Everybody is talking about the impending largest tax increase in history due on January 1, 2011. In addition to the cost this imposes on the economy, there is the uncertainty this creates. The Giant Wakes writes:
The Bottom Line: Until the uncertainty surrounding the future Federal tax rates is resolved, it will remain yet another factor conspiring to keep businesses sitting in the economic sidelines, waiting for clear signals before committing capital to growth – and, the uncertainty had better be resolved in favor of sustaining the current rates rather than increasing them, if we hope to see an end to the ‘jobless recovery’ and any kind of broad-based improvement in consumer economic circumstances any time soon.
While The Giant Wakes may write about government intervention in a future post within his ten-part series called “Ten Tyrants of Uncertainty,” I thought I’ll jump ahead and add to the discussion.
Which is a bigger deterrent to economic activity: tax uncertainty or the uncertainty of government intervention? When government steps in to bail out one company at the expense of another, economic calculation is thrown out the window. And this does not just apply to corporations where our government may bail out GM thus hurting Ford or give billions to large banks while letting small banks fail. It also applies to each of us an individual. Those of us who are responsible, paying our mortgages each month or not buying a house knowing we cannot afford one, are now paying for those who irresponsibly bought more house than they could afford but whose mortgages have been “modified” by the government.
As a result, we now have a bipolar economy. We have those who have abandoned all risk taking, not knowing what the government will do. And we have those who take extreme risks, believing the government will bail them out if they fail. In the mean time, nobody is taking the reasonable calculated risks that are essential to a productive and profitable economy.