Banker Wishes Tax Cut Were Deeper

June 2, 2003
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GRAND RAPIDS — While details of the recently adopted cuts in federal taxation still are somewhat sketchy, the president of United Bank of Michigan says his one concern is that the cuts aren’t deeper.

“I don’t think the tax cut is big enough,” Mike Manica told the Business Journal, “but everything will help right now.”

He said he believes that the cuts are important psychologically in that they will create the feeling that investment is occurring, so that consumers will increase demand a bit and create more jobs.

“In that respect,” he said, “I think the cut is really good. Anything that creates jobs is good.”

And though he cautioned that new economic activity probably wouldn’t manifest itself for several months, he said he believes that reduction of personal income tax rates will be the real driver.

“Those generally have shown to be very effective in the past,” he said, referring to the income tax cuts of the Reagan and Kennedy years.

He said it was his understanding that the income tax measure essentially accelerated earlier cuts that were supposed to go into effect two to three years from now.

“I also understand that the cuts will be retroactive to Jan. 1,” he added.

Manica said he believes the second most important part of the measure is the reduction of the capital gains tax on many investments from 20 percent to 15 percent.

“Even though we’ve had some obvious pullback in the stock market in the past 18 months or two years, that (cut) still potentially could get people to loosen up and maybe sell some items that had some profitability in them.

“That’s generally what these cuts do,” he said.

“And, once again, you take a look at history and capital gains cuts have actually generated more revenue. When they decrease the rate, it increases activity.”

He said it’s harder for him to read the impact of the change in the dividend tax from the payer’s ordinary rate to a flat 15 percent (and 5 percent for earners in the 10 percent and 15 percent brackets).

“It’s hard to say what real effect that’s going to have,” Manica said. “It’ll go anywhere from modest to significant, but right now I just don’t know.

“It surely shouldn’t have any kind of negative effect,” he stressed. “I don’t see any negatives out there.”

He did say he believes the cut in the dividend tax will have a beneficial effect on corporate behavior in some cases.

“There are various theories about this,” he said. “But in some cases companies were saying, ‘We don’t pay the dividend because we’ve already paid tax on it, so therefore your shareholder value is increased by us keeping the money and investing it in more and better businesses, more equipment, so therefore we’re going to have more money to increase your shareholder value.’

“What that allowed, however,” Manica added, “was a build-up of big cash balances in some corporate situations — Enron being one — and all of a sudden these guys were under great pressure to take riskier investments to show that return that they were promising and they got into some kind of accounting shenanigans.”

He explained that some unscrupulous corporate officers did all they could to hike stock prices to improve their own stock options.

“You had a number of bad actors involved in these things and, unfortunately, a lot of corporate America got unfairly painted with that same brush.” He told the Business Journal he’s prejudiced, but he doesn’t see that kind of thing happening among West Michigan business leaders.

In terms of his own firm, Manica doesn’t see the new tax law having much impact either on its consumer loan or mortgage loan businesses.

“The consumer loan business is pretty steady and I don’t see a huge up-tick in that. Our mortgage loan business has been very strong. If rates go up a bit, that actually may scale back.

“The other part of our business that has really — well, I don’t want to say ‘struggled,’ because it hasn’t, but it’s certainly not going through any kind of huge growth — is commercial lending.”

And that’s where the help is needed, he said.

“It’s in that commercial business where people borrow money to buy new machines, and software, new buildings, where service companies sprout up — all of that has just been barely keeping its nose above water.

“And that’s where that job creation comes from,” Manica said, “… all those new businesses and all those entrepreneurs. That’s why our economy is floundering around at 6.5 and almost 6.75 percent unemployed.

“That’s the number you have to get down.

“You start getting people back to work and it’s a double whammy effect, because as soon as unemployment starts going down and people perceive jobs, then the size of the job market picks up as a lot more people come back into the work force who had given up.”

The return of those job-hunters to the market makes it harder to bring unemployment numbers down, he said. “But it’s a better effect,” he added, “because more people actually are back at work than just the raw number that you’re looking at today tells you.”   

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