No this isn’t a misprint.  The debate continues on extending the Bush tax cuts in the face of mounting government deficits.  While many issues such as health care reform, social security and immigration are often difficult to quantify objectively since we have not had experience with proposed changes the issue of income tax rates is not.  Critics, often with the best of intentions,  have said that extending tax cuts and further reducing income taxes will  benefit the rich over the poor and will lead to more deficit spending.  The public is told we cannot afford  tax cuts due to government spending on entitlements, defense and all of the other important things the government does.  While cutting taxes in the face of mounting deficits may seem counterintuitive critics are ignoring history.  Past income tax rate cuts have increased government revenues, boosted our economy, created jobs and shifted the tax burden away from low income families to the middle and upper income folks.

According to US Treasury statistics, for example, the 1982 tax act increased revenues by $130 billion in its first four years – after tax rates were cut dramatically. The 1984 Deficit Reduction Act increased tax collections by $72 billion in the four years after taxes were cut again.  The bulk of these revenue increases came from the wealthiest Americans.  This should not have been a surprise.

Across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts.  In   both cases the reduction of high marginal tax rates actually increased tax payments by “the rich,” and also increased their share of total individual income taxes paid.   According to the IRS in 1981 the top 1 percent of income earners paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent – after the top tax rate had been cut from 69.13% in 1981 to 28% in 1988.

The broad-based income tax cuts that President Reagan implemented in the 1980’s set off an entrepreneurial boom that propelled the growth of the economy for the next 20 years.  Certainly the Clinton Presidency benefited from the tax cuts, and to Clinton’s credit, he even added his own cut by reducing the Capital Gains Tax. 

Reagan’s detractors point to his lack of sensitivity for social issues and the legacy of his deficit spending- yet the legacy is a positive one.    In the seven years following the Reagan tax cuts almost 20 million good paying jobs were created (US Dept. of Labor).

According to Joint Economic Committee for the US Congress report (1996) the share of the income tax burden borne by the top 10 percent of taxpayers increased from 48 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.

The middle class also benefited,   middle class being defined as those between the 50th percentile and the 95th percentile for income.    Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

According to the Bureau of Labor statistics inflation, measured by the consumer price index, increased by 49.5% between 1977 and 1981.  Between 1982 and 1986 inflation was 19.1% – much lower than prior to the tax cuts.

Those who objected to the tax cuts in President Bush’s Fiscal 2004 Budget and extension this year need a vision that takes into account these lessons of history.  This is a case where those who would benefit the most from lower taxes could be hurt, with the best of intentions.  Clearly, there is an optimal point below which taxes should not be cut but certainly increasing taxes today does not make sense from an economic or social standpoint.  Lower income taxes stimulate growth, create good jobs, increase government revenues,  and shift the tax burden from low income families to upper income payers.   

If all the intellectual energy that is being used to debate historically established facts is channeled into other subjective issues, and not promoting partisan rhetoric, all Americans will benefit.   

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

It was  two years ago today (10/13/08) that as part of the financial bail out  Treasury Secretary Hank Paulson told the heads of  9 major US banks how much money they would take from the Government as part of Tarp.   When all was said and done some of the bankers did not want or need funds but committed to taking  $125 billion of taxpayer money. 

 While the figure of $800 billion and $750 billon in Tarp lending has been bantered about ultimately $245 billion  was actually paid out to banks and financial instituations.  Of that amount $188.6 billion has been repaid with interest thus far.   (source: Troubled Asset Relief Program). Ultimately the US taxpayers will most likely get fully paid back with interest much like what happened with past government bailouts. 

 In August 1971, Congress passed the Emergency Loan Guarantee Act, which could provide funds to any major business enterprise in crisis. Lockheed was the first recipient. Its failure would have meant significant job loss in California, a loss to the GNP and an impact on national defense.  Today funds paid out were $1.4 billion.  By 1977, Lockheed had paid off its loans, and its dependency on the federal loan guarantees came to an end. The government earned about $112.22 million in loan fees.

 In 1989   The Financial Institutions Reform Recovery and Enforcement Act authorized $293.8 billion dollars to finance the folding of numerous failed S&Ls. The final tab for the bailout was roughly $220.32 billion. Of that total, taxpayers were responsible for about $178.56 billion.  The portion paid by taxpayers was repaid with interest in less than five years. 

 While taxpayers may ultimately benefit from TARP, the word has become fodder for political attacks as we approach the mid term elections.  Ads are lambasting candidates from both parties for supporting the $700 billion package, when it is clear that ultimately the dollars spent were far less than the $700 billion authorized and  two yeas after being paid out over 77% has been repaid with interest.   Ultimately, the bailout may have averted a depression and will most likely be profitable for taxpayers.

