Joe and Janet have let the cow out of the bag.

During Joe Biden’s campaign for the presidency, he repeatedly made a point of promoting a hike in taxes as a good and necessary thing. But he also told ‘ordinary Americans’ not to worry because tax hikes would only be applied to corporations and ‘rich’ people: those making over $400,000 per year. Well, either they hadn’t done the math or they changed their minds, or they passed spending bills beyond what they thought they would, or they re-evaluated the potential impact of the increased debt. It’s beginning to look like the correct answer is ‘all of the above’.

The updated talk from the administration now is that the 400k income threshold has been chopped in half, to 200k. Now, before you say ‘Hey, 200 grand is still a decent income.’ Keep in mind that literally millions of taxpayers in that category are small business owners whose businesses are Sub-S or LLC (or similar) so the taxable income of the business falls directly on its owners. These folks are technically ‘corporations’ but they pay tax as individuals. The result of this legerdemain simply moves the tax burden to the middle-class — where it almost always ends up anyway.

But Joe and Janet want us to be comforted by their claim that it’s the big corporations that will really get stuck with the lion’s share of the tab. And they say raising taxes on those guys will not hurt the economy. We disagree.

Often, in our weekly missives, we remind people that while they are connected, the markets are not the economy. The same can be said about the relationship between economics and accounting. The latter is based on memorializing factual events and values while the former has a healthy dose of ‘What if?” This helps explain why government forecasts are so often wide of the mark. So, back to the question of the impact of raising taxes (mostly) on ‘corporations’:

Taxes on businesses appear on the balance sheet (or operating statement) as a line-item expense – like the phone bill, rent, employee salaries, employee benefits, etc. These (and other) costs are packaged into the selling price of the company’s stuff that it sells to the public (or other businesses). Any increase in costs very likely will ultimately be passed along to the consuming public. This is true up to the point where the selling price becomes uncompetitive at which point the business will go back to the line-item budget to find things whose costs can be reduced. At most companies, the biggest items are employee salaries and benefits. So, these line-items are magnets for the comptroller’s scalpel. And, need I mention that, if you are already looking to reduce employee costs, odds are you are not looking to do any new hiring?

Another problem with raising corporate taxes has to do with human nature. Like people, corporations respond to pain. One type of response is to choose which country you want to locate your business. When the former administration chopped corporate rates a good part of the reasoning was to encourage big companies to return to our shores, make stuff here and hire American workers. Yellen has a spooky idea to protect us from losing American businesses to those far-away places with strange sounding names. She wants to work with other world governments to impose a Minimum Global Corporate Tax. Yeah, we couldn’t believe it either.

Ron’s Market Minute – Ron Loses a Bet; and something to be aware of…

In the few days leading up to the jobs announcement last week (which didn’t make it to the headlines as it was Good Friday) I had the opportunity to have several small business owners probe me for my thoughts on the status of the economy. As many of you know, we try to keep an eye on the job changes because an overoptimistic jobs report tends to push the markets up, and vice versa. 

Last week we noted a number of company announcements that highlighted anticipated jobs openings would be higher than projected, about as often as companies were raising their earnings guidance. We had been informed that the expected jobs increase was to be about 660,000 (already a decent number). So, when queried about my thoughts regarding jobs I replied that 660,000 was the expected number, but I wouldn’t be overly surprised to see a number up around a million. The business owners both laughed at my optimism and asked if I wanted to bet on that- we agreed that if the numbers hit a million, they owed me lunch, and if it didn’t, I would owe them a lunch. 

So, on Good Friday when the Bureau of Labor Statistics released the March employment data at 916,000, I was mostly pretty pleased. And also made a note that I now owed a couple of people a lunch. 

I believe this is what we should be expecting as the unprecedented shutdowns loosen up. The best stimulus possible (IMHO) is a successful vaccine (and herd immunity) which gives our population the confidence to return to more of a normal life. 

Also, we expect similar gains in jobs filled in the months ahead. It’s great news, but we need it.  Even after the huge bump in March payrolls, the US numbers are still 8.4 million short of the pre-Covid employment numbers, although we expect that most of that gap will be filled by the end of this year. This should be very good for market’s potential returns. Anyone else want to bet on job numbers? 

One more thing: Many investment companies are discontinuing their automatic process of sending shareholder reports by regular (snail) mail.  Instead, you may receive a postcard or even a phone call from www.fundreports.com asking if you’d like to receive shareholder reports by mail or email. I’ve received several of these postcards which give instructions on how to go online to request reports. We know that not everyone reads through the updated data on the status of your investment holdings, but now you may have to take an extra step to receive the data that previously came to you automatically. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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