Posts Tagged ‘Bush-era tax cuts’

Right Up to the Cliff

Friday, January 4th, 2013

Like a good 30’s serial, Congress seems to enjoy brinkmanship and 11th hour rescues. And it was historic. For the first time in 20 years, Republicans voted to raise income taxes (the last time was when George H.W. Bush broke his “read my lips, no new taxes” pledge).  The Senate’s “fiscal cliff” bill passed 257-167. The Bush-era tax cuts will expire for people making $450,000 and up on earned and investment income. They will see their top rate go back to where it was during the Clinton era – from 35 percent to 39.6 percent. The deal also delays implementation of the sequester – $110 billion in automatic spending cuts set to begin Jan. 2—by two months. Ultimately, it comes down to gamesmanship and how the issues poll. Higher taxes on the middle class poll badly for Republicans as opposed to refusing to raise the debt ceiling. That’s why Republicans fared better in August of 2011 during the debt ceiling talks than in January of 2013.

Not that the Democrats won a clear victory. Left-leaning house and senate members decried the deal for sparing people earning between $250,000 and $450,000 from higher taxes. And the administration faces three new cliffs in short order – when the sequester comes back in two months; followed by a new debt ceiling deadline and expiration of the continuing budget resolution at the end of March.  We are now in an era of cliffhangers.

One clear winner is Joe Biden who burnished credentials as a wily tactician and a master of backroom deals. After the Obama-Boehner impasse, it was Biden and Senate minority leader, Mitch McConnell who made the deal happen (by a landslide 89-8 vote). With Biden set to lead the campaign for gun control, it seems clear that the administration sees him as their chief negotiator.

All told, the fiscal-cliff deal produces $620 billion in deficit reduction over 10 years. Stay tuned.

The 4th Quarter Rush to Sell

Friday, January 4th, 2013

With the Bush era tax cuts on capital gains poised to expire at the end of the year, the investment sales market went on a tear in the 4th quarter. According to CoStar, total deals were up 46% from the same time a year ago based on transaction data through Dec. 31, according to Brian Kerschner, real estate economist for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting company.

Not surprisingly, it was small-cap deals — assets most likely to be sold by owners hoping to mitigate the tax consequences of a sale – that really spiked, increasing in volume by 77% in the fourth quarter. Large-cap deals typically have less exposure to capital gains because they tend to involve REITs and pension funds which are tax advantaged investors.

The maximum rate for long-term capital gains had been 15% for individuals earning up to $85,650 a year or families earning up to $142,700. If we had gone over the cliff, the rate would have jumped to 20%.

Deals that closed in the waning days of 2012 included the following:

  • had the blockbuster of the year:  It paid $1.16 billion for its Seattle headquarters, encompassing 11 buildings totaling 1.8 million square feet.
  • Cupertino, CA-based Mission West Properties, Inc. sold all of its real estate assets for about $1.3 billion in two separate transactions
  • Dexus Property Group sold the majority of its U.S. industrial portfolio for $561 million as part of its strategy to exit the U.S. market by April, reallocating proceeds from offshore property sales to core Australian properties, CEO Darren Steinberg said. The sale of 26 of Dexus’  27 American properties was achieved at a significant premium to their book value.

Incidentally, the same logic applied to the residential market. New York, for example, saw an extraordinary 2,598 home sales in the last three months of 2012 — the highest for a Manhattan fourth quarter in at least 25 years.

Under the terms of the fiscal-cliff deal reached Tuesday, capital-gains taxes increased only for annual incomes over $400,000 for individuals and $450,000 for households. They will pay a new capital gains tax rate of 23.8%.

Beware: Double Dip Ahead?

Thursday, May 31st, 2012

The 17-nation Eurozone is at risk of falling into a “severe recession,” the Organization for Economic Cooperation and Development (OECD) warned, as it called on governments and the European Central Bank to act quickly to keep the slowdown from becoming a drag on the global economy.  OECD Chief Economist Pier Carlo Padoan warned the euro-zone economy has the potential to shrink as much as two percent in 2012, a figure that the think tank had described as its worst-case scenario last November.  The OECD -which comprises the world’s most developed economies — said its average forecast was that the Euro-zone economy will shrink 0.1 percent in 2012 and grow a mere 0.9 percent next year.  “Today we see the situation in the Euro area close to the possible downside scenario” in the OECD’s November report, “which if materializing could lead to a severe recession in the Euro area and with spillovers in the rest of the world,” Padoan said.

The report believes that Europe will lag behind other countries, especially the United States, where the economy is expected to grow 2.4 percent this year and 2.6 percent in 2013.  “There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind,” Padoan said.  Europe is split between a wealthier north that is growing and the southern nations that are falling into recession, according to OECD statistics.

The global economic outlook is still cloudy,” said Angel Gurria, OECD Secretary General. “At first sight the prospects for the global economy are somewhat brighter than six months ago.  At closer inspection, the global economic recovery is weak, considerable downside risks remain and sizable imbalances remain to be addressed.”

Germany, Europe’s largest economy, will grow two percent next year after expanding 1.2 percent in 2012.  France, the Eurozone’s second-biggest economy, will grow 1.2 percent next year after expanding 0.6 percent this year, the OECD said.  By contrast, Italy’s economy is expected to shrink 1.7 percent this year and 0.4 percent in 2013.  Spain will remain mired in recession, with contraction of 1.6 percent this year and 0.8 percent in 2013.  Padoan has asked Eurozone leaders to enter into a “growth compact” to promote expansion while cutting deficits.  French President Francois Hollande has made achieving this type of pact the focus of his European diplomacy.

