Wednesday, August 11, 2010

How to Start Getting Out of this Economic Mess



One thing we do know about economics and the effects on the federal budget: ‘If people ain’t working, they ain’t paying taxes!

Income, corporate, payroll, excise, capital gains…nothing, nada, zippo!’

Any convoluted scheme to raise taxes on this group or another is doomed to abysmal failure if people are not able to find a job and start drawing a paycheck.

Herbert Hoover raised taxes in 1930 (bad idea early in what became the ‘Great’ Depression for a reason) supposedly to close the yawning budget deficits but in 1931, the IRS reported that less than 5% of the projected revenues had been collected.

When there are no jobs, or economic growth, or capital appreciation of assets owned by people in the form of real estate, homes or business, there is just not much that can be taxed to pay for any of the wonderful sounding programs any legislator wants to pass supposedly 'for the good of the entire nation'.

We have long believed that the best program to promote the ‘general welfare’ of the nation as directed in the Constitution is to enact policies that encourages investors to invest and entrepreneurs to risk their own capital and start new companies so they can hire the rest of us to work for them.

Let’s face it: The chances of anyone of us having the brains and skill sets that allows us to become the next uber-wealthy Bill Gates or Warren Buffett is, well…it is precisely 2 in 310 million, the current population of the US. (There are 403 billionaires in the US today and close to 8 million households with family net worth over $1 million in case you are interested)

So contrary to the class warfare you hear coming out of the left side of the political spectrum, sometimes pretty vociferously, we say this:

'Thank God for wealthy people!

We hope and pray we can create more of them going forward in the US of A! They hire the rest of us; they take risks and borrow the money and do all sorts of things most of don’t like or want to do to run a business. They pay for our health care; contribute to our pension and 401k plans and then when they die, they leave $600 billion to charities to further enhance our way of life!

Is this a great nation or what?’

We recently heard from an expert on tax accounting and business planning about his ideas on how to end the uncertainty in the commercial real estate market which has been a millstone around the necks of investors and banks for the past 3 years and could be prolonged unless we do something pretty dramatic about it soon.

Maybe we have too much commercial real estate in this country; it is way over-built in many states. But until the problems are cleaned up in this important job sector and economic engine of our country, we fear we may be in for a dreary state of economic malaise as Japan has experienced for the past 20 years due to their political inability to recognize their losses, clean up the banks’ balance sheets and reinvigorate the economy by dealing with their commercial real estate problems.

Here is what he had to say about it:

"Under President Reagan, we had ACRS (pronounced “acres” and means Accelerated Cost Recovery System) tax depreciation.  In short, it allowed at 15-year recovery period on buildings. Currently, the period is 39 years.

('Depreciation' just means tax deductions that can be taken off of your income tax returns to recognize the wearing down of fixed assets like buildings over time.  The shorter the time frame, the higher the deductions each year which means more money stays in your pocket and does not have to be sent to Washington)

Think about it – will the building down the street have that Starbucks you visit every morning on the way to work housed in it for the next 39 years?!

But wait, there is a second Reagan policy that is needed today. Back then, you could take those depreciation deductions and actually use them on your tax return. Today, there are complicated “passive loss” limits that operate to limit current-year deductions to zero and provide no incentive for people to buy up marginal real estate investments – much less the ones that are not finished when the developer went broke.

In the early 1980s, companies with extra cash set up subsidiaries to buy into all sorts of investments where they could deduct the ACRS tax depreciation. A return to the ACRS policy will give companies sufficient incentive to actually start deploying their cash horde into the economy.

Going back to such Reagan policies, the return on acquired real estate would go up significantly, energize the industry and attract large amounts of capital. Numerically, the cash flow enhancements from such an incentive can be as great as a 38% improvement-- THIRTY-EIGHT PERCENT! The enhancement steps down marginally in subsequent years.

Bottom line: a real estate investor would get a 38% improvement on year-1 cash flow by going back to Reagan policy -- much more powerful than a $600 rebate check for individuals (Bush) or any of the so-called 'stimulus' provided by the Obama administration so far.

I believe such a policy would single-handedly give a significant bump to the real estate industry and help unclog bank balance sheets by providing better liquidity for which banks can deal with distressed real estate loans.  Plus it would finally set a 'floor' under plummeting real estate values and allow banks and investors the certainty to get back to work doing what they do...making loans and managing real estate.

I agree – don’t go back to W. Go back to Reagan.’

What do you think? It has to be better than anything we have heard out of Washington for 3 years out of either political party. Both established parties appear to be either entering the Alzheimer’s stage of political thought processes or the ‘Back to the Future’ economic thought circa 1930 that helped keep our parents and grandparents alive with federal support, to be sure…..but which did not help return the American economic engine to full speed for over a decade!

Anybody want to wait for this economy to fully recover in the ‘Happy Days Are Here Again!’ year of 2020? That is what might happen unless we make some dramatic decisions and changes on both the fiscal and financial side of things.

‘Anyone? Anyone? Bueller? Ferris Bueller?’

courtesy of www.examiner.com

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