How Are American Companies Preparing for the Obama Tax Increases

The cost of raw material, capital and labor are the three key elements to any business. With the growth of the dot-com economy the costs of marketing and product development can be considered part of the raw materials of a business.

With the inevitable election of Barak Obama and his coming to office in January, American business know that their taxes and cost of labor will be increasing. With these increases pending, companies are planning now for how to manage these increased costs.

The FICA increase is an increase in the cost of labor, as the employee and employer split the 12.4 of the income that is taken for Social Security. With the elimination of the cap, currently at $100,000, all middle management is now more expensive. For small businesses where the business owner absorbs the full about then cost will be more pronounced.

The United States currently has the 2^nd highest tax rate in the world. After the increases expected in January 2009, we American's will be the most taxed people in the world. More then 50% of our income will go to the federal government. While the level of increase is still a talking point to Obama we can expect a corporate tax rate in the mid 40% range.

Add in the doubling of the Capital Gains Tax, and enough revenue will be drained from the private sector to strangle economic growth.

One result will be that "Tax Freedom Day" the day when citizens have covered the contributions to the federal government will move from April 23^rd to some time in early July.

So what are companies doing to prepare for this dramatic increase in labor costs and higher taxes?

American Corporations are pulling back their horns, and putting off growth and new hiring until after then see where we are 8-9 months from now.

They are putting off new major purchases to conserve cash.

They are looking at their underlying assets and looking to sell unused or under utilized assets.

The investor class and other real estate investing groups will look for properties that allow them to maximize their tax savings, even over the returns they can make. What is the point in making money if it is just taken away by the federal government?

There will be side effect and unintended consequences to this economic shift. Cities and major urban areas will no longer be an attractive investment opportunity. The property values in urban areas will continue to decline, and the associated property taxes will decline, hurting even more the cities that live off of those taxes.

Overseas investment will increase, and the money kept overseas, as a way to avoid the highest taxes in the world. This will be especially true for US multi-nationals several of whom are already looking to leave the US because of our tax rates.

One issue that has not been discussed is that you have to pay for good employees, when the employee's taxes go up by 25%, they want a raise to help cover the cost.

These costs then get passed on as inflation.

The real issue is the one that is again, not being discussed. It is NOT the tax increases that Barak Obama will sign that is the major issue, but rather the ones he will not veto.

It is Harry Reid, and Nancy Pelosi that will be calling the shots, especially with a young and inexperienced President at the helm.