Business and Finance

Congress is getting ready for another round of sparring over whether to extend the 2 percentage point payroll tax cut past its Feb. 29 expiration. Consider it a warm-up for the main event later this year, likely after the November election.

The Bush tax cuts are set to expire at the end of 2012. If Congress does nothing, most people who work and lots of people who don’t will see higher taxes starting Jan. 1.

The fight to come has sky-high stakes - a possible tax increase of over $200 billion a year imposed on an economy that may still be struggling for traction. Come November, voters will have their chance to swing the outcome.

The wealthy have the most at risk. For instance, the estate tax will be much higher for people who die after New Years Eve.

Now, estates up to $5 million are exempt from the estate tax, also known as the death tax. That exemption drops to $1 million next year. The top tax rate on estates would jump to 55 percent from 35 percent.

“This is insanity. There are 70 tax code items that expired last Dec. 31 and 38 more that expire at the end of this year. The future of all these items is up to the lame duck Congress and it’s anybody’s guess what will happen,” said Dan Connors, an enrolled agent at the Buenger Doyle Tax Service in Granite City.

President George W. Bush and Congress gave the vast majority of wage-earners a break when they trimmed tax rates across the board in 2001 and 2003.

Everybody who actually pays income taxes benefited when the bottom tax bracket was cut to 10 percent from 15 percent. But higher brackets were cut as well. As a result, the higher a person’s income, and the more they gain from investments, the more dollars they saved on taxes. The top bracket, for couples earning more than $388,000, fell to 35 percent from 39.6 percent.

Taxes on dividends and capital gains were cut too, to a maximum of 15 percent. If the cuts expire, the rate on capital gains will go to 20 percent, while dividends will be taxed as ordinary income.

A couple with a child earning $60,000 from wages saves about $1,000 under the Bush tax cuts, according to a calculator supplied by the Tax Foundation. A couple earning $300,000, with $20,000 of that in investment income, saves $6,800. A couple earning $1 million, with $200,000 from investments, saves about $71,000.

But the poor will also lose if all the tax cuts expire. The earned income tax credit for the working poor will become less generous. The $1,000 child tax credit would be cut in half, and people who owe no taxes would no longer get a refund check because of it.

If the deadline draws close with no action, expect some churning in the financial markets. Dividend stocks have been the most popular investments on Wall Street for most of the past year as investors yearn for yield. Higher dividend taxes would subtract some appeal.

People with big capital gains on stocks would be tempted to sell them late this year to avoid the tax hike.

For now, tax advisers are telling their clients to sit tight and watch closely.

“Both parties know that the worst possible outcome would be for the Bush tax cuts to completely go away,” said Bob Jones, CEO of Central Trust in Clayton.

Taxes will be a campaign issue, but the betting is that serious bargaining will wait until after the election.

The major Republican presidential candidates would generally extend the Bush cuts, and then some. Mitt Romney would kill the estate tax and eliminate taxes on investment income for most investors.

Newt Gingrich would give taxpayers a choice of paying under the current system or at a new 15 percent tax rate. Rick Santorum would lower income tax rates further and triple the exemption for children.

President Barack Obama would preserve the Bush tax cuts only for families earning less than $250,000, while adding new taxes on people earning $1 million or more.

The debate will feel like “groundhog day all over again,” says Mark Luscombe, principal analyst at CCH, a tax analysis and software company. The Bush cuts were originally to expire in January of last year, when the recession was biting deeper, but Congress and Obama agreed to extend the cuts for two years.

If re-elected, Obama won’t agree to another punt, Luscombe predicts. After all, he doesn’t have to run again. If there is no agreement, all the Bush tax cuts would disappear on Jan. 1.

“This could be the last year of relatively low tax rates,” says Luscombe.

Todd Sivia, an estate planning attorney in Edwardsville, thinks heirs to large estates are at risk, given the government’s projected $1.1 trillion deficit this year.

“History shows that, when we’re deep in debt, we always re-establish the estate tax and it comes back with a vengeance,” Sivia says.

