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Obama Tax Increase to Slash 700,000+ Jobs

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 7, 2012

IN THIS ISSUE:

1.  July Unemployment Report: Good News & Bad

2.  Obama Tax Increase to Cost at Least 700,000 Jobs

3.  Pre-Election Day Layoffs Notification Controversy

Today’s Overview

We begin by looking at last Friday’s unemployment report for July. The government reported that the economy created 163,000 new jobs in July, which was a big increase over the last three disappointing months. Yet the report also bumped the national unemployment rate from 8.2% in June to 8.3% in July. We will look into the details of the report as we go along.

President Obama continues to push for a tax increase on families making over $250,000 starting on January 1. The debate for months has centered on whether or not this tax increase will result in widespread job losses. Well, a new study from the accounting firm Ernst & Young has answered that question definitively – at least 700,000 jobs will be lost if Obama gets his way.

Finally, a little-known law passed back in 1988 requires companies with 100 employees or more to give at least 60-days notice to their workers if they know in advance that an event is coming that could lead to widespread layoffs. We all know about the so-called “fiscal cliff” that is coming on January 1 if Congress doesn’t do something to stop it.

The fiscal cliff involves automatic large cuts in federal spending beginning on January 1. No one knows if Congress will take action to eliminate these spending cuts before the end of the year. Thus, the dilemma is whether employers, especially the thousands of government contractors, are required to send out termination warnings 60 days in advance of the end of the year.

Obviously, President Obama does not want to see widespread termination warnings just before the election. So it will be interesting to see how this plays out. As usual, this situation is not receiving much attention in the media – at least not yet. Let’s get started.

July Unemployment Report: Good News & Bad

Last Friday’s unemployment report from the Bureau of Labor Statistics (BLS) was both better and worse than expected. According to the BLS, the economy created 163,000 new jobs in July which was considerably better than the pre-report consensus – that’s the good news. The bad news is that the official unemployment rate ticked up to 8.3% when it was expected to hold steady at 8.2%. The stock markets rallied on Friday anyway.

U.S. Unemployment Rate 2002-2012 (Bureau of Labor Statistics)

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2002

5.7

5.7

5.7

5.9

5.8

5.8

5.8

5.7

5.7

5.7

5.9

6.0

2003

5.8

5.9

5.9

6.0

6.1

6.3

6.2

6.1

6.1

6.0

5.8

5.7

2004

5.7

5.6

5.8

5.6

5.6

5.6

5.5

5.4

5.4

5.5

5.4

5.4

2005

5.3

5.4

5.2

5.2

5.1

5.0

5.0

4.9

5.0

5.0

5.0

4.9

2006

4.7

4.8

4.7

4.7

4.6

4.6

4.7

4.7

4.5

4.4

4.5

4.4

2007

4.6

4.5

4.4

4.5

4.4

4.6

4.7

4.6

4.7

4.7

4.7

5.0

2008

5.0

4.9

5.1

5.0

5.4

5.6

5.8

6.1

6.1

6.5

6.8

7.3

2009

7.8

8.3

8.7

8.9

9.4

9.5

9.5

9.6

9.8

10.0

9.9

9.9

2010

9.7

9.8

9.8

9.9

9.6

9.4

9.5

9.6

9.5

9.5

9.8

9.4

2011

9.1

9.0

8.9

9.0

9.0

9.1

9.1

9.1

9.0

8.9

8.7

8.5

2012

8.3

8.3

8.2

8.1

8.2

8.2

8.3

         

Let’s look at the jobs report data a little more closely today. As you may know, the BLS derives its numbers from two completely separate surveys: 1) of US “establishments” (businesses) which report their payrolls; and 2) of U.S. “households” which report the employment status of their inhabitants. According to the “payroll survey,” the US economy added 163,000 jobs in July following three consecutive sub-100,000 months. However, the household survey showed 195,000 fewer jobs, so the unemployment rate rose to 8.3%.

You may recall that the BLS reported a month ago that only a paltry 80,000 jobs were added in June. Well on Friday, the BLS revised that number down to only 64,000 new jobs in June. Don’t be surprised if the 163,000 new jobs in July number gets revised lower next month as well.

Since the beginning of this year, employment growth has averaged 151,000 new jobs per month, slightly lower than the average monthly gain of 153,000 in 2011. Most economists agree that we need at least 150,000 new jobs per month just to keep up with population growth, and we need even more to bring the unemployment rate down. This explains in part why so many Americans are having to work part-time (more on that below).

