Regulations, Tax Hikes Weaken American Economic Outlook

Businesses are reluctant to hire and invest in the face of more regulations and higher taxes.

Fog in the Houston Ship Channel, Texas, February 21, 2008
Fog in the Houston Ship Channel, Texas, February 21, 2008 (Louis Vest)

Uncertainty over new regulations and tax increases that are set to go into effect in January of next year is eroding American business confidence yet politicians in Washington are unlikely to act before November’s elections and may not even reach a compromise agreement after them.

Dave Cote, chief executive of Honeywell, complained last week that “you can’t count on these guys doing what they need to.” He’s hardly the only businessman who is frustrated. JPMorgan Chase reports that 61 percent of its American clients says that the looming tax increases are affecting their hiring plans. The Economist quotes Bruce Joston of the Chamber of Commerce, a lobbying group, saying, “If you can’t plan, you don’t invest. If you can’t invest, you won’t hire.”

Business’ main concern is the expiration of the Bush era tax cuts that were extended last year but are set to expire in January. Democrats want to preserve the lowered rates only for incomes under $250,000 while Republicans favor extending all of the current tax rates. Because Republicans are in the majority in the House of Representatives and Democrats likely to retain their majority in the Senate, both parties are able to hold the process hostage to their demands.

President Barack Obama’s payroll tax credit as well as several other deductions and lowered rates are also slated to be retired unless Congress acts. If it doesn’t, taxes will go up by a total of $440 billion next year which will depress consumer spending and undermine business growth.

Among the specific credits that due to be phased out is one for research and development. With businesses typically considering three to ten year time periods for research projects, the Chamber of Commerce warns that continued uncertainty — for instance in the form of another one-year extension — will convince companies to move research overseas.

Tax provisions for equipment purchases are set to become less generous. The enhanced credit was designed to incentivize companies to bring forward expensive purchases when the economy was showing weak growth. Uncertainty over the future form of this credit now has the opposite effect: businesses are putting off the very investments that the governments like them to make.

Beyond this “fiscal cliff,” Quartz‘ Simone Foxman reports that a “regulatory cliff” looms, one that particularly affects the financial industry.

More than four years after the fall of Lehman Brothers, regulators are beginning to crack down on banks, law firms and businesses, demanding that those companies managing consumer debts and deposits adhere to stricter standards.

Unlike the scheduled tax increases, there appears to be little chance of staving off the new financial regulations even if Republicans, who are opposed to many of them, win control of the government in November. Repealing them will take time and businesses have to comply in the meantime.

Quartz cites a Natixis Global Asset Management poll that found 78 percent of investors in thirteen countries concerned that “the staggered pace of implementing financial reform around the world is creating more, not less, systemic risk.”

It was Jamie Dimon of JPMorgan Chase who wondered in June of last year if policymakers had considered “the cumulative effect of all these regulations and could they be the reason it’s taking so long for credit and jobs to come back? Is this holding us back at this point?”

Add to that many small businesses’ apprehension about President Barack Obama’s health reform law which will soon force them to buy insurance for every one of their workers if they employ fifty or more and it becomes quite apparent why one in two Americans believes that the economy is getting worse.

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