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Taxes

Money Morning Mailbag: Can Anyone Fix the Fiscal Mess?

As opinions continue to pour in to the Money Morning mailbag, something is becoming quite clear: People are getting fed up with the national and global "fiscal mess." The pessimists outweigh the optimists and are tired of standing idly by watching ineffective financial policies.
As the United States continues to spar with China on currency issues and Greece has yet to make substantial strides toward recovery, U.S. taxpayers and investors fear that our country is headed for worse economic times. Despite the fact there's a financial reform bill on the horizon, there is overwhelming doubt that the government will implement as much of a financial system overhaul that's needed. 
Here are some of the more passionate views on the government mistakes that caused a U.S. financial quagmire, threatening the country's future stability.

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Congress May Double Taxes on Private Equity Firms in Search for New Revenues

Democrats in Congress, seeking new sources of revenue after passing President Barack Obama's $940 billion health-care reform measure, may double tax rates on executives at private-equity firms.

The U.S. Senate has taken up a House proposal to levy a new tax on executives who make long-term investments, including venture capitalists, managers of real- estate partnerships, hedge-fund and private-equity managers, Bloomberg News reported.

The proposal, expected to raise $24.6 billion over a decade, eliminates a tax provision which allows money managers at privately held partnerships to treat most of the revenue they bring in as capital gains.

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Question of the Week: Do the Pitfalls Outweigh the Promise For the New Healthcare Reform Program?

When U.S. President Barack Obama signed the new healthcare-reform bill into law yesterday (Tuesday), it ended months of political bickering and maneuvering, and began a new chapter in the nation's healthcare saga - one in which the country will feel the effects of this sweeping, costly and controversial policy overhaul.

The fact is that many Americans will have healthcare for the first time ever. Offsetting that bright spot, however, is the reality that the program could add trillions in debt to the country's already burgeoning national debt, further complicating the matter.

Going forward, it will now be left to the pundits, analysts and the healthcare industry to decipher what these provisions really mean for the industry, for individuals, for taxpayers - and even for investors.

But here at Money Morning, we wanted to know what you think about this new law. That's why we made healthcare reform the inaugural topic in our new "Question of the Week" feature.

Money Morning Question of the Week: U.S. President Barack Obama's controversial healthcare proposal is now law. What do you think? How do you feel? Do you think it's a beneficial or harmful move for you as a consumer, as an investor, and as a taxpayer? What do you think it means for our nation's economy?

What follows is a sampling of the enthusiastic and passionate responses that we received. Make sure to also check out next week's "Question of the Week," a query that seeks your thoughts on the growing levels of U.S. debt.

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Healthcare Reform Losers: Companies Providing Retiree Benefits Face Multi-Million Dollar Tax Costs

After sending letters of protest to Congress in the months prior to the healthcare law's approval, U.S. companies are now facing multi-million dollar after-tax hits this year due to a tax provision in the new legislation, labeling them healthcare reform losers instead of winners.

Part of the new healthcare law places a federal income tax on government subsidies given to companies that provide retirees and their spouses with drug benefit plans. The 28% subsidy was created as Medicare Part D, adding a prescription plan for senior citizens to the Medicare Act of 2003. To encourage companies to continue offering retirees a drug plan, the tax-free subsidy reduced companies' costs. Fewer senior citizens then went through Medicare's prescription program - which would have cost taxpayers much more than the subsidy price.

Caterpillar Inc (NYSE: CAT) and Deere & Company (NSYE: DE) are just two of the businesses that fought the new stipulations. The manufacturers estimate the tax will cost them $100 million and $150 million this year, respectively. Other companies who will pay handsomely include AK Steel Corp. (NYSE: AKS) with $31 million in charges, and Honeywell International Inc. (NYSE: HON) with an estimated fee of $42 million.

Consulting firm Towers Watson & Co. (NYSE: TW) estimates these taxes could cost companies about $233 per person receiving drug benefits - a hefty price tag when a company gives benefits to 40,000 retirees, like Caterpillar.

Overall, more than 3,500 companies offer drug benefits to 6.3 million retirees. Although the tax won't be effective until 2011, accounting practices force companies to recognize the fees in the period in which the law is signed. That means the tax could nab $14 billion from corporate profits in a year when companies were hoping to recover from huge losses during the recession.

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New Banking Regulations … Same Old Story

U.S. banks, drunk with greed, drove the nation's economy to the brink of financial Armageddon.