Lawyers have long experience in avoiding or delaying the estate tax. Tactics include gifts and establishing trusts to move assets between generations.

Sivia notes that higher estate taxes could turn grandparents more generous, as they try to pass on more of their wealth through gifts while living.

The prospect of higher income tax rates could motivate people who have been thinking of converting a regular IRA into a Roth IRA. Such conversions mean paying taxes on the IRA now, in trade for tax-free growth in a Roth. They can be a good move for people with many years to retirement.

Upper income people are due for a tax hike anyway, regardless of whether the Bush cuts are extended. The health care reform law of 2010 established a “Medicare surtax” that takes effect next year, notes Bert Schweizer, principal at Buckingham Asset Management in Clayton.

The complex tax applies to singles earning over $200,000 and $250,000 for married couples.

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European financial chiefs are trying to soothe global CEOs and political leaders, insisting they have a handle on the eurozone’s troubles.

Germany’s Finance Minister Wolfgang Schaeuble says he’s “quite optimistic” about a Greek debt restructuring deal, despite recent strains in the complex talks. He says he doesn’t expect Greece to default.

He stressed that recent developments in markets have been “positive” for Italy and Spain.

France’s Finance Minister Francois Baroin welcomed actions by the European Central Bank that he says have helped “reduce tensions in the European banking system payday loans.”

Both spoke Friday at the World Economic Forum in the Swiss ski resort of Davos, where many business and political VIPs fear that Europe’s debt crisis will drag the global economy into a new recession.

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OPEC’s acting president said the producer group should stay out of political battles, Iran’s official IRNA news agency reported Sunday, an apparent bid by the bloc to steer clear of a potential showdown between Tehran and the U.S. over threats to close the vital Strait of Hormuz.

Iraqi Oil Minister Abdul-Karim Elaibi said that while Iran’s “enemies” have imposed various sanctions on the Islamic Republic, the 12-nation Organization of the Petroleum Exporting Countries’ main focus should be protecting its members’ interest and not being dragged into a political struggle over oil.

Elaibi, who is also OPEC’s current president, last week said he was going to Tehran to warn against closing the strait, through which about a sixth of the world’s crude flows daily. IRNA did not say whether the tension over the waterway was raised during the oil minister’s meetings with officials.

Instead, the language reflected the warmer relations between Iran and Iraq since a U.S.-led coalition had ousted former strongman Saddam Hussein in 2003. The Shiite government in Baghdad is seen as increasingly close to Tehran, and Iran is investing heavily in Iraq.

Iran has warned repeatedly it would choke off the strait if sanctions affect its oil sales. The U.S. has enacted, but not yet put into force, sanctions targeting Iran’s central bank and, by extension, the country’s ability to be paid for its oil. The European Union, a major buyer of Iranian oil, is considering sanctions on Iranian crude.

The tension over the strait and the potential impact it would have not only on global oil supplies, but also the price of crude and the economies of the countries that buy Iranian oil, have weighed heavily on consumers and traders credit reports free.

Gulf nations have offered assurances that they would step in and provide any additional crude needed by the global market. Iran interpreted the offer as an attempt to undercut it and issued a quick warning to the Gulf Arab producers to not try to offset its exports with their own.

Elaibi’s remarks appear to be an attempt to pull the producer bloc out of the political fray, but they also reflect the uneasy balance Iraq faces.

Iraq exports most of its crude through the strait, and any attempt to shut the waterway could be a severe blow to its economy. At the same time, it appears reluctant to come across as being too harsh on its neighbor, in part because of the investments Iran provides and its ideological weight as the region’s strongest Shiite government.

His visit to Tehran came just days before Iraq inaugurates a new oil export outlet in the Gulf with a capacity of up to 900,000 barrels a day. It would be the first of five floating facilities that would eventually handle about 5 million barrels a day.

The new outlet will help Iraq, limited now by infrastructure bottlenecks, to export more oil.

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The European Central Bank

One in eight people earning at least $1 million annually was audited by the Internal Revenue Service last year, making them far likelier to be examined than those making below $200,000, according to IRS data released Thursday.

