Sunday, April 30, 2017

To Tax, or Not to Tax? Is That Really the Question?

When tax reform is discussed, it is usually in terms of who gets a new tax cut and who loses a tax subsidy. This time around, individual taxes are (sort of) on the table. Looked at from an isolationist viewpoint, both individual and corporate taxes should be susceptible to increase or decrease going into the negotiation, as the end-goal in any tax reform debate in the US at this point, should be to increase revenue. But more realistically, in a globalized world only one of the two tax bases are mobile.

With that guiding principle, an ideal tax reform proposal should include both individual and corporate tax rates being realigned with the times. No politician wants to stand on the platform of higher taxes, so maybe America’s first non-politician president might want to give it a try. Point blank, individual tax rates in this country need to go up. Yes, people will complain, but the ones that use more of the services will be right here paying their taxes. Corporate tax rates on the other hand need to be lowered to bring them in line with other developed economies. The goal is to incentivize multinational and international businesses to setup shop in the US. An ideal outcome would be to see a reversal of the corporate tax inversion trend in the US, and eventually to see foreign companies inverting to be domiciled in the US.

The primary objective of corporate tax policy in the US is to drive private sector spending of cash that would otherwise be held and/or spent outside the country. To do this, companies need to be incentivized, and the path of least resistance for spending and investing for large multinational companies is the lowest tax rate jurisdiction. The potential for a net shortfall in corporate tax revenue should be outweighed by the potential social benefit of a sustained increase in both domestic and foreign corporate spending within the United States. Paired with an increase in individual income tax revenue, the social benefit from increased private sector spending should put marginally less strain on the Federal government budget.

Of course, no conversation about US tax reform is complete without at minimum a mention of entitlement spending. Lowing corporate tax rates and even increasing individual tax rates short of draconian levels will at best have a marginal effect on the overall fiscal position of the US Federal government. Real, tangible efficacy does not come into play until you start pairing net tax rate increases with decreases in entitlement spending. Not just cosmetic cuts, but deep slashes in social security and medicare spending. The burden will inevitably fall onto the states which would have to in-turn increase tax rates to cover the additional costs of providing social safety nets.

Private sector spending in increasing productivity needs to be met with a better educated, more flexible workforce. Which again the burden falls on the Federal and state governments to bolster the education system. There aren’t two ways about it, tax rates need to be increased in the United States. Of tax rates in general, individual tax rates need to be increased on a disproportionate scale to corporate tax rates, which need to be decreased to become more competitive on a globalized stage. This is a tall order for even the most agile, and well-versed politician, damn near impossible for someone relying on on-the-job-training. On the other hand, maybe this is the one time in American political history that the motives of a self-serving businessman align with what is best for the country. After-all, despite being the richest person to every run for President of the United States, Donald Trump managed to be most relatable to some of the poorer parts of American society. Good luck Mr. President.

Tuesday, April 11, 2017

New Equilibria

It's spring time and all the usual signs are there. The weather, the people, the animals, but somehow this year feels different. The efforts of previous years simply just do not yield as much as they once did, and that's OK. This does not signify a need for retrenchment, but rather a need for exploration and evolution. The way forward, should always be forward. Globally, financial economics and the markets it studies are in a state of uncertainty, and again, that's OK. This is a time for new equilibria to be achieved, and in the process, there will inevitably be winners and there will be losers. The social responsibility of any organized economic area is to further the wellbeing of its inhabitants, this can especially be said for the afore mentioned losers. In the current environment, long standing trends are becoming more ambiguous, and this should be viewed as an opportunity. The opportunity is finding intrinsic value within the cluttered noise of markets, and market prices.