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U.S. Tax Code: An Economic Growth Engine That’s Too Big to Fix


With debt, deficit, default, and downgrade grabbing all the headlines and now finally registering in the financial markets, Friday brings a new data point that could steal the spotlight: Second-quarter GDP, hitting the tape at 8:30am eastern time.

The importance of this number is profound. It is the latest snapshot of strength (or weakness) in the U.S. economic recovery.

There's little economic bright side coming from Breakout guest Todd Petzel, Chief Investment Officer at Offit Capital Advisers. Those of you preferring your economic forecasts cheery, best close your eyes and don your earmuffs, we're going to use words like "stagflation", "misery index" and "Washington DC".

Petzel says the answer to a looming economic trainwreck lies in the tax code. As often discussed on Breakout, America's tax code is absurdly long as well as what Petzel calls "a living document," meaning it's constantly morphing into something larger and more horrible. Petzel is in favor of both tightening the code and giving small businesses tax breaks as incentives to hire. That translates into both a tax hike and a tax cut, meaning nothing along those lines is likely to happen pretty much ever.

Clearly Petzel believes the near-term problem with the U.S. economy is coming from DC itself. "People are waiting for solutions that are not coming from Washington or anywhere else," says Petzel, who obviously hasn't strolled through the comment sections of our economic policy segment.

The obvious near-term concerns of rampant idiocy regarding the debt ceiling aside, Petzel believes zero interest rate policies create a drag on the economy. "Cash on corporate balance sheets is like a drug for CEOs," he offers, referring to the opiate class of drugs which lead to reduced activity rather than, say, speed. Reluctant to dive blindly into hiring decisions or issuing debt to build their businesses until we gain clarity on tax policy, the deficit, and everything else queued up in Washington right now, a smart CEO says 'I don't want to take a chance."

Petzel's economic bright spot is that we don't "have to worry about the Fed until 2013, after the election."

Alas, once the banks start lending again, and make no mistake they aren't, it's going to lead to rampant inflation. Once lending and corporate activity picks up, the velocity of cash will ramp and the money now buffering balance sheets will work against the economy as more dollars chase low inventories of goods predominantly made overseas.

All of this stuff remains in place regardless of GDP. GDP isn't going higher anytime soon and no matter how low it goes the Fed et al are essentially out of stimulus ideas. But again we don't need to worry about Fed until 2013, which is nice. Petzel notes the Fed doesn't raise rates during election years, the hikes former President Bush 41 blames for escorting him out of office being the exception.

Add it up and no matter where GDP prints and regardless of what the government does short of being smart and pragmatic, our fate has been determined. It's the tax code, stupid! Let us know your thoughts below.