The left-leaning Economic Policy Institute (EPI) in Washington, DC has calculated that the economy has lost 9.7 million jobs since before the recession. At the current average pace of job growth (151,000 per month), EPI estimates it would take 10 years for the United States to return to full employment. Even if the rate of job growth was 350,000 a month, the job recovery would take three years to return to “full employment” (around 4-5%), according to EPI.

The number of persons employed part-time for economic reasons (sometimes referred to as “involuntary part-time workers”) was essentially unchanged at 8.2 million in July. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job. If we add these people who are working part-time because they can’t find full-time jobs, then our U-6 unemployment rate rises to 15%.

Based on the household survey, there were 12.8 million unemployed persons in the US in July. But as I have pointed out in the past, that 12.8 million figure does not include those who have either given up completely from looking for work or those that have not looked for work in the past four weeks.  The BLS doesn’t count them as unemployed. If we add these people, then the real U-7 unemployment rate edged up to 17.0% in July.

Of the 12.8 million that the BLS chooses to count as unemployed, the number of long-term unemployed (those jobless for 27 weeks and over) was 5.2 million, or 40.7% of the 12.8 million total. Put differently four-in-10 unemployed Americans have been out of work for more than six months.

Among the major worker groups, the unemployment rate for Hispanics (10.3%) edged down in July, while the rates for adult men (7.7%), adult women (7.5%),teenagers (23.8%), whites (7.4%), blacks (14.1%) and Asians (6.2%) showed little or no change in July from a year earlier.

Civilian Employment (CE16OV)

This chart from the BLS gives us a look at the “big picture” in terms of the employment situation. You can see where we were before the recession at around 146.5 million people employed; you can see where we were following the depth of the recession at 138 million; and where we are today at around 142 million. So we are now almost halfway back. We still have almost five million fewer jobs than we did in late 2007.

President Obama was quick to hail the July unemployment report on Friday as a step in the right direction. Certainly it was better than the anemic 64,000 jobs created in June. He also pointed out that the economy has created just over one million jobs since the beginning of the year, which is true.

But as far as a step in the right direction, he totally avoids what I noted above. New jobs averaged 153,000 per month in 2011, and they’re averaging 151,000 so far this year. Essentially, that’s no direction! And with his proposed tax increase on families making over $250,000 a year – many of which are job creators – he apparently doesn’t care too much about the high unemployment rate.

Obama Tax Increase to Cost at Least 700,000 Jobs

President Obama has staked his campaign on raising taxes on individuals making over $200,000 and families making over $250,000 starting on January 1. There have been wide-ranging debates over whether this tax increase would really cost jobs. Well now, we have the answer. The accounting firm of Ernst & Young recently published a new study which concludes that Obama’s tax increase on “the wealthy” will indeed cost jobs and slow the economy. What follows are some of the highlights of the report.

On the question of whether the tax increase will really affect small businesses, the study notes:

“The concern over the top individual tax rates has been a focus, in part, because of the prominent role played by flow-through businesses – S corporations, partnerships, limited liability companies, and sole proprietorships – in the US economy and the large fraction of flow-through income that is subject to the top two individual income tax rates.

These businesses employ 54% of the private sector work force and pay 44% of federal business income taxes. The number of workers employed by large flow-through businesses is also significant: more than 20 million workers are employed by flow-through businesses with more than 100 employees.”

Well, that question is finally answered definitively! Here are the tax assumptions Ernst & Young used in the report:

  • “The increase in the top two tax rates from 33% to 36% and 35% to 39.6%. The reinstatement of the limitation on itemized deductions for high-income taxpayers (the “Pease” provision).
  • The taxation of dividends as ordinary income and at a top income tax rate of 39.6% and increase in the top tax rate applied to capital gains to 20%.
  • The increase in the 2.9% Medicare tax to 3.8% for high-income taxpayers and the application of the new 3.8 percent tax on investment income including flow-through business income, interest, dividends and capital gains.

With the combination of these tax changes at the beginning of 2013 the top tax rate on ordinary income will rise from 35% in 2012 to 40.9%, the top tax rate on dividends will rise from 15% to 44.7% and the top tax rate on capital gains will rise from 15% to 24.7%. [Read that again!]

