September 2014 - Forecasts & Trends

The US corporate tax rate is the highest among developed nations at 35% at the federal level. Tack on state and local taxes, which can add 5-7%, and US corporations are looking at a 40%-42% income tax burden. But the US takes it even another step further, unlike any other country in the developed world.

Uncle Sam demands that American companies with offshore operations pay US taxes on all income earned abroad – if those profits are repatriated to the US – even though taxes have already been paid to the countries where the income was actually generated. Think of it as double taxation on profits.

No wonder then that more and more US corporations with offshore operations are keeping those profits outside the US in order to avoid this double taxation. It is estimated that up to $2 trillion of those foreign profits are parked outside the US. That is a ton of money which, if brought home, could result in lots of new projects that could create many new jobs.

With an obligation to their shareholders to maximize profits, large US corporations are increasingly taking additional steps to minimize taxes owed to the Treasury in a process that has been coined “tax inversion” as I will explain below. This involves US firms moving their corporate headquarters overseas to countries where the tax burden is lower.

Today, we’ll explore how the extraordinarily high US corporate tax rate hurts the economy and why more and more large American corporations are moving their headquarters offshore. And we’ll look at why the Obama administration is trying to stop it – when all it would take to fix it is the US lowering its tax burden to a more reasonable level. But no, Obama wants to raise corporate taxes even more. This should make for an interesting E-letter.

But before we get into that discussion, let’s take a quick look at last Friday’s third and final report on 2Q Gross Domestic Product.

Today we focus on the costs to consumers of out-of-control federal regulations. While government regulations have increased for decades, the issuance of such new laws has exploded in recent years under the Obama administration. This regulatory maze is taking a serious toll on the economy, as I will discuss below.

Most Americans are unaware that the government issued over 3,600 new regulations in fiscal year 2013 alone! Likewise, most of us have no idea that this rising regulatory burden costs the economy up to $2 trillion each year. This is regulatory overkill, and it’s no wonder then that this economic recovery is so weak. That’s our main topic today.

The Fed Open Market Committee is meeting today and tomorrow, and the focus is on whether the Fed will hint at when it might implement the first interest rate hike in almost eight years. The latest FOMC policy statement will be released tomorrow afternoon, and I will report on it in my blog on Thursday. If you have not subscribed to my free weekly blog, go here (http://garydhalbert.com).

Last week, the Conference Board reported that its Consumer Confidence Index rose to a near seven-year high in mid-August. It was the fourth consecutive monthly rise in the Index and handily beat the pre-report consensus.

While I have no reason to doubt the validity of the latest Consumer Confidence Index reading, there are several other indicators which suggest that consumers are not so optimistic in reality.

When it comes to the direction the country is headed, 66% believe we are on the “Wrong Track,” with only 26% who believe we’re headed in the “Right Direction.”

Recent polls on the question of whether the next generation’s life will be better than our own have been decidedly pessimistic. For example, the latest NBC News/Wall Street Journal poll of adults found that only 21% believe life will be better for their kids, while a whopping 76% feel it will be worse, the highest negative reading in the poll’s history.

I will cite other examples of statistics that challenge the latest soaring Consumer Confidence Index as we go along today. The question is: How, in the face of all these negative indicators, can consumer confidence be at a near seven-year high?

Before we get into the discussion of the latest consumer confidence reading, let’s take a look at a few other recent economic reports.