In the near future, our work with distressed investments could become even more challenging.
Recently, two influential groups called for major (x2 major) changes in the tax code and other laws, which will significantly impact the financial markets.
As the probability of these changes become a reality, they will influence our assessment of distressed investments, and the plans crafted and strategies implement to resolve them.
So, we need to monitor them, and plan accordingly.
The proposed changes could rival the impact on the commercial financial markets made by the changes to the Federal tax code in the mid-80s (such as the Tax Reform Act of 1986).
Reports by these two groups merit our continued attention:
- Earlier this month, the co-chairs of the National Commission on Fiscal Responsibility and Reform ("NCFRR") issued their preliminary report on the major changes needed in Federal programs and laws in order to address the federal budget and the national debt. Since the report is nothing more than a high level summary, it does not articulate the details of "how" the proposed changes will effect debt and equity investments – and their impact upon distressed debt and equity. However, it clearly points to significant changes to the Federal tax code
- On November 17, the Bipartisan Policy Center’s Debt Reduction Task Force released their plan, which called for larger cuts and changes than those proposed by the NCFRR. (Link to the task force’s plan, executive summary, press release and charts.)
Like the NCFRR, membership of the Bipartisan Policy Center includes former leaders of both parties from both the federal level and the state level. It is an impressive list.
A quick look at the Debt Reduction Task Force plan points to changes that will impact investments:
- reforming Medicare and Medicaid
- ensure that Social Security can pay benefits for the next 75 years
- find savings in other entitlement programs
- freeze both defense and non-defense discretionary spending for several years
- establish a 6.5 percent Debt Reduction Sales Tax
- enforce all of these savings through strict budget rules
- Near term changes
- “payroll tax holiday” for 2011
- suspending Social Security payroll taxes for employers and employees (a move that the Congressional Budget Office estimates could create as many as seven million jobs)
- phase in the steps to reduce deficits and debt gradually beginning in 2012
- Long term changes include dramatic simplification and changes to the federal tax code
- establishing individual tax rates of 15 and 27 percent (from the current high of 35)
- cutting the corporate tax rate to 27 percent (from the current 35)
- ending most deductions and credits
- simplifying may deductions and credits
- ensuring that nearly 90 million households no longer have to file returns
Change could be on the way. And it could be tough in the short term. And it could be good in the long term. Or some other combination.
But are these changes merely a wish list? Is this list not capable of becoming reality given a political system (and will) that finds it hard (or impossible) to implement painful choices?
Maybe. Or maybe not.
Either way, on the outside chance that some part of this list is implemented, these are topics worth monitoring.
Please post your comments below.