Friday, September 14, 2012
During the course of the offsite, the question was asked, "Will the Bush-era tax cuts be allowed to expire and will Sequestration occur?" It was semi-rhetorical as both will likely affect our business and the speaker was leading into several key points about our position in the market.
However, I sat back and gave it some more thought and in the end, I think I'd answer, "Yes" with an asterisk. The simple reason for this is that this approach aligns with what is easy for Congress to do: nothing. If Congress does nothing, both events will take place. Congress is great at doing this (or not doing anything). There will be pontifications and all sorts of posturing but in the end the Republicans will argue that they didn't raise taxes, it was just the expiration of these tax cuts. The Democrats will defend sequestration saying that they don't want to cut defense spending (at the risk of national security) but it was just the option left with where we were.
Now for that asterisk - regardless of who wins the White House in November, Congress will act quickly before the Christmas recess to extend the Bush-era tax cuts (which, technically, Obama and the Democrats have supported by extending them) for only one more year but with a specific purpose that might even be worded into the bill extending them: a group will be formed to revamp the current tax code. Everyone agrees that if they simply expire, we will experience another dip in this recession and it won't do the country any good. The only "out" that both parties have is a reformation of the tax code. The Democrats will get increased taxes on the wealthier Americans and the Republicans can attest that they kept the Grover Norquist deal and work to minimize whatever increases are pressed forward by the Democrats. Democrats love to harp on the wealthy having an "effective" tax rate in the mid-teens, but that is largely due to capital gains taxes and other tax shelters which are simply smart investments. So it is likely that there will be a push to rewrite the tax code in order to capture more taxes from this kind of income. This is dangerous as it could reduce the amount of investment capital made into American companies but will likely be championed as "fair". Because it isn't "fair" to the Democrats that there are wealthy people like John Kerry, Mitt Romney, etc. with millions in investments while others are paying higher tax rates on regular salary-based income. Oh the humanity!! ELEVENTY!@!@#!$ Call it what you will: envy, class warfare, unfair, it will be cast as such. Many deductions will be eliminated or reduced and loopholes closed. In the end, probably a good thing, but I'll withhold judgement until it happens.
The House passed a six-month Continuing Resolution (CR) that will hold federal agencies at the current (2012) funding levels for October through March 2013. This also limits new contract starts which is not a good thing for the federal government or those who contract with the federal government. Sequestration will take place and its affect will be complicated. Many agencies will have difficulty implementing the cuts, even though many agencies do have fat to cut, including the Defense Department. The problem is that the cuts will be applied with a broad brushstroke versus a surgical scalpel.
Now many will like to show various graphs/charts - the CBO has one that we saw at the offsite - that shows that under the current budget plans, we get close to a balanced budget, if it wasn't for the tax cuts. This is a red herring. Predicting the changes in revenue year to year, based on tax cuts or the repeal of tax cuts is difficult at best. What is missing from these graphs/charts is the impact of the entitlement programs. In the whole discussion, the scope was limited to the "discretionary spending" - we need to grab that third rail and deal with it.