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Fed's Bullard: Congress Must End Tax Uncertainty to Fuel Hiring

Thursday, 27 September 2012 04:26 PM

Congress needs to clear up uncertainties surrounding how much businesses will pay in taxes if the country wants to see high unemployment rates fall, said Federal Reserve Bank of St. Louis President James Bullard.

Legislative entanglements have made tax burdens anything but clear.

President Barack Obama's Affordable Care Act will raise taxes on investment income in the future, while at the end of this year, the Bush-era tax cuts and other benefits expire at the same time automatic cuts to public spending kick in, a combination known as a fiscal cliff that could throw the country into recession if left unchecked by Congress.

In the meantime, companies are putting off investing in new projects and foregoing hiring in the process, which keeps recovery moving along at a tepid pace at best.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Clearing up tax uncertainty would encourage businesses to draft budgets and strategies and put more people back to work again, bringing the unemployment rate down from its current level of 8.3 percent.

"Congress could show they have consensus, even if it's maybe not the completely ideal policy, but if they had consensus and you knew what the taxes were going to be in the future, then businesses will go ahead and make their bets based on that tax code," Bullard told CNBC.

"What they don't like is the notion they might invest in a business, the business might do well, possibly become a target and get taxed in the future. They don't want to be in that kind of a situation. So I think that that's inhibiting investment."

While technology companies invest to keep up with the pace of their industry, other sectors can afford to be wait, and recovery lags as a result.

"In other sectors of the economy, they're willing to be more patient and have the opportunity to be more patient and maybe more opportunity to invest overseas," Bullard said.

"So those are all factors that are weighing on these kinds of big investment decisions."

The nonpartisan Congressional Budget Office estimates that the economy could contract by 0.5 percent next year while unemployment rates would rise to around 9 percent by late 2013 if lawmakers fail to steer the country away from the fiscal cliff.

Lawmakers have refused to address tax and spending issues in an election year, suggesting instead they can return after elections and tackle the fiscal cliff or even in early 2013 with retroactive legislation.

However, political brinkmanship displayed during the 2011 debt-ceiling debacle could return get in the way of tackling the fiscal cliff.

In 2011, lawmakers waited until the last minute to raise the government's debt ceiling, nearly throwing the country into default and prompting the Standard & Poor's ratings agency to strip the U.S. of its coveted Triple-A rating.

"I continue to think that despite all the brinksmanship, there will eventually be some kind of deal. Obviously it won't be what everybody wants, it will have to be some kind of compromise and it might be hard to see it right now, but I think there will be some kind of deal," Bullard said.

"What's bad for the U.S. economy is that our political system insists on brinksmanship in order to solve these kinds of problems. It would be much better if we could get a better method of getting to these kinds of solutions, and I don't see it now."

The Commerce Department earlier cut its second quarter gross domestic product rate to a final 1.3 percent from an initial estimate of 1.7 percent.

The economy grew at a 2 percent rate in the first quarter.

Separate data show that orders for durable goods in the U.S. plunged 13.2 percent in August, which analysts cite as evidence that businesses aren't expanding out of fear.

"The corporate sector is getting very nervous from a combination of worries about Europe, worries about the fiscal cliff and a general lack of confidence in the recovery,” said Ethan Harris, co-head of global economics research at Bank of America Corp. in New York, according to Bloomberg.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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Congress needs to clear up uncertainties surrounding how much businesses will pay in taxes if the country wants to see high unemployment rates fall, says St. Louis Fed President James Bullard.
Thursday, 27 September 2012 04:26 PM
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