Whither Obama

Whither Obama

Freedenberg

Barack Obama comes into office faced with a dilemma regarding the economy.

He must pump money into the economy to stimulate growth and reverse the trend which has dragged the nation into deep recession. But, like all Presidents, he needs to be frugal and cut spending to ensure long-term growth and avoid inflation.

When does one demand stop and the other begin? How does he prioritize? Is he sowing the seeds of the next economic problem while he endeavors to solve this one? How much revenue needs to be raised? If the answer is to put off revenue increases, how much U.S. debt will the world credit markets stand?

These are not academic questions.

They help us to understand the very real problems that the new President will face the moment that he assumes office.

In my last column, I discussed the revenue shortfall that is built into the budget for Fiscal Year 2010. The “death tax” disappears entirely, removing tens of billions of dollars worth of potential revenue at the end of Obama’s first full year in office. Because of the odd way in which the law is written, it returns with a vengeance in 2011. But because of the strange gyrations of revenue, it is a tax likely to force legislation in 2009.

Congress almost never opens the tax code to amendment and revision for one provision alone. The Senate, in particular, rules amendments to the entire tax code as in order during any tax debate. That means that both corporate and personal rates are likely to be on the table.

Candidate Obama made it clear that he intends to tax the rich if only to reintroduce fairness into the tax code. How will he and the overwhelmingly Democratic Congress define “rich”?

The President-elect hinted that he might not want to raise taxes at the height of a recession. How much risk of exacerbating a recession is he willing to take to reintroduce “fairness”? And how do “S-Corp” small businesses fit into this fairness model? The balance sheets and economic plans of tens of thousands of small business owners hinge on the definitional sub-paragraphs of the tax bill that emerges from legislative conference this fall.

Many other tax issues that are important to manufacturers will likely be on the table as well.

My trade association’s – AMT’s – recent efforts to extend the temporary business incentives enacted as part of the 2008 stimulus bill, including bonus depreciation and enhanced small business (Sec. 179) expensing, will likely be considered.

The R&D tax credit also will have to be reconsidered, if only to extend it once again beyond its 2009 expiration date. But, if we are to create a “green economy,” R&D credits will have to be improved to make them more accessible to small business.

There are many other relevant business tax issues, but I will conclude this short list with the prediction that some sort of windfall profits tax is likely to be imposed on the oil and gas industry.

It is hard to believe that the environmentalists, who are an important part of the Democratic Party’s constituency, would allow oil and gas to escape additional taxation.

It will be justified on the grounds of making us a more energy-frugal nation. But it will be necessary as well to finance the large number of alternative energy R&D projects that are likely to come out of Congress as well as the Obama Administration.

The bottom line direct and indirect tax impact on manufacturing will be substantial. How much so? No one can predict. But there is no such thing as a free lunch, or a free transition to a fairer, greener America.

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