What Closing Tax Loophles Means for Chauffeured Car

On Monday, Team Obama proclaimed that tax shelters and loopholes would be closing in 2011, and that corporations who do business outside of the country would have to pay taxes not only to the foreign countries, but the United States as well. This is good and bad.

Lets talk about the good first. Some shell corporations and individuals hide money overseas (Cayman, Bahamas, Switzerland, etc.) and get away with paying little or no taxes. This is bad and in the words of Joe Biden, "unpatriotic." It is an American's duty to pay taxes, however it is not patriotic by any means to pay more than you should. But, the simple fact remains that some get away with it and it is wrong.

Now the bad. This has a myriad of unintended consequences. Of the CEO's and investors I've talked with over the past few days, this new regulations will weaken the American economy. Here's why.

Corporations pay corporate income taxes in countries in which they do business. For instance, ABC Corp, who is a US registered corporation, will pay income taxes to Mexico if they sell their product or generate any type of revenue based on their activity in Mexico. Then, because of laws that are currently in effect, ABC Corp could leave this money in Mexico and not pay taxes to repatriate the money back to the United States. New legislation would require the companies now to pay income tax not only to the foreign country, but to the US as well, essentially double taxation.

Lets theorize that ABC is making 20% profit after taxes in the foreign country. Now with an additional tax due to the U.S., ABC Corp decides that the profit is now not enough to operate in in Mexico, and even all foreign countries. Plants shut down that export goods, offices abroad close down (that means less travel!) and the U.S. economy becomes smaller because not only are companies choosing not to pay extra to Uncle Sam, the companies are now uncompetitive in the market.

This legislation, smartly designed to take effect in the next congress, is just more government noses getting where they shouldn't be. Its the unintended consequences, President Obama, that we have to worry about. Just because communism looks great on paper, we know what the reality is. I am saying now that these higher taxes specifically, because they effect so many corporations in this globalized marketplace, will severely hurt the chauffeured car industry. Less travel, less employees and smaller economy would wreck havoc on our industry.

Pineapple Seeds Anyone?

First, one may ask why I say pineapple seeds. Some economists will talk about signs of life in the economy as "mustard seeds" (most notably Larry Kudlow of CNBC), however, I prefer pineapple seeds. Why? A good friend of mine grows pineapples in his backyard, in which he told me that a full grown pineapple takes two to three years to become full grown. I thought "WOW! That sounds like the economy after a recession."

I believe that we are getting close to the bottom and this is great news. We have seen some great economic numbers that are showing signs of life. While I am optimistic, by no means are we in a recovery period yet. My feeling is that we are going to go staganant for a while, simply because of the hesitation right now in the market. Many investors are still very worried about the possiblity of the United States owning so many companies (Citi, BofA, Fannie, Freddie, Chrysler, GM, did I miss any of them?). Now with Chrysler going into bankruptcy, the taxpayers have just lost the loan we made the company.

This week the "stress tests" are going to come public and I see this as a disaster. The tests are going to tell us that more banks will fail without more capital injections. Just between Citi and BofA, we are at $95 Billion of injection. Now, this past week, Treasury has stated that any of the largest 100 banks in the U.S. will not be allowed to fail. So much for capitalism.

Lets get back to the good news. Consumer spending was up 2.2% for the quarter. This was an excellent number. Interestingly, gross domestic product (GDP) shrunk for the quarter at a 6.1% annualized rate. This is interesting because increased consumer spending normally means a boost in GDP. The good news about this is that inventories are shrinking. Output has now declined for three straight quarters. We also have to remember that because of the job cuts, output will shrink as well as manufacturers are slashing capacity.

Talking about jobs, we have to remember that jobs are a reactive number for corporations. Many companies cut jobs after bad news, not before. Jobs will continue to be lost for several more quarters until there are real signs of recovery. Also, do not forget that 8.5% unemployment figures are not the worst we have seen, compared to the 10.8% in 1982 and the extended period in 1975 where the unemployment figures stayed above 8% for the entire year.

While the situation is still bad, there is light at the end of the tunnel. President Obama and his administrations must realize that raising taxes next year and instituting a cap and trade (tax) program will setback our economy even more from the recovery we may start to see probably in the fourth quarter of this year. Operators, stay lean and do not try to create supply for the smaller demand that is out there.