Just 1 in 100 individuals earning less than $200,000 had their income tax returns examined, the IRS said.

The 12 percent of millionaire earners audited in 2011 was appreciably higher than the 8 percent who were audited in 2010. IRS officials said the high ratio was part of an effort to demonstrate that tax laws are applied fairly.

“That has been something we’ve concentrated on to assure that there’s equity in the system, to assure that those at the lower end of the spectrum know that those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else,” Steven Miller, deputy IRS commissioner for services and enforcement, said in an interview.

In recent weeks, President Barack Obama and congressional Democrats have sought to boost taxes on the wealthy as a way to pay for jobs programs, a theme they are expected to continue in this presidential and congressional election year. IRS spokeswoman Michelle Eldridge said the growing portion of millionaire earners’ returns audited is not related to politics.

“The IRS is an agency of civil servants, and we base our audit decisions on tax issues _ nothing else. We don’t play politics here,” she said.

Between 2004 and 2009, the percentage of millionaire earners audited ranged between 5 percent and 7 percent.

The data was divided into only three categories of income: below $200,000, $200,000 and up, and $1 million and higher.

About 1 in 25 people earning $200,000 and more was audited in 2011.

The IRS also audited a greater proportion of large corporations than smaller ones, the data shows.

Last year, 1 percent of corporations with assets under $10 million were audited. Among corporations with assets of $250 million and up, 28 percent were audited.

The IRS said its enforcement efforts to collect all taxes owed _ which include audits, court cases and other activities _ netted $55 billion last year. That is nearly $3 billion less than the previous year, which Miller attributed to a falloff in estate taxes and corporations writing off their losses.

All together, the IRS audited nearly 1.6 million of the 141 million individual income tax returns that were filed. In 2010 _ the most recent year available _ more than 8 in 10 individuals audited ended up paying additional taxes.

The agency collected a total of $2.3 trillion in revenue last year from individuals and businesses, including the $55 billion from its enforcement efforts.

The IRS figures also showed that:

_In 2011, the agency garnisheed wages or seized money from bank accounts 3.7 million times, put liens on property 1 million times and seized 776 pieces of property.

_77 percent of individual returns were filed electronically last year, up from 69 percent in 2010.

_70 percent of callers to IRS taxpayer information telephone lines got through, slightly less than the 74 percent who reached someone in 2010. Miller attributed that to budget cuts to the agency.

_The information IRS officials dispensed over the phone to taxpayers was accurate 93 percent of the time, the same as the previous year.

_The IRS website, http://www.irs.gov, was visited 319 million times in 2011, a slight increase.

The data was presented by federal fiscal years, which begin on the previous Oct. 1.

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Global stock markets opened a risk-filled new year still smarting from a rough 2011, as many exchanges remained closed. German and French stocks rose in light volumes as a a reading of manufacturing activity in Europe improved.

Germany’s DAX closed up 3 percent Monday at 6,075 while the French CAC-40, which ended 2011 17 percent lower, climbed 2 percent to 3,222. Stocks fell in South Korea and closed flat in Taiwan.

Trading was light with the New York, London and most Asian stock exchanges closed.

Investors appeared to be reassured by European purchasing managers survey index numbers that improved in December from November. Activity in the manufacturing sector was up, but at levels that still show a fifth straight month of contraction.

Many of the world’s leading indexes are coming off a down year. Britain’s FTSE was off 5.6 percent by year end, Japan’s Nikkei fell 17 percent to its lowest close since 1982, and the Standard & Poor’s 500 showed zero gain.

Data releases later in the week such as eurozone inflation on Wednesday and German factory orders and U.S. non-farm payrolls on Friday will give traders more grist. The U.S. employment figure is expected to rise by some 150,000 after increasing 120,000 in November.

Markets face an uncertain first quarter as eurozone leaders try to get control of government debt woes that threaten to harm the global economy with another financial meltdown.

