint’s amendment for it to become a part of the Constitution.
Does anyone think this amendment will ever be taken seriously in the foreseeable future?
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The Largest Tax Hikes in History
If you have noticed your grocery bill and general living expenses increasing in recent months—brace yourself. In six months we are going to experience the largest tax hikes in history. Unless Congress makes some pretty large changes in current laws.
Note: Small businesses should pay particular attention.
What Are These Tax Hikes?
Following is a condensed version of a recent article written by Ryan Ellis, Tax Policy Director of Americans For Tax Reform, a centrist organization founded in 1985.
(Condensed version)
In just six months, the largest tax hikes in the history of America will take effect and hit families and small businesses in three great waves on January 1, 2011:
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011 and as a result:
- Income tax rates will rise. The top income tax rate for small businesses will rise from 35 to 39.6 percent. The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.
- Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1,000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut.
- The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1, 2011, there is a 55 percent top death tax rate on estates over $1 million. [All family owned businesses, especially agricultural businesses, need to plan now for this eventuality—bf.]
- Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.
Second Wave: Health Reform Costs
There are over twenty new or higher taxes in the new healthcare laws. Several will go into effect on January 1, 2011. Here is one of the most onerous:
- The “Special Needs Kids Tax” This provision of healthcare reform imposes a cap on flexible spending accounts (FSAs) of $2,500 (Currently, there is no federal government limit). This new cap will be particularly cruel to parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education…which can easily exceed $14,000 per year. Under current tax rules, FSA dollars can be used to pay for this type of special needs education.
Third Wave: The Alternative Minimum Tax and Employer Tax Hikes
When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:
- The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.
- Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment today. In January of 2011, all of it will have to be “depreciated.”
- Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.
- Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.
- Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.
Well, there you are. Unless businesses and individuals alike intervene with their elected representatives, this is what we have to look forward to. So, business owners and individual taxpayers, what do you say, …isn’t it time to let our elected officials know how we feel and what we want them to do in Congress?
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One More Roadblock for Small Business
Today the U.S. Senate is back at work, and one of their early agenda items is to work on the bill just passed by the House last week dealing with “carried interest.” This is pretty much a Wall Street term for some of their profits, and “carried interest” has always been taxed at the capital gains tax rate. The bill just passed by the House raises that tax rate from 15% today to about 35% on this profit.
Since this increased tax rate would apply to some Wall Street profits—who wouldn’t want to stick it to Wall Street? Unfortunately, this bill also includes Venture Capitalists in the mix. This means that “carried interest” (a portion of the profits taken from an IPO or merger) would be taxed at the higher rate, instead of at the capital gains rate.
If the bill becomes law, every Venture Capitalist will be taking a harder look at every potential investment, and will likely only invest in the most promising “cream-of-the-crop” deals. When factoring in additional expenses from higher taxes, VCs are not going to make any deals other than sure things.
Why should they? There are other places VCs can invest their fund money, e.g., hedge funds. Yes, hedge funds would also be taxed at the higher rate, but they also promise faster returns with less risk than founding businesses. Of course, hedge funds do not create new businesses or jobs.
I don’t know, maybe higher taxes on “carried interest” would be a fair and equitable thing—it has been discussed for many years in Washington. But could it be implemented at a worse possible time than right now?
The very politicians who proclaim that small business is the primary avenue to economic recovery for the U.S., turn right around and pass a bill that makes it harder for new businesses to start up and create new jobs. Venture-backed startups added over 13,000 new jobs in the first quarter of this year—why damage that kind of progress now?
VCs have lobbied to have their industry exempted from the bill, but of course the House members turned a deaf ear…and we’ll have to wait and see what the Senate does.
So, if anyone out there is working on an upcoming new business that will require venture capital funding—you had better get busy and let your Senator know that this new bill could make it much more difficult for you to start your new business. You may also want to let your Congressman know that they have likely jeopardized your chances at venture capital.
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Consumer Spending Rises
I see where consumer spending rose more than forecasted last month. Apparently those who still have jobs, or income, believe the recession is over and it’s time to spend again. It is likely that much of this enthusiasm is based on the results of the stock market—which shows a near total recovery.
The stock market certainly could have been a good indicator 50 years ago—when 95% of public stock was owned by individual stockholders. Sadly, today about 75% of the stock in public companies is held by large institutional investors. These are the people who play the stock market like “high-rollers” play in Vegas…they don’t invest according to what is; they invest according to what they “feel” might happen.
On the other hand, maybe they know something we lay people don’t…but I doubt that is of much comfort to the 30 million unemployed and underemployed in the U.S.
Maybe I’ll believe the recession is over when they start putting the bulk of the unemployed back to work—at jobs other than flipping burgers or taking the Census.
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