The OECD is chiefly concerned that problems with European sovereign debt are a significant threat to growth around the world. “The crisis in the Eurozone remains the single biggest downside risk facing the global outlook,” Padoan said.  “This is a global crisis which is largely a debt crisis.  It is a result of excessive debt accumulation in both the private and public sectors.  One can not safely say we’re out of the crisis until debt comes down to more manageable levels.”

To protect its economic recovery, the OECD urged the American government to move very gradually to tighten its budget.  A wave of U.S. spending cuts and tax hikes – known as the “fiscal cliff” — are set to take effect in January unless politicians agree to delay at least some of them.  Bush-era tax cuts and benefits for the long-term jobless are both expected to expire.  Another $1.2 trillion in spending cuts on federal programs would take effect as a result of Congress’ failure last year to find a comprehensive deal to cut the budget deficit.  The OECD said these actions would be the wrong fiscal policy given the still-fragile condition of world’s largest economy.  “The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery,” according to the OECD.

Wall Street economists say that fiscal policy could tighten by about $600 billion in 2013, or about four percent of GDP, if lawmakers cannot agree on what programs to cut.  Goldman Sachs estimates the “fiscal cliff” could trim approximately four percent from GDP in the first half of 2013.  The majority of economists, however, expect lawmakers to act before that particular hammer has an opportunity to fall.

As Spring Arrives, Companies Are Hiring Again

Monday, March 21st, 2011

January’s big snowstorms on the East Coast contributed to the creation of just 63,000 jobs nationally in that month.  In February, however, businesses started to hire workers. The economy added 192,000 jobs, the best showing since May of last year, the Bureau of Labor Statistics reported Friday.  The unemployment rate – which is politically important — fell from nine percent to 8.9 percent.  Economists said the employment numbers were “solid” but not “ebullient.”

The optimistic view is that the economy has at long last turned the corner.  “I think the economy has not only turned the corner: I am expecting the employment gains to accelerate slightly,” said Sung Won Sohn, a professor of finance at California State University, Channel Islands.  “We have definitely reached the point where the economy is self-sustaining.”  Sohn thinks that the Federal Reserve can halt its monetary stimulus program for the economy.  “There is a growing possibility they will cut short their bond-buying program before the end of June,” he said.  Improved job growth would also help cut the federal budget deficit, since income-tax revenues would rise and requests for unemployment benefits will be reduced.  States and cities would get a boost for the same reasons.  “The chances are the revenue projections may be slightly better than the government anticipates,” according to Sohn.

Other economists were not as sanguine about the pace of recovery.  “If we see 200,000 jobs added in March, April, and May, that will convince market participants that the recovery is self-sustaining,” said John Canally, economist at LPL Financial in Boston.  “You can’t make that call just by looking at February, because the numbers may have been distorted by the weather.”  According to Canally, the most accurate indications of how the weather affected the numbers were in construction, which gained 22,000 jobs in February after falling 33,000 in January; transportation, which added 22,000 jobs compared with losing 44,000 in January; and leisure and hospitality, which added 21,000 jobs after dropping 3,000 the previous month.  “All of those swings are because of the weather,” he said.

Manufacturing added 33,000 jobs in February, primarily in producing durable goods such as washing machines and refrigerators.  This comes as no surprise to Frank Fantozzi, president of Planned Financial Services in Cleveland.  “In talking to our corporate clients, we were hearing there was definitely hiring going on and activity improving,” Fantozzi said.  “My litmus test is when our corporate clients from manufacturing to services send me e-mails saying they are looking to hire someone and asking if we have anyone in our network who would qualify.”

Not surprisingly, the Obama administration was cheered by the February numbers.  “We are seeing signs the initiatives put in place by this Administration – such as the payroll tax cut and the investment tax credit – are creating the conditions for sustained growth and job creation,” said Austan Goolsbee, chairman of the Council of Economic Advisers.  Republicans countered, suggesting that the improvement was because they had convinced the Obama administration to extend the Bush-era tax cuts for two years.  “Removing the uncertainty caused by those looming tax hikes provided much-needed relief for private-sector job creators in America,” said House Speaker John Boehner (R-OH).

According to Esmael Adibi, an economist at Chapman University in California, “Three sectors – construction, financial activities and government – are taking the oomph out of the recovery.  Job creation is what is going to bring housing back, but with this pace of job creation, we’re not going to see a quick turnaround.”

November Unemployment Matches 1980s Record

Wednesday, December 22nd, 2010

November Unemployment Matches 1980s RecordWith the U.S. unemployment rate rising to 9.8 percent in November,  the Department of Labor is concerned that economic recovery isn’t progressing as quickly as it would prefer.  For the 19th consecutive month, unemployment has stayed above nine percent — the longest streak on record, beating out previous highs in the 1980s.   Despite optimistic predictions that the nation would add 150,000 jobs in November, just 39,000 new jobs were added during the month, bringing unemployment up from 9.6 percent to 9.8 percent.

The Federal Reserve has decided to stay the course, saying the “economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.”   Worries about steady high unemployment were the main motivation behind the Fed’s decision to launch a second round of economic stimulus in November with a new bond-buying program.  Progress on reducing unemployment has been “disappointingly slow,” according to the Fed.

The persistent level of high unemployment shows that many Americans are still suffering, even though the National Bureau of Economic Research says the recession officially ended in June 2009.   The economy lost more than eight million jobs during the recession.  “To anyone around the dinner table, it means little,” says Lawrence Mishel, president of the liberal Economic Policy Institute.  “The fact is, unemployment is going to remain flat for a year.”

“With the jobless rate stuck at 9.8 percent, the economy needs all the help it can get,” said Sung Won Sohn, economist at California State University.  Because nearly 40 percent of the unemployed have been jobless for more than six months, there is growing fear that the cause may be more profound than the deepest recession in more than 70 years.