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Wednesday, February 22, 2012

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Economic Events of the Week

Wednesday – Existing Home Sales
Thursday – Jobless Claims, EIA Petroleum Status Report
Friday – Consumer Sentiment, New Home Sales

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Story of the Day
Obama’s Dividend Assault (Wall Street Journal Editorial)

Washington Update
Obama to Propose Lower Corporate Tax Rate (Washington Post)
A Bolder Romney Tax Cut Plan is Coming (Larry Kudlow in National Review)

Market Talk
US Debt to GDP Passes 101% (Zero Hedge)
‘Why This Time Could Be Different’ With Higher Gasoline Prices (Real Time Economics)
US Home Sales Probably Rose to Highest Since May 2010 (Bloomberg)

Editorials & Opinions
A Better Grecian Bailout (John Taylor in Wall Street Journal)
Budget Gimmicks are Alive and Well in Payroll Tax Deal (Howard Gleckman in TaxVox)

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Story of the Day

Obama’s Dividend Assault (Wall Street Journal Editorial)

President Obama's 2013 budget is the gift that keeps on giving—to government. One buried surprise is his proposal to triple the tax rate on corporate dividends, which believe it or not is higher than in his previous budgets. Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate. Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.


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Washington Update

Obama to Propose Lower Corporate Tax Rate (Washington Post)

President Obama on Wednesday plans to propose a major overhaul of the nation’s corporate tax code, an election-year gambit that is likely to draw a contrast over a key policy issue with the Republicans vying to replace him. Obama will propose lowering the nation’s tax rate to 28 percent. At the same time, however, he will seek to increase the amount of revenues raised overall through corporate taxation by eliminating numerous deductions and loopholes that save companies tens of billions of dollars a year on their tax bills, according to a senior administration official. Today, the U.S. corporate tax rate of 35 percent is one of the highest in the world, but an abundance of loopholes and deductions means that many companies pay far less than that — or nothing at all. Companies in the United States pay almost half the taxes than companies do in other rich countries, compared to the size of the economy, according to the Organization for Economic Cooperation and Development.

A Bolder Romney Tax Cut Plan is Coming (Larry Kudlow in National Review)

Team Romney tells me there will be a bolder tax-cut plan released either at the debate tomorrow night (if Mitt gets it in) or more formally at his Detroit Economic Club speech on Friday. I’m embargoed from releasing details until tomorrow. But I can say that the new plan will be across-the-board with supply-side incentives from rate reduction, and that it will help small-business owners as well as everyone else.


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Market Talk

US Debt to GDP Passes 101% (Zero Hedge)

Today, without much fanfare, US debt to GDP hit 101% with the latest issuance of $32 billion in 2 Year Bonds. If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30, or just three weeks ago. Said otherwise, it has taken the US 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time. Still, this trend made us curious to see who has been buying (and selling) US debt over the past year. The results are somewhat surprising.

‘Why This Time Could Be Different’ With Higher Gasoline Prices (Real Time Economics)

Soaring oil prices in the spring of 2008 sent gasoline prices surging and accelerated the recession. Now, rising gas prices are threatening the recovery. But lower natural gas and utility costs this time around might limit some of the damage, says Deutsche Bank chief U.S. economist Joseph LaVorgna. In a note to clients Tuesday, titled “Why this time could be different,” LaVorgna reminds us of his rule of thumb for measuring the effect of run-ups at the pump: a one-cent increase in gasoline prices increases household energy consumption by about $1.4 billion. With the 29-cent jump in gas prices over the past two months, that would translate into about $40.6 billion in higher household energy costs.

US Home Sales Probably Rose to Highest Since May 2010 (Bloomberg)

Sales of previously owned U.S. houses probably rose in January to the highest level since May 2010, adding to signs the housing market is regaining its footing, economists said before a report today. Purchases climbed 1.1 percent, a fourth straight monthly increase, to a 4.66 million annual rate from a 4.61 million pace in December, according to the median forecast of 74 economists surveyed by Bloomberg News. A strengthening job market, combined with record affordability driven by the drop in home prices and mortgage rates, will probably keep underpinning demand. Nonetheless, the Federal Reserve and Obama administration are striving to find ways to lend the industry additional assistance amid concern that mounting foreclosures will continue to hinder the recovery.


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Editorials & Opinions

A Better Grecian Bailout (John Taylor in Wall Street Journal)

With Tuesday's vote, the finance ministers of the European Union have agreed to a second giant Greek bailout, just two years after the May 2010 bailout that was supposed to be all that was needed. While the day-to-day machinations of this long saga seem monotonous from afar, a closer look reveals several changes that bode well for the future of economic policy in Europe. First, the new bailout involves a substantial write-down of Greek bonds—close to 75% of their economic value. Second, the fears of contagion—that a write-down on Greek debt would cause a run on the debt of other European countries—are far less than they were two years ago. Investors have adjusted their portfolios, foreign bank exposure to Greece is way down, and the correlation between spreads on risk-sensitive Greek credit default swaps and spreads on default swaps on sovereign debt elsewhere in Europe has declined.

Budget Gimmicks are Alive and Well in Payroll Tax Deal (Howard Gleckman in TaxVox)

The other day, I criticized the unwillingness of Congress to finance the latest extension of the payroll tax cut. Since that blog, the Congressional Budget Office released its estimates of the cost of the entire mini-stimulus, including the so-called “doc fix” and changes in unemployment compensation. And the games were even worse than I feared. Congress made no pretense of paying for the payroll tax cut itself. But it did claim it would pay for the rest of the package. Hint: It didn’t. There are two bits of legerdemain happening here. Both are functions of the 10-year budget window the Congressional Budget Office and the Joint Committee on Taxation use to score legislation. The first gimmick allows Congress to pretend tax cuts or new spending are temporary, when it is obvious to all they are not.  The second is a sort of congressional lay-away plan. Lawmakers get to buy politically popular policies today but avoid paying for them until years from now.


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