To save U.S. banks from losing their license to dangle the nation's economy over a cliff, the U.S. Federal Reserve and the country's elected elite threw them a bailout party and gifted them with the accounting- world's version of "Transformers. "

Unfortunately, new banking regulations aimed at solving these problems are little more than the same old song and dance that forced the bailout - and stuck U.S. taxpayers with a multi-trillion-dollar tab.

To see how reformers have failed to fix the banking system,

please read on...

Greece Cutting Back to Court EU Favor

Greece unveiled its third austerity plan Wednesday and was met with praise from the European Union (EU), European Central Bank (ECB), and the International Monetary Fund (IMF), but hostility from the Greek public.

The plan consists of spending cuts and tax increases that will cut the budget deficit by $6.5 billion, and help Greece to reduce its current deficit to 8.7% of gross domestic product (GDP) from 12.7%.

"This was a necessary decision. It was not a matter of choice," said Greece's Prime Minister George Papandreou. "It was a matter of survival for our country, allowing it to breathe and break free from the clutches of speculative forces."

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Obama's Targets Insurers with $950 Billion Health Care Reform Plan

Health insurance providers are protesting this week as the government comes a step closer to strengthening its industry regulation by calling for new "common sense" practices.

This latest development in U.S. President Barack Obama's push for health care reform occurred Monday when the White House released a sprawling $950 billion proposal in anticipation of tomorrow's (Thursday's) scheduled summit.

Obama's plan, which combines the respective reform bills of the Senate and the House of Representatives, suggests drastic changes are coming for insurance providers.

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How Banks Are "Crowding Out" the U.S. Rebound

When U.S. President Barack Obama unveiled the $787 billion "stimulus" bill of extra spending and modest tax cuts last year, it became clear that the U.S. budget deficit was going to eclipse the 10% of gross domestic product (GDP) level for at least one year (and, as we now know, probably three years).

On those grounds, I opposed the "stimulus" - a position that was a lot less popular then than it has since become. However, as I'll show you below, it now looks as if I was right - and the implications for the U.S. economy are highly worrisome.

You see, the theory postulated by economist John Maynard Keynes holds that the extra spending stimulates additional output fails to address the question of where the money comes from.

Government cannot create wealth - it has to borrow it. If, before the stimulus, government finances were in good shape, as was the case in China, then stimulus does indeed stimulate: The modest budget deficit that it causes is easily financed, and the extra spending creates some jobs and maybe some useful infrastructure, depending on how well targeted it is.

In the United States, however, government finances were in a mess before the stimulus began.

To find out how banks are blunting the recovery, read on ....

Obama Deficit Brings Us Closer to the Brink of National Bankruptcy

U.S. President Barack Obama's budget for 2011, presented on Monday, shows a deficit of $1.3 trillion for the fiscal year that ends that September. That shortfall is actually $287 billion more than the Congressional Budget Office (CBO) had projected less than a week earlier, when it had released a budget forecast of its own for that same fiscal year.

Granted, we're getting used to seeing budget deficits expand at a pretty quick pace these days. But even by government standards an increase of nearly $290 billion in less than a week is almost too much to bear!

All kidding aside, $105 billion of this $287 billion increase came about mostly because of a change in "assumptions." The CBO budget assumed that all the 2001 Bush tax cuts would be reversed, whereas the Obama budget reverses only those that applied to the rich (those with incomes above $250,000).

The CBO budget also made the ridiculous assumption that the Alternative Minimum Tax (AMT) would be allowed to revert to its 2001 level, forcing 25 million taxpayers to calculate their taxes twice - and to then pay the higher of the two estimates. That was never going to happen, and the Obama budget finally abandons that idiotic piece of fiction.

The disparity in deficit projections between the CBO and the Obama administration weren't limited just to fiscal 2011. For the period from 2011 to 2020, the CBO forecasted a budget deficit of $6.047 trillion, while the Obama budget released just days later projected a shortfall of $8.532 trillion - a difference of $2.485 trillion.

The difference in assumptions between the CBO and Obama projections explains nearly half of that difference. Of course, that still leaves the other half.

And a troublesome half it is.

To find out how these numbers may forecast a U.S. bankruptcy, read on...

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Obama's Budget Adds $1 Trillion in Taxes, Balloons Federal Deficit

President Barack Obama yesterday (Monday) unveiled a $3.8 trillion budget proposal that includes big tax increases on individuals and businesses, and expands the federal deficit by more than $5.5 trillion by the end of the decade, including a record $1.6 trillion next year.

The budget blueprint for the fiscal year that begins Oct. 1 reflects the administration's struggle to find a balance between containing the spiraling federal deficit with the need to boost the economy and create jobs - both of which figure to be political bombshells in the upcoming 2010 elections.

