In mid-September I posted “A Time for Compromise & a Proposal,” in which I wrote: I would like to propose, as many others have, that a 2-year extension for all tax brackets would make the most sense during this recovery. It would also demonstrate that the administration is willing to compromise with the Republicans, who for now are the minority party in the House and Senate, but appear to have very good odds to once again become the majority party in the House after the midterm elections.
Earlier this week in the New York Times’ Op-Ed page, Peter Orszag wrote: ‘In the face of the dueling deficits, the best approach is a compromise: Extend the tax cuts for two years, and then end them altogether. Ideally, only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it. Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned. Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem - take a look at the remarkably low 10-year Treasury bond yield - there is little reason not to extend the tax cuts temporarily.’ (It was announced on December 9th that Orszag would be joining Citi’s investment banking group as a vice chairman.)
After the “shellacking” that the Democrats took in the November midterm elections, the President decided two weeks ago that it was time for a compromise and a move toward the center. Yesterday, after having passed both the House and the Senate, President Obama signed it into law. This Hail Mary play by the President, with a big assist from Vice President Biden on the Hill, may in fact help save an administration that had become more and more unpopular while the economy continued to lose ground. The non-partisan Pew Research Center for the People and the Press reported that 60% of Americans supported this tax compromise, while only 22% opposed it. (WSJ 12/13/10)
The capital gains tax will remain at 15% over the next several years, which should have a positive impact on innovation by entrepreneurs and their venture capital and growth equity sponsors. In addition, the payroll tax reduction for Social Security should put more dollars in the consumers’ pockets at a time when they have not been able or willing to assist this recovery. Earnings, particularly those of tech companies, are very strong, indicating that we may be seeing a business-led recovery, even while the housing market remains weak. Oracle, for example, earlier this week reported that earnings for the most recent quarter were up 28%, on a 47% increase in revenue. (WSJ 12/17/10)
Now that the uncertainty of tax rates for the next 2 years has been removed by this historic compromise on the extension of the Bush tax cuts, I sense that the recovery will finally have some wind at its back and that ‘11 will see much stronger job creation. I also anticipate that with interest rates remaining at low levels we will see a very robust M&A market in ‘11 after a very mixed market in ‘10. Sale multiples should become stronger, as both strategic investors and private equity firms compete for quality companies.
Happy Holidays & here’s to a stronger economy creating significantly more private sector jobs in ‘11!