 It’s interesting that many financial institutions were virtually forced to take funds and now many see the bailouts as helping those on Wall street and not Main street.   As with many financial, political and economic issues the TARP program was not new or unprecedented and most likely will not be the last bailout that we see from the government. 
Opinions expressed in this article are those of the author and are not necessarily those of Raymond James.

Despite a small uptick as the month ended, investors reacted to a series of disheartening economic reports by pushing stocks steadily lower in August. Broad market averages posted declines for four consecutive weeks. However, a pledge by Federal Reserve Board Chairman Ben Bernanke that the central bank would take bolder steps to stimulate the economy if business conditions continued to worsen provided a welcome piece of cheer.

 Among the news troubling investors was a revision in the Commerce Department’s estimate of second-quarter gross domestic product (GDP) – to a 1.6% (annualized) rate from the previous estimate of 2.4%. Unemployment remained stubbornly high at 9.5%, and the housing sector also was a sore spot, with sales of both new and existing homes reaching record lows. Altogether, the widening realization that economic growth has slowed sent stocks broadly lower (see figures below).  

	8/31/10 Close	7/30/10 Close	Change	Gain/Loss
DJIA	10,014.72	10,465.94	-451.22	-4.3%
NASDAQ	2,114.03	2,254.70	-140.67	-6.20%
S&P 500	1,049.33	1,101.60	-52.27	-4.7%

  As always, there were also positive signs. Consumer confidence, as measured by the Conference Board, rose to 53.5 from July’s reading of 51, outpacing the consensus forecast of economists. Consumers also increased their spending slightly (0.4%) from July’s levels. Both reports indicate that consumer spending, which accounts for some 70% of U.S. economic activity, is continuing to hold up.

 August was also punctuated by a number of takeover announcements, as companies in a variety of industries deployed their stockpiles of cash in efforts to gain market share and diversify operations. Takeover activity can sometimes be interpreted as a sign that corporate CEOs see bargains in the market.

Although August was a difficult month for equities, there are always opportunities in the financial markets. If you’d like to discuss repositioning your portfolio as we head into the final months of the year, I’d be happy to review your current holdings with you. Just give me a call!

Please note:

Ivesting involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results. Investors cannot invest directly in an index. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks.

The major financial indices retreated into negative territory for the year Wednesday as a weaker outlook from the Federal Reserve and reports of a slowdown in factory output in China softened investor expectations. Among major world exchanges, only the Shanghai market gained for the day.

Adding a little impetus to the slide was a report that the nation’s trade deficit widened noticeably in June, dropping 18.8% to $49.9 billion compared to $42 billion in May. It is the largest trade gap since October 2008.

 For the day, all major U.S. indices were down (see figures below).

	8/11/10 Close	8/10/10 Close	Change	Gain/Loss
DJIA	10,378.83	10,644.25	-265.42	-2.5%
NASDAQ	2,208.63	2,277.17	-68.54	-3%
S&P 500	1,089.47	1,121.06	-32.59	-2.8%

 Investors were reacting to the latest Fed comments that highlighted worries about the rate of continued growth in the United States. The news from China, it was feared, could foreshadow a slowdown in global business and job growth.

 Until Wednesday, the market had been relatively flat in August following a generally steady gain through July.

As I’ve noted before, market volatility is a continuing fact of life, but market corrections offer good opportunities to re-enter the market. I’ll be happy to review your portfolio in the light of current market trends if you wish. Just give me a call.

Randy Carver RJFS Registered Principal 

 

Investing involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results. Investors cannot invest directly in an index. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks.

Equity and fixed income markets will move up and down – this is normal. While we have seen increased volatility lately the direction of the market and to a lesser extent the month to month change in your account value is not that important. The questions that investors should ask is can they maintain their standard of living? Is their portfolio allocated properly based upon their individual current needs, long term objectives and risk tolerance?

Investors cannot buy the Dow or the S&P directly and most do not have holdings that only mirror these indices; they have diversified portfolio which may move in the same direction but not to the same extent as the market. Watching day to day or even quarter to quarter moves can distract you from maintaining a long term perspective. If you can maintain your standard of living and are not taking unreasonable draws from your portfolio then the direction of the markets does not really matter. Generally a reasonable level of withdrawal is 4% per year. The important question is can you maintain and enhance your standard of living over the long term.

We expect increased volatility as we approach the mid term elections. We also anticipate increasing inflation, interest rates and taxes over the next three to five years. It’s important to make sure that your portfolio is allocated based upon your individual needs, not the short term market trends. Please contact any financial advisor in the office if you would like to discuss your situation or if we can otherwise be of service