These higher tax rates result in a significant increase in the average marginal tax rates (AMTR) on business, wage, and investment income, as well as the marginal effective tax rate (METR) on new business investment. This report finds that the AMTR increases significantly for wages (5.0%), flow-through business income (6.4%), interest (16.5%), dividends (157.1%) and capital gains (39.3%). The METR on new business investment increases by 15.8% for the corporate sector and 15.6% for flow-through businesses.

This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending.”

And the report gets even more specific as to what these tax increases mean for the economy:

“Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labor force participation. The higher tax rates on capital gains and dividend[s] increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labor productivity and means lower output and living standards in the long-run.

  • Output [GDP] in the long-run would fall by 1.3%, or $200 billion, in today’s economy.
  • Employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs, in today’s economy.
  • Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively.
  • Real after-tax wages would fall by 1.8%, reflecting a decline in workers’ living standards relative to what would have occurred otherwise.

These results suggest real long-run economic consequences for allowing the top two ordinary tax rates and investment tax rates to rise in 2013. This policy path can be expected to reduce long-run output, investment and net worth.” [Emphasis added throughout.]

Need I say more? Unfortunately, this new study has received very little attention in the mainstream media (surprise, surprise), and most voters don’t know about it. Please pass it along!

Pre-Election Day Layoffs Notification Controversy

By now everyone reading this knows that the so-called “Fiscal Cliff” is looming on January 1, if Congress doesn’t act before the end of the year to head it off. The fiscal cliff consists of: 1) the automatic end for all of the Bush tax cuts for everyone; 2) the mandatory federal spending cuts of $1.2 trillion over 10 years, with 50% of that coming from defense spending; and 3) the elimination or expiration of several government freebies including the 2% payroll tax holiday, extended unemployment benefits, etc.

Obviously, this is a very BIG deal! The CBO has warned that the economy will very likely slump into a new, possibly severe recession if Congress doesn’t take action to reverse all or most of these mandatory actions before the end of the year. And as I have written previously, Congress has no plans to address these issues until after the election, leaving precious little time to pass new legislation before the end of the year.

What most Americans don’t know or have long-since forgotten is a law passed way back in 1988 called the Worker Adjustment and Retraining Notification Act, or “WARN” Act. This law requires companies with more than 100 employees to alert workers 60 days in advance that they may be laid off, if there is a foreseeable event that is likely to require the dismissals.

Some states, such as New York and California, require notifications as early as 90 days in advance. Failure to do so can lead to hundreds of dollars in penalties, per employee, per day if the employees are not alerted well ahead of their possible dismissals. Let me explain.

Let’s say you are the head of a large defense contractor for the government. You know that if Congress does not take action to reverse current law before the end of the year, the Defense Department is going to have to make major cuts in spending. You also have reason to believe that these spending cuts will force you to lay off a lot of your workers early next year.

You also know that the WARN Act requires you to notify these workers 60 days in advance (90 days in New York or California) that they may be terminated. 60 days in advance of January 1 is November 1 (October 1 in New York and California). If you read the WARN law literally, you have no choice but to alert your workers that they may be laid off after January 1.

This means that there could be huge layoff warnings coming before the November elections! As you might expect, the Obama administration is trying to head off these mandatory termination warnings prior to the election. According to recent reports, the Labor Department has been trying to convince these government contractors, and business owners in general, that the warnings are not really mandatory, when the law says they are.

Basically, the Labor Department has been arguing that there’s no need for these dismissal warnings since the WARN Act can only be adjudicated in court. Yet the contractors’ legal representatives have stated that their clients need to issue the warnings just ahead to not run afoul of the Act. Put differently, they don’t want to rely on assurances from the Obama administration that they won’t be fined. Can you blame them?

Word is spreading among businesses well beyond the scope of government contractors that the WARN Act applies to them as well – and it does if they have over 100 employees, and if they know that the fiscal cliff could cause them to have to lay off employees. Thus, there is the potential that we could see literally millions of termination warnings before the election!

Obviously the Obama administration does not want to see this happen before the election. It appears that the only way to head off this chaos is for Congress to pass new legislation of some kind to change the rules. Yet Congress remains deadlocked until after the election. Might this be yet another example where the president resorts to an “Executive Order” to give employers some kind of relief?

I must admit that I don’t know how this will turn out. No one does. But it will be very interesting to see how it plays out. Stay tuned!

Wishing you a break from the heat,

Gary D. Halbert

SPECIAL ARTICLES

Could the election have swayed the unemployment report?

What Is The Real Unemployment Rate?

Notification of Layoffs Controversy

More on the notification of layoffs controversy

 


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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