Whether McCain or Obama, Tax Hike Looms

At least one person in Washington remembers that the Bush tax cuts are due to expire, setting the stage for a huge tax increase over the next decade. It’s a good thing, since a collective amnesia seems to have settled over the Beltway. Candidates propose raising taxes here, there, and everywhere, conveniently forgetting that an increase is on the way, no matter who is elected.The newly installed head of the Securities Industry and Financial Markets Association, Timothy Ryan Jr., is trying to sound the alert about taxes while simultaneously battling a financial crisis of epic proportions. The financial services sector, which accounts for 8% (and falling) of gross domestic product, is under siege, and Mr. Ryan is its chosen champion.As head of the organization that speaks for investment banks, brokers, and money managers on global capital markets issues, Mr. Ryan faces urgent calls for regulatory reform, a hostile public, and arguably the greatest threat to the financial system since the Great Depression. His main focus, though, is not any of the above. It is instead to get the word out about what he sees as an even greater threat to investors: a giant tax hike.“We are leading the effort to help people understand what is happening. This is where the next crisis for investors will be coming from,” he says. “Over the next 10 years we’re facing a $2.4 trillion tax increase as the Bush tax cuts expire. That’s baked into future budgets, and it will come out of the pockets of the 30 to 40% of the population that pays most of our taxes. It will impact available pools of liquidity, reducing wealth in this country, and mean less money available to invest.”Mr. Ryan is referring to the expiration at the end of 2010 of the 2001 and 2003 tax cuts implemented by the Bush administration. Among the changes due to expire in 2010 are the drops in top individual rates to 35% from 39.6%, in the maximum capital gains tax to 15% from 20%, and in the highest dividend tax rate to 15% from 39.6%. Also, under President Bush, the child credit was doubled to $1,000 from $500, the estate tax was phased out, and the marriage penalty was eliminated. All these changes are set to expire.“The candidates are not being fully truthful when they talk about raising taxes. We could all go to sleep and taxes are going to go up. They don’t have to raise them; it will happen automatically,” Mr. Ryan says.Work done by his organization indicates that more than 80% of households with incomes between $100,000 and $200,000 will pay the alternative minimum tax by 2010. In 2011 alone, according to Sifma, taxes will rise by $148 billion.“We have to convince Congress to pass measures to extend some of the tax cuts,” Mr. Ryan says.Unfortunately, Congress may not be in much of a listening mood.Once again the federal government has been forced to bail Wall Street out, and once again Congress is baying for blood. Mr. Ryan has been here before.A lawyer by training, Mr. Ryan, prior to joining Sifma, logged many years as a senior banker and executive at JPMorgan Chase. More particular to his current job was his tenure as head of the Office of Thrift Supervision during the last real estate bust in the early 1990s. As head of OTS, he was responsible for closing 700 insolvent institutions and selling more than $300 billion in assets. At OTS, and as a director of the Resolution Trust Corporation, he has seen cleanup; some of his best friends are regulators.Keeping things interesting, today’s mess is not quite the same.“There are two big differences,” he says. “One, it’s more global, because it’s capital markets. The last crisis was more limited to real estate and to the U.S. The second big difference is that this time around the financial institutions that need capital have been able to raise it. The last time, the institutions could not raise capital, so we had to close them.”I asked Mr. Ryan if that could yet happen in this cycle. After all, a number of institutions, including Citigroup and Merrill Lynch, have had to go to the market more than once, and it’s not clear that we’ve seen the full extent of the industry’s losses. Might some firms get closed out?“I don’t know,” he says. “That’s the ultimate question. My sense is that, for the large complex multinational firms, they will have the capacity to raise the money. The issue will be more with regional and community banks, most of whom haven’t raised money yet.”Mr. Ryan says the fate of some of the smaller banks may depend on regulatory policy. Historically, private equity firms have not been allowed to take control positions in financial institutions unless the target banks are “troubled.” However, the Fed could change its rules to allow such purchases.Mr. Ryan thinks there’s a lot of interest on the part of the buyout companies. “Most of these guys would like to be in the position of Perelman or TPG and others back in 1989-90, when they took control positions in depositories at the bottom,” he says.Does Mr. Ryan advocate such a policy accommodation? “Sifma has no position,” he says. “On a personal basis, based on history, I would always use private funds rather than federal money.”This is but one of the myriad regulatory issues swirling around the capital — initiatives that Mr. Ryan is in an excellent position to navigate. For instance, Sifma has gone on record in support of Treasury Secretary Paulson’s giant proposed regulatory overhaul, but Mr. Ryan notes that the process has just begun.“The plan is expected to take seven to 10 years to be implemented,” he says. “But there are some real time issues that require attention right now. The Fed window is open to the investment banks until September 16, and we need to figure out how the SEC and the Fed will oversee these organizations.“Sifma is on record saying that the window should not close on the 16th; either they come up with some permanent access for the primary dealers, which would include the four investment banks, or they extend the date to sometime next year,” he adds.Mr. Ryan says he thinks the window should be made permanently available to “people who are major players in the global markets. Then the issue is, what’s the cost? The cost is not in dollars but in business model changes, in terms of regulatory, capital, and activities.”“It’s not a simple issue,” he says. And it’s only one of many.peek10021@aol.com

Whether McCain or Obama, Tax Hike Looms

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