Faber Report: CEOs Fear Higher Taxes Will Slow Economy

Exchanging Money
Michael (Mx5tx)
Exchanging Money

It’s been a generally good week in the financial markets. Stocks have been up, IPOs and follow-on offerings have hit the market with force and been well received (something we have discussed often on The Strategy Session).

Investors seem focused on what they expect will be generally positive earnings numbersfrom much of corporate America.

So it is with trepidation that I introduce a troubling theme that has popped up in many of my conversations this week, both on and off the record, with people who run large enterprises.

The theme is simple and somber: 2010 will be a decent year, but a variety of forces will conspire to slow consumer spending in 2011 taking the economy down with it.

I don’t want to get drawn into a debate on taxes, but can tell you that it is the number one reason cited by CEOs who are concerned about 2011.

It’s their contention that higher taxes in 2011 will curtail spending. And even with a middle class tax cut, the precarious financial position for many states will negate any impact from federal tax cuts. As well, taxes are assuredly going higher for wealthier Americans, who account for almost half of all discretionary spending.

As someone who spends his day on the phone with incredibly wealthy people, I’ve never been completely clear whether they really rein in spending when taxes go up.

But I don’t believe the concern is whether the hedge fund managers or private equity workers will keep spending if their tax bills go up a bit. It is with the many Americans who make more than $250,000 a year, but nowhere near what my sources make in a week.

And whether the CEOs who are seeing bad things down the road are right or not, it is as much their view of the future that will help to shape it.

They are concerned and cautious about economic performance in 2011 and as a result they are not hiring. Until that changes, it’s probably not a bad thing to be worried about 2011 too.

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