"We're trying to accomplish a soft landing in terms of our fiscal trajectory," Peter Orszag, director of the White House Office of Management and Budget, said at a press briefing.

But the budget is certain to add fuel to the debate over the size and scope of government. As expected, Republicans railed against the administration's big spending programs and tax increases.

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Can Bernanke Tune Out Political Pressure as the FOMC Again Ponders Policy Changes?

When U.S. Federal Reserve Chairman Ben S. Bernanke emerges from the central bank's monthly policymaking meeting at around 2:15 p.m. today (Wednesday), it's a near certainty that he'll reaffirm his pledge to keep interest rates "exceptionally low" for an "extended period" of time.

Bernanke has kept the benchmark Federal Funds rate at a record low range of 0.00%-0.25% since December 2008, and that's not likely to change as a result of today's meeting of the central bank's Federal Open Market Committee (FOMC).

At some point, however, Bernanke will have to tighten credit and raise interest rates in order to soak up all the excess liquidity and curb inflation in the U.S. economy. But the question remains: When that time comes, will Bernanke have the fortitude to do so?

There's no simple answer. And for good reason: With the country mired in its worst financial crisis in most Americans' lifetimes, the central bank's decisions now are as political in focus as they are economic.

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Why the Government Wants to Hijack Your 401(k)

It's bad enough that we've been forced to bail out Wall Street. But now the Obama administration is hatching plans to raid our retirement savings, too.

To say that I'm "outraged" doesn't come close to describing the emotions I experience every time I think about the government's latest hare-brained scheme.

According to widespread media reports, both the U.S. Treasury Department and the Department of Labor plan are planning to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other "steady" payment streams backed by U.S. government bonds.

Folks, there's only one reason these agencies would do such a thing - the nation's creditors think that U.S. government bonds are a bad bet and don't want to buy them anymore. So like a grifter who's down to his last dollar, the administration is hoping to get its hands on our hard-earned savings before the American people realize they've had the wool pulled over their eyes ... once again.

For the full details on the government's newest financial gambit, read on...

TARP Tax More Politics Than Economics

U.S. President Barack Obama today (Thursday) unveiled the widely anticipated "Financial Crisis Responsibility Fee," which effectively amounts to a tax on banks to pay back money the government lost on the Troubled Asset Relief Program (TARP).

The fee would apply to financial firms - both domestic firms and U.S. subsidiaries of foreign companies - with more than $50 billion in consolidated assets, and equate to 15 basis points, or 0.15% of a company's covered liabilities each year. Deposits assessed by the Federal Deposit Insurance Corp. (FDIC) would not count toward those liabilities.

The tax, which must be approved by Congress, would go into effect on June 30, 2010, and earn about $90 billion over 10 years, but could go on longer. The White House said collecting $117 billion would take about 12 years.

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Banking's Bigwigs Called to Carpet as Obama Prepares New Bank Tax

Four prominent Wall Street executives testified on Capitol Hill yesterday (Wednesday) about errors they committed during the financial crisis. But no amount of contrition or case making will be able to spare the financial services industry from the wrath of public opinion and a new tax to be imposed by President Barack Obama.

The bigwigs from Goldman Sachs Group Inc. (NYSE: GS), JP Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS), and Bank of America Corp. (NYSE: BAC) were called on yesterday (Wednesday) to explain themselves to the U.S. Congress' Financial Crisis Inquiry Commission (FCIC) - the ten-member commission appointed with goal of investigating the causes of the financial crisis.

"Over the course of this crisis, we as an industry caused a lot of damage," Brian Moynihan, chief executive of Bank of America, said before a standing-room only crowd in the House Ways and Means Committee room, The Wall Street Journal reported.

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Obama Bank Tax No Reason to Flee Financials

U.S. President Barack Obama plans to implement a tax on financial institutions to offset taxpayer losses stemming from the Troubled Asset Relief Program (TARP) and help reduce the deficit. But Obama's new bank tax is no reason to turn bearish on financials, which staged an impressive comeback last year.

At a time when many financial companies are gearing up to announce fourth-quarter and full-year earnings, as well as details regarding employee compensation and bonus payments for 2009, the government is considering charging banks fees to recover as much as $120 billion in lost taxpayer money.

While most of the big banks have started paying back their TARP investments, the government has yet to recoup large swathes of money that went to American International Group Inc. (NYSE: AIG), General Motors Corp., and Chrysler LLC. Last month, the Treasury estimated that the net cost of TARP to taxpayers would be $41.4 billion.

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