RCM Editorial: Obama's Budget Proposal: Sensible or Senseless?

I'm at 36,000 feet and on my way home after an epic snowboarding trip to Vail, Colorado. I have spent the last 4 days knee deep in fresh powder shredding the back bowls, but a thought has been tugging on my mind. Much to my chagrin, I have been unable to mollify this sinking feeling that our country is being run by a gaggle of neophytes. And so I feel I must put pen to paper, or fingertip to key as it were, and shed some light onto the deadly mold growing in the hallowed halls of our government. The growth of which I speak (whose obnoxious smell is fatal to our society) has a name: tax increases.

Those of you who read this blog know that we try to avoid a political discussion. We generally keep our thoughts focused on developments we feel are moving the markets. A political discussion seems really pointless due to both parties' phenomenal inability to do anything right. But, I suppose this is nothing new. Historically speaking our country has gone through periods of utter ineptitude in leadership and we always seem to pull through.

Today's missive will focus on the question of tax increases during a recession. Is it sound? Is it healthy? Is it smart to raise taxes during a recession? I know it is popular. If you are pandering for votes you will most certainly get a resounding applause in the town hall if you blame the rich and the big bad corporations. Forget about the fact that 'rich' is defined by this administration as an income of over $250,000 (a broad net that catches many struggling small businesses) and never mind the fact that corporations in fact offer jobs to the very same people applauding. Nope, use the biblical rally cry of 'tax the rich', 'tax the corporation' and listen to the adulation that pours out of your constituents. So we know it is popular, but is it effective? Is the Messiah going to lead us out of this recession with tax hikes, or simply into an economic desert for the next 40 years? We are hitting turbulence...No, I mean quite literally as we start our descent into Palm Beach International. I will pick this up tomorrow from the trading desk...

...O.K. I'm back at RCM headquarters, looking at the sun come up over the horizon, smelling the ocean and listening to the palm trees. It is good to be home, but we still have this little problem of Obama's budget package that is rife with tax increases. I would like at this moment to ask those of you who are reading to think if you can remember any time in history when tax increases helped any country get out of a recession. Please comment at the end of this blog with a concrete example of tax hike success. I would truly love to know as the knowledge may very well make it easier for me to sleep at night.

On the other hand, I can certainly come up with examples of tax cuts helping an economy recover. Take, for example, Ireland's dramatic cutting of corporate taxes to 0%. This decision led to an economic boom and a significant increase in employment for a country that had been a perpetual looser in both categories.

Would you rather stay Stateside? O.K., let's talk about the 1980s. Jimmy Carter's obstreperous tax and spend administration left us with a 90% top tax bracket, double-digit unemployment, an economy in a shambles and inflation soaring. Reagan, love him or hate him, dropped taxes across the board while closing loopholes that the rich employed to escape the egregious rates. This led to a serious increase in tax receipts, job creation and economic recovery. I'm going to go out on a limb and sight the Bush administration for a moment. Before you caterwaul at the screen take a deep breath and continue reading. We all agree the Bush administration was a disgrace. I will gladly concede the Bush stupidity seemed to be boundless, but as my Dad likes to say, "even a blind hog finds an acorn sometimes". The acorn: In 2004 companies were allowed to bring profits into the U.S. that they had earned and left abroad, paying a tax of only 5.25%. Prior to this one-time tax break, repatriated profits were taxed at the full federal rate of 35%. As a result, $312 billion was brought home leading to an $18 billion boost to government coffers. This cash infusion helped shore up companies' domestic operations.

So I ask again, why on earth is the Obama administration raising taxes? Must we repeat the mistakes of past administrations? The very definition of insanity is doing the same thing over and over but expecting different results. There is over $500 billion foreign-earned profits in overseas accounts today. Even a simpleton like Bush knew that dropping the tax rate on this cash horde would result in a boost to tax receipts. Am I wrong, aren't we trying to reduce the deficit? Wouldn't a quick $26.25 billion help?

When I questioned Obama's preparedness to lead, believers chided me for being obtuse and offered up the mantra that 'Barack is really smart and will surround himself with smart people'. Well, I ask the believers: How smart does he look now? How about the people he is putting around him, four of whom want us to believe they can't figure out the taxes they owe? Is this the type of change and leadership you were looking for? Please don't offer up the new mantra of 'he inherited a mess and it will take time'. While both of these statements may be true, neither answers my question. Leadership doesn't take time to evidence itself and choosing people to surround you who don't lie or cheat would be the first step.

I have taken time out of my trading day to address these issues because the budget proposal is clearly affecting the markets. The equity markets are leading indicators of the economic picture and they are speaking with every tick lower. As I finish this piece the S&P 500 is at new lows: down 5% with 15 minutes to the close. Instead of using the new budget proposal to show leadership by focusing on the credit crisis, Obama has acted like a child with a new toy and pushed his agenda without any regard for its effect on the real world. Example, his agenda blew out one of the remaining legs of the market; the medical sector. Without a doubt his proposals are hostile to capital on many fronts and instead of extinguishing the inherited fire he is adding fuel to it. As long as this path into the economic desert is followed we at Rosenthal Capital Management will continue to maintain our posture of defending capital that led to profits in 2008 and continues to generate profits in 2009 with our fund Fortune's Favor Precious Metals leading the charge.