Much of the attention in coming weeks will center on Italy, the eurozone’s third-largest economy and the focal point of the eurozone’s struggle to deal with a crisis caused by heavy levels of government debt. Fears of default on those debts mean that bond investors demand ever-higher interest, making it a challenge for the new government of Prime Minister Mario Monti to roll over euro53 billion ($69 billion) in debt maturing in the first quarter cash advance. If a country can no longer borrow affordably to pay off bonds that are maturing, it faces eventual default or a bailout.

Debt woes may be compounded by at least a mild recession over the last quarter of 2011 and the first part of 2012.

In Asia, South Korea’s Kospi, which lost 11 percent of its value last year, closed nearly unchanged at 1,826.37. South Korea’s tech sector move higher, with Samsung Electronics up 2.1 percent and LG Electronics gaining 2.3 percent. Steel giant POSCO slid 1.1 percent and Korea Electric Power shed 1.8 percent.

Taiwan’s TAIEX, which was also open for business Monday, fell 1.7 percent to 6,952.21. Foxconn Technology, the world’s biggest contract electronics manufacturer, which makes iPads and iPhones for Apple Inc., fell 0.9 percent. Personal computer maker Acer Inc. shed 2.3 percent.

The Asian-Pacific region’s major benchmarks, including Japan’s Nikkei 225 index, Hong Kong’s Hang Seng Index and Australia’s S&P ASX 200, were closed.

Last year was one that traders would prefer to forget: most Asian equity indexes closed out 2011 deeply in the red. The Nikkei in Tokyo ended the year at 8,429.45 _ its lowest closing since 1982.

China’s benchmark Shanghai Composite Index, closed Monday, endured a 21 percent loss for the year as the impact of Beijing’s multibillion-dollar stimulus faded and the government tightened curbs on lending and investment to cool blistering economic growth.

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Chinese industrial companies

Federal regulators are blocking Duke Energy’s planned acquisition of Progress Energy to form the country’s largest electric company, ruling the companies haven’t done enough to protect competition in their North Carolina and South Carolina home markets.

The Federal Energy Regulatory Commission had scheduled a Thursday hearing on changes to the merger plans in Washington, but regulators surprised the utilities late Wednesday by rejecting the companies’ solution to protect competition.

The FERC action is likely to delay the merger’s year-end target for completion and could require changes that the companies find unattractive.

A Duke spokesman said the company was reviewing the order. He wouldn’t comment about how it affects Duke’s commitment to the deal.

Jefferies & Co. analyst Paul Fremont said the companies’ next move will be to take a serious look at their power plants and decide which can be sold. Any proposed sale must be reviewed by state regulators, who would need guarantees that it wouldn’t affect pre-negotiated power rates for utility customers.

The order will delay the deal by about three months, at least, he said. The companies also may walk away from the deal at this point, deciding that the government was demanding too many sacrifices. “It’s too early to say at this point” what will happen, Fremont said.

The federal agency in September questioned the deal’s impact on customers in North and South Carolina. Regulators suggested that the companies consider a number of measures that would diminish their influence, such as selling power plants, building new transmission lines or giving up control of their transmission system to a regional operator. The companies responded last month with a plan to sell excess electricity at a fixed price to wholesale buyers in their Carolinas territories.

Regulators now say the proposal by Charlotte-based Duke and Raleigh-based Progress doesn’t go far enough.

The “mitigation proposal does not remedy the proposed transaction’s adverse effects on competition,” the FERC ruling said.

Duke first announced it planned to buy Progress in January for $13.7 billion. If approved, the combined company will serve 7.1 million customers in North Carolina, South Carolina, Florida, Indiana, Ohio and Kentucky.

Duke shares rose 12 cents to $20.97 in premarket trading Thursday while Progress shares added 6 cents to $54.49.

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New polymer banknotes demand that all money-handling machines in the country be upgraded at a cost of $75-100 million, the Bank of Canada estimates.

That compares to $20-30 million for the last conversion in 2004-2006, bank spokesperson Julie Girard said Tuesday.

It sounded like a can’t-miss proposition: Buy the winners, drop the losers.

