The Beige Book 03/09/05

The Fed seems sanguine about current conditions, but there appears some room for worry. Most Districts cite Steel and Fuel costs push Production Costs. Vehicle Sales are already in Discount phase, with high Inventories and weak Sales; a serious threat exists for the SUV market, if Fuel costs remain high. Labor shortages in skilled labor is being reported in exactly those areas where adverse bottlenecks can be created. Consumer Credit remains steady when We need a Credit Payoff period to firm up Household financing, and to reduce Imports. Housing Construction should be slowing after prolonged steady growth, indicative of over-construction; suggesting a need for higher mortgage rates--prior to a Sunset for the mortgage credit. Many Districts report greater ease of passing on Input costs for Businesses, a sure sign there is Consumer expectation of Inflation; a Indicator which only this Author responds, though Consumers may be the best Weathervane of Any.
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Center on Budget and Policy Priorities

http://www.cbpp.org/3-10-05tax.pdf

March 10, 2005
DIVIDEND AND CAPITAL GAINS TAX CUTS
UNLIKELY TO YIELD TOUTED ECONOMIC GAINS
Benefits of These Tax Cuts Flow Disproportionately To The Well-Off
By Joel Friedman


The Administration’s budget calls for making permanent most of the tax cuts enacted during
its first term that are slated to expire by the end of 2010, including the capital gains and dividend tax cuts that expire at the end of 2008. The budget resolutions currently being considered in the House and Senate also assume that these expiring tax cuts are extended. The House budget assumes tax cuts totaling $106 billion between 2006 and 2010, while the Senate resolution would reduce revenues by $70 billion over this five-year period.

Households with incomes over $200,000 will receive three-quarters of the
dividend and capital gains tax-cut benefits; those with incomes above $100,000
will receive 88 percent of the benefits. Only 12 percent of the benefits of the
dividend and capital gains tax cuts will flow to the 87 percent of households with
income under $100,000 in 2005

The appropriate fairness issue, therefore, is whether the tax cut for dividend and capital gains income shifts the burden of raising revenue on to wages and away from income generated by stocks and whether it weakens the progressivity of the tax code by giving a substantial tax break to those high-income households that own the lion’s share of equities

The study by NBER and Federal Reserve economists shows that firms that increased or
initiated dividends did not increase their total payout about half the time.23 The effect was
particularly strong for companies that were paying dividends for the first time. The authors
estimate that the observed reduction in repurchases offset nearly three-quarters of the newly paid dividends, significantly lowering the increase in total payout
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Lay Readers may not understand the last Quote, but there is the implication that Corporate Management are using the Tax Cuts to overstate their assets, feed their own Pay and Bonuses schedules, and discount Losses through artificially inflating Stock price. The Author uses a lame National Savings argument, but it is sound research and good Read. lgl