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The US Tax System Must Change

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An interview with George J. Schultze of Schultze Asset Management.

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Now that President Obama has been reelected, Wall Street is weary of the future. How will the financial sector respond? When will it fully recover? Will the election results embolden regulators and inspire a greater degree of oversight? Will the president introduce new forms of regulation?

While there are many questions that will continue to go unanswered for some time, there is one that financial professionals can scratch off their list.

"I don't know that I necessarily expect much more regulation for the hedge fund industry," George J. Schultze, Managing Member and Founder of Schultze Asset Management, LLC, told StreetID. "And the fact that [President Obama] signed the JOBS Act indicates that maybe he's moving a little bit more toward the center in terms of regulation and trying to create jobs in the United States and maybe back off a little bit on the financial sector."

If Obama doesn't, Schultze -- who authored the book The Art of Vulture Investing: Adventures in Distressed Securities Management -- said that there is going to be "some more stalemates and gridlocks in Washington."

"The past year has been pretty difficult with his inability to function normally with the government nearly hitting its debt limit and the fiscal cliff coming up and scaring everybody, and the US government getting downgraded for the first time in history," said Schultze. "I think if he doesn't try and come to the center more, we may be facing some bigger problems."

To improve the financial sector -- as well as the entire US economy -- Schultze believes that the tax system must change.

"Capital tends to move more quickly when it has less confidence in certain regions or is worried about the outlook for certain regions," said Schultze. "I think most people would agree that the US federal government budget deficit is looking pretty bleak right now, and the outlook is looking pretty uncertain."

Schultze is concerned that if "we don't fix this situation sometime in the near future," more capital will head overseas. "And that's troubling not just for hedge funds but for the entire economy," he said. "I think it's causing lower consumer confidence and also causing weakness in the equity market.

"In the last year or year and a half, the Federal Reserve Bank of the U.S. has bought most of the issuance of new treasury paper. So it's a really uncertain time and an uneasy situation that we're in. Rates are low but they're very much subsidized by the federal government through the Federal Reserve Bank and through quantitative easing."

Schultze argues that the US tax code "makes US companies uncompetitive."

"I think you can say the same thing for the US income tax code," he said. "Our corporate rates are higher than most other countries around the world. I think that because of that, when they can, businesses try to relocate out of the US And you've seen that in a big way with manufacturing in the past couple decades. Companies have moved not just because of cheaper corporate tax rates but also because of less regulation and less need to pay the same kinds of benefits that we promise our workers onshore."

Many Wall Street firms and organizations wholly support regulation that is smart, efficient and not overly burdensome. But when imposed too harshly, regulations can have serious consequences.

"I think it's sort of a race to the bottom," Schultze added. "You start increasing taxes more and more and fewer and fewer new businesses get started. You can make the argument -- and I think it's a legitimate one -- that it becomes a slippery slope, and then before you know it you're on the way to becoming more like France, or in the worst-case Greece, where basically the only people that want to stay are the ones who are illiterate or don't have the ability to leave. I think it causes a brain drain. I think it causes an investment drain."

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