Developing countries from Brazil to China are expanding much faster than aging economies in the U.S. and Europe, where borrowing during the boom years has been a drag on growth. So the smart money bought stocks in emerging markets, expecting that rapid economic expansion there would provide better rewards. This year, that bet hasn’t worked out.

The broadest measure of U.S. stocks, the Standard & Poor’s 500 index, is down just 0.4 percent this year. Markets in Brazil, China and the like have lagged far behind, even though their economies are still growing faster than the U.S.

“If you were anywhere in the world other than in the S&P 500 this year, you got crushed,” said Greg Peterson, director of research at Ballentine Partners, an investment advisory firm.

The main reason emerging market stocks have suffered deeper losses isn’t because their economies are suddenly sluggish. Analysts say it’s because people have been worried about the European debt crisis and a possible recession in the U.S. It may seem unfair, but when fear of another financial crisis strikes money managers, they tend to flee emerging markets and stay closer to home.

This summer, panicked money managers dropped the most risky investments first. That meant bonds from deeply indebted countries like Italy and Portugal, small companies in the U.S and emerging market stocks got hit the hardest. Even gold, an asset normally considered safe, dropped as traders shifted money into dollars.

“There was a globalization of fear,” says Nathalie Wallace, a senior portfolio manager at Batterymarch Financial Management.

The same thing happened when the U.S. financial crisis hit in 2008. The S&P 500 fell 38.5 percent for the year. But the MSCI Emerging Market index, made up of countries where the banks didn’t peddle subprime mortgage bonds, plummeted 47.3 percent.

“Anytime you see risk and fear coming, you see emerging markets get hit a bit more,” Wallace says. “It doesn’t mean the underlying fundamentals of the economy have changed.”

Consider the collection of emerging-market rising stars known as the BRICs, which stands for Brazil, Russia, India and China. All have economies whose growth exceeds the U.S.

_ Brazil: The economy has expanded 3.1 percent over the past year. The benchmark Bovespa has lost 15.3 percent.

_ Russia: Economic growth of 5.1 percent. The Micex has dropped 11.1 percent this year even after a 10 percent rebound in the past month.

_ India: Economic growth of 7.7 percent. The BSE Sensex index is down 14.4 percent.

_ China: Economic growth of 9.1 percent. The Shanghai Composite has slumped 10 percent this year.

By contrast, the U.S. economy has expanded 1.6 percent over the past 12 months. That’s sluggish compared to the developing world’s stars. And worries that the U.S. could slip into a recession, or that Europe’s debt crisis could tip it into one, have weighed on investors for months. Even after those fears dragged down stocks nearly 20 percent in a month, the S&P 500 outshines indexes in nearly all of the world’s fastest growing economies.

In fact, if you rank the U.S. against emerging markets this year, it places ahead of 20 countries and behind just one, Indonesia.

China and other emerging markets long relied on shipping toys, timber and other goods to consumers in the U.S. and Europe. Trade helped them grow. But that has a downside, says Tim Morris, a portfolio manager at J.P. Morgan’s asset management unit. When a small country hitches its fortunes to U.S. shoppers, it’s bound to suffer when the U.S. economy slows down.

A related problem for many emerging market countries is that they’re dominated by energy and material producers, the type of companies most vulnerable to a global slowdown. Todd Henry, an emerging markets equity specialist at T. Rowe Price, points to Brazil, a country that isn’t as dependent on exports for growth. “It’s a relatively closed economy,” Henry says. “But commodity and energy companies make up a large part of their stock market. So if the world is slowing down, that gets priced in.”

The largest company in Brazil’s stock index is the oil giant Petrobras. When the U.S. economy looks weak, the price of oil falls and the companies that sell oil fall, too. That pushes down Petrobras, which tugs on the Bovespa. In other words, when the U.S. has the sniffles, Brazil’s stock market still catches a cold.

“Americans tend to think our problems are limited to the U.S.,” says Richard Bernstein, chief executive officer of Richard Bernstein Advisors LLC. “But our problems are their problems, too.”

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