Numerous
readers have emailed and asked me a personal question: “What would YOU
like to see happen with the fiscal cliff?” We thank you for the
question.
Please
remember, this missive will not be about what is going to happen. We do
not know that outcome and neither does anyone else. We hold an opinion
that there is a deal coming. We think it will be at the 11th hour or
even early next year after we tumble over the January 1 cliff. But that
is just an informed guess. President Obama didn’t add much clarity to
that view in his Bloomberg interview today. Readers may see it and hear
it on Bloomberg.com.
Instead,
today’s letter is about what we would like to see happen, and why. My view is
simple: until we experience the cliff, we will not understand what it really
means. Hence, we will not act wisely if we do it
prospectively.
We believe the
markets and citizenry are too complacent about our government. US
investors are used to watching the Washington charade. Voters, in nearly
every congressional jurisdiction, are trapped by limited choices, which is why
we re-elect most incumbents. Our politics are the politics of default
choices.
Our markets are
driven by forces such as low interest rates and global demand and geopolitical
risk. We go on about our daily business in spite of our broken
government. We engage in a collective trillion economic decisions each
and every day, without government help. Leave us alone and we can pretty
much figure out what to do.
We have a
broken political system, in which our leaders are about as popular as the
proverbial used-car salesperson (according to recent polls). Most of us
feel that way about them but cannot do anything about it, so we go on with our
lives and let the self-serving “leaders” in Washington decide our fate.
One defining
characteristic of Americans is to rally in time of crisis. We do that in
wartime. We do that with natural disasters like Katrina and Sandy.
We do that with regard to health matters. We are generous with our
charity. Mainstream Americans are mostly good folks. But we are
reactive, not proactive.
So, let’s see
if we can rally to deal with this government crisis. But we won’t do it
unless and until we know we have a real crisis on our hands. So, let’s
have at it. To get there, we need to go over the cliff and stay there
long enough to actually begin to experience what it feels like, and what it
means, to be off the precipice.
Let’s see what
happens when all the income tax credits expire on lower incomes and when 140
million Americans get hit with an average $1000 a year in a payroll tax
hike. Let’s see what the experience is when sequestration kicks in
hard. Let’s watch the layoffs of defense contractors who have to
downsize since they won’t be paid by the federal government. Let’s tax
capital and dividends and income at high rates and let our citizens begin to
feel the impact in their pocketbooks. Let’s tax estates at confiscatory
rates. Let’s allow tax-free bonds to be penalized when our schools and
sewer systems need financing. Let’s subject 24 million folks to the
alternative minimum tax. And on, and on, and on.
The political
morons generalize in their pronouncements because they fear giving us real
details. Our president repeatedly attacks the rich with class-warfare
rhetoric. He says upper 2% of income but he doesn’t say that many are
independent businesses. Does he ever mention an S-Corp small business
that is trying to accumulate capital to grow a business and hire folks?
Many small businesses finds themselves burdened with a marginal effective tax
rate above 50% under the present tax system – before we even go over the
cliff? That is where a small business can find itself when all taxes
imposed are combined.
Obama avoided
this detail today. He cited CEOs of big companies. He ignored the
half of the country that is small and independent firms even while claiming
that 97% of them will benefit.
Obama uses the
new-age definition of millionaire: a couple filing a joint income tax return
with a $250,000 annual income. He never mentioned that his failure to
compromise means the lower-income tax groups will incur a very high tax hike
once we’re off the cliff. He never admits that some of the lower
middle-class tax rates he claims are obtained are in place by using the
deception of credits.
The Republicans
are not any better. Republicans never say, “We defend the 15% carried
interest provision.” They never explain the details by which many
wealthy Americans benefit from provisions in the tax code that are engineered
to benefit the few at the expense of the many. They just say no changes
in tax rates. And now they are clamoring for “revenue,” which means
changing the tax code, not the rates.
Readers, please
note, it is the effective tax rate that really counts. Let me repeat and
add clarity. It is ONLY the effective tax rate that counts.
Both
Republicans and Democrats are disingenuous. That is a nice term for
lying to us and deceiving us and using fuzzy language to mask the truth.
So, my personal
proposal is to have a major fight and a resulting stalemate that persists
until there is real pain in the land. I would like to see my fellow
citizens get really angry with Washington and set aside their partisan
differences and then throw out some of the bums of both parties.
I would like to
see us get mad enough and scared enough and clear enough about what’s really
happening to us, that we realize we have to pull together to claw our way back
from the cliff and get this country on stable ground.
Let me invoke a
scene from a movie that will date me. What I want you to do is throw
open the window, stick out your head, and yell “I’m mad as hell and I’m not
going to take this anymore.” If you are too young to remember the movie,
Google the phrase and watch the scene (YouTube will take you
there).
That is what I
would like to see happen, dear readers. We need to open our windows and
yell. Get 314 million of us angry enough at our government, and we will
stop this nonsense. Unless we get that angry, this broken-down system of
ours is going to go clickety-clack right off the cliff.
Happy holidays
to all cliff dwellers (us). Get angry. Tell your congress people
that you’re angry. Whether you’re Democrat or Republican, be angry, be
clear-headed, and demand the truth. It’s our country!
Thank you for
asking.
David R. Kotok, Chairman and Chief
Investment
Officer
