Tax reform
Significant tax change IS coming ...
Not soon, but in four to six years. By then, doing nothing won’t be an option.
Driving reform ... a ticking time bomb: The AMT, or alternative minimum tax. Meant to ensure that the richest Americans don’t use deductions to avoid taxes altogether, the AMT was devised years ago but never indexed to adjust for inflation’s impact on incomes. So it’s starting to hit the middle classes.
By 2010 ... an explosion: More than half of taxpayers with incomes of $75,000-$100,000 and 16% of filers in the $50,000-$75,000 range will fall under the AMT, raising voters’ ire.

A fix will cost billions. Tinkering around the tax code’s edges won’t produce enough funds to offset lost revenue if the AMT is changed.
Lawmakers will have to be aggressive, tackling the entire code.
But wholesale replacement with a flat tax or sales tax won’t fly. Lawmakers will balk at eliminating some tremendously popular deductions, such as for mortgage interest and charitable donations. If they’re kept, the flat rate would have to be high, about 26%, to yield enough revenue. Similarly, the rate on a national sales tax would be an eye-popper ... at least 30%, perhaps even 50%, to allow exceptions for food, drugs, etc.
The political obstacles are just too great in either case.

What ultimately does get done depends a lot on who is president.
Bush would move us closer to a flat tax, eliminating or sharply reducing deductions.
He also wants no taxes on investment income. In fact, legislation passed in Bush’s first term already moved us quite a bit in that direction, cutting taxes on capital gains and dividends and squeezing rates into a narrower range.

Kerry favors a more progressive tax system with a bigger bite on upper-income taxpayers, a lower burden on just about everybody else, and the same rates on earnings and investments.
There are problems in moving that way, too. A GOP-controlled Congress won’t put more of the burden on high-incomers.

In the end, we’ll probably wind up with a patchwork of changes: Fewer brackets and deductions, streamlined tax breaks for education, etc.
Not an entirely new system, but different from the present one.

Business costs
Steel prices will keep rising from $750 a ton now for hot-rolled to $825 by October. Smaller buyers will probably pay $975 or more. Prices will take a winter dip but return to October’s levels by February.
Driving the trend: Chinese demand for scrap, coal, and coke.
Hit hardest: Users of stainless steel ... makers of appliances, tools, office furniture, cookware, and antipollution devices for autos. Stainless prices, up 25% since Jan. at $1,500 a ton, will reach $1,600 by June. Higher costs for nickel and chromium are factors in the rise.

Congress wants people’s medical records computerized and online. It could cut health care costs by 10%. Both parties support bills aimed at creating a nationwide network among hospitals, insurers, etc.
But setup would be costly ... an impediment for many hospitals. In addition, lawmakers would need to establish uniform national standards so that computers of the various groups involved could communicate.

The steady climb in water prices is likely to continue at the 4% to 5% average annual pace seen in the past decade. Higher costs borne by utilities for security, meeting tougher water quality regs, and replacing aging infrastructure will be passed on to water customers.
There IS a silver lining: The billions of dollars in investments will increase sales for piping, sensors, water filtration systems, etc.

The economy
The expansion is settling into a moderate but steady pace that will carry through next year. GDP growth of 3.5% in 2005 won’t feel boomy, while the rate of job growth will average about 150,000 a month ... less than in past expansions. But keep in mind that the economy is showing genuine activity, not just a sugar rush from the tax cuts.

Not all sectors will fare equally well as the expansion proceeds. It’ll seem like good times for some. Others face a tougher road ahead.
Reduced auto output will reverberate through the supply network. Makers of everything from radios to radiators risk seeing orders decline.
That may pose problems for Bush as the November election approaches. The auto industry happens to be concentrated in key battleground states. Layoffs in Michigan, Ohio, etc. won’t be good news for the White House.
Durable goods will lose some steam as housing starts level off and homeowners use up most of the cash they extracted from refinancing.

Airline woes will worsen by next year, with three big carriers ... United, US Airways, and Delta ... teetering perilously close to failure. That spells trouble for suppliers of in-flight food, plane maintenance, and parts and also for cities where these airlines are big employers ... Chicago (United), Pittsburgh (US Airways), and Atlanta (Delta).
Makers of textiles and apparel face a further winnowing after worldwide tariffs on these goods are lifted at the end of 2004.

But health care shows no sign of cooling off. This sector will remain a big job generator as aging baby boomers need more services.
Transportation is on a roll. Foreign trade and business spending will keep demand firm for truck, rail, shipping, and logistics services.
Industrial equipment looks promising as optimistic managers respond to increased orders with new investment plans. Business spending is likely to rise 8% or so next year after a 10% increase in 2004.
Computers and IT have at least another year of very robust sales. By then, the pace of equipment upgrades by businesses will probably slow.

© 2004 The Kiplinger Washington Editors, Inc.