Worse Than Expected

The U.S. Commerce Department announced on Friday that the Gross Domestic Product (GDP) decreased at an annual rate of 6.2 percent in the fourth quarter of 2008, which was worse than the minus-3.8 percent preliminary estimate.

“Worse than expected” has become a consistent theme with nearly all measures of economic activity lately. Housing, unemployment, jobless claims, consumer spending, consumer confidence or your personal favorite leading or trailing indicator of the health of the economy could all use the headline “worse than expected”.

As the tsunami spending continues in Washington, D.C. with staggering federal deficit projections, neither the president, Congress nor the mainstream media are talking about another soon to be “worse than expected” headline, namely, federal tax revenues. This means the projected federal deficit of $1.7 trillion for fiscal year 2009 will likely be worse than expected.

Here are seven factors that will cause tax revenues to fall:

1. Business profits will be down or negative; as a result . . .
2. Businesses will reduce capital investments
3. Unemployment will be higher
4. Corporate foreign profits will stay off-shore
5. Corporations will cut or suspend dividends
6. Corporations will minimize inventories; and . . .
7. Small businesses and independent contractors will choose to make less money because of the “war on prosperity” in President Obama’s budget proposal.

When two of the 30 Dow Jones Industrial Average companies are already cutting dividends because they expect profits, if any, to be worse than expected, then the other 14 million publicly traded companies (based on Dun and Bradstreet data) and the hundreds of thousands of private businesses are not far behind with similar actions.

The expectation for federal tax revenues can only be worse than expected.

Highlights of the war on prosperity in President Obama’s budget proposal include allowing the Bush tax cuts to expire for couples making over $250,000 a year. Fully 64 percent of those taxpayers are small businesses (subchapter S corporations), which means their business profits will be taxed the same as ordinary income at 39.6 percent top rate instead of the current 35 percent.

Also, those evil rich people making over $250,000 will only be allowed to deduct 28 cents on the dollar for charitable contributions, local taxes and other deductions instead of the 40 cents on the dollar currently allowed.

So far, there has been no mention of what happens to the capital gains tax rate when the Bush tax cuts expire, which means it will probably go back to a 28 percent rate versus the current 15 percent rate. It’s called a sneak-a-tax.

We should expect that President Obama’s budget proposal will be approved by the Democratic-controlled Congress. After all, they gave him the remaining $350 billion in TARP funds, a $789 billion so-called “stimulus package,” and a $410 billion Omnibus Appropriations Act for FY 2009 that has passed the House and is on the way to passage through the Senate to his desk.

All of this spending plus the interest on the debt will push the federal national debt to $12.7 trillion.

Conclusion: The recession we are in will be worse than expected. It’s called a depression. We have got to HITM harder. Join!