Tuesday, May 5, 2009

Is the Market Taking Obama's Tax Increase Seriously?

This story hasn't caught a lot of media attention, and its surely hasn't caught the market's attention, and I have been wondering why. The story I'm talking about is President Obama's plan to close corporate tax loopholes for corporations doing business overseas. It is facing strong opposition from memebers of his own party. A couple of quick highlights:

  • President Barack Obama’s plan to end tax breaks for U.S.-based multinational companies drew a skeptical response from fellow Democrats on Capitol Hill, indicating that his proposal may face obstacles in Congress.
  • Senate Finance Committee Chairman Max Baucus, a Montana Democrat, called for “further study” of Obama’s proposals within minutes of the president’s announcement yesterday. Joseph Crowley, a Democrat on the tax-writing House Ways and Means Committee, said he doesn’t want any tax changes to “harm” Citigroup, his New York district’s largest private-sector employer.
  • Obama proposed outlawing three offshore tax-saving strategies commonly used by companies such as Citigroup, General Electric Co., and Procter & Gamble Co. In doing so, he reignited debate about whether U.S. companies can remain competitive in world markets if they have to pay billions of dollars in taxes on foreign profits.
  • The proposal, combined with a $60.1 billion plan to limit many expense deductions for American companies that take advantage of laws allowing them to defer tax on foreign profits and a $43 billion crackdown on abusive foreign tax credits would be the biggest tax increase on U.S. corporations since 1986.

My take on this:

This is clearly something President Obama is fired up about. We all knew he was going to have to raise taxes somehow, somewhere, and this is something he was counting on. The problem is, I don't think his fellow Democrats will let him do it, not to mention the Republicans. Its an unfortunate situation because most members of congress are so tied to large corporations that they don't want to touch this kind of bill. I was amused how Rep. Crowley doesn't wan't any tax changes to "harm" Citigroup. Yes, that Citigroup!

I've spent a couple of days trying to figure out why the market hasn't responded negatively to this. I mean, it could be a major factor for some of these big companies. My theory as of right now would be twofold:

1) The market is shrugging off most bad news as it continues to rally, and

2) The market doesn't think this will pass. That is probably the simplest theory.

And one more quote just for laughs:

"Natalie Ravitz, a spokeswoman for Senator Barbara Boxer, a California Democrat, said that any tax overhaul should not lead to “unintended consequences.'"

Washington is the land of unitended consquences.

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