InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
DECEMBER 7 , 2016
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
This week in IntelDigest, we discuss various policy proposals for the consideration of the incoming administration.
Before getting to policy matters, we’d like to start with a brief discussion of the markets, which we will cover in more detail next week. However, a monetary event will likely take place next Wednesday before our weekly issue is published; that event could have a significant impact on the markets.
Equities have been surging since Election Day, on the expectation that a Trump presidency will be good for business … less regulation, lower taxes, and Billions of Dollars in infrastructure spending by the government.
The Trump election rally would normally feed into a December “Santa Claus Rally” lasting into January. And, it may still do so. However, we have stated on several occasions that we expect The Federal Reserve to raise short-term interest rates in December, and we still believe so. The Federal Open Market Committee meets next week, and will likely announce a rate hike next Wednesday.
One year ago, a Fed hike of 25 basis points (1/4 of 1%) led to an 11% fall in equities over the following two months. Now, there were other monetary events happening at that time (a Chinese devaluation of the Yuan, for example) which also impacted the markets.
However, a prudent investor may reasonably determine that cashing-in some profits before The Fed rate hike next week is justified.
The Starting Point
To set the stage for policy recommendations, we must establish the overriding truth which the new administration MUST face when it takes office. The U.S. national debt will likely stand at approximately 20 Trillion Dollars as of Inauguration Day. Combined state and local government debt will be at least 3 Trillion Dollars.
Therefore, total government debt in the United States will be north of 23 Trillion Dollars. Gross Domestic Product of the U.S. will barely reach 19 Trillion Dollars by the end of this year. So, the U.S. debt-to-GDP ratio will be over 121%.
The new administration MUST prioritize getting the national debt and annual deficit under control. It doesn’t have to be done immediately; the process can stretch over several years or even a decade. But, there must be a process in place to show The American People that this dangerous situation is being addressed.
This will require a committed President and Congress to work together to craft budget compromises, government reorganization, deficit reduction, balanced budgets, and reform of both entitlement programs and the culture of the military. All of these approaches will be necessary to avoid a fiscal disaster which awaits us because of mismanagement … by both Republicans and Democrats, in both The Congress and the Presidential Administrations … over the last 16 years.
Allowing the Debt to grow further will just make it harder for our economy to grow out of the problem. Since the Financial Panic of 2008, the American economy has been growing at a rate of 2% per year (after inflation); but, the Debt increase has grown at DOUBLE the rate of the economy! These trends must be reversed, at minimum.
A New Culture
The basic goal is to find a process which will provide for the financial needs of the country while also putting the federal budget on the road to being balanced. We have been (justifiably) extremely critical of Congress in these weekly letters. We believe that the esteemed Members of Congress who have served over the course of the last two presidencies have totally abdicated their responsibility in managing the budget. They have consistently put partisan agendas, special interests, and their own “sacred cows” ahead of crafting fair and balanced federal budgets.
The new President and Congress must agree that reduction of the national debt is an undeniable Priority, as is fiscal responsibility in every annual budget and proposed law. Achieving debt reduction may require increased tax revenue; it certainly requires decreases in federal spending … in all departments, including the Pentagon.
So, considering that taxpayers WANT THE GOVERNMENT TO SPEND in order to provide healthcare and Social Security benefits and other necessary government services, such as defense. And, considering that we have the large Baby Boom generation entering retirement years. And, considering that growing the economy out of our Debt problems would be extremely difficult … after all, unlike the 1980s, we don’t have low stock prices and low market capitalizations and a falling interest rate environment and favorable demographics to facilitate the process.
A new “corporate culture” is needed in governing, both in terms of management processes and government policies. It’s time to go bold and innovative, and completely re-make the fiscal side of government.
What Steps to Take?
Considering only those areas which come under the financial and economic bailiwick of IntelDigest, we propose the following;
1. Corporate Tax Reform
Reduce corporate income taxes – either to a flat percentage for all businesses (perhaps 15%), or a progressive tax schedule that tops out at 20%
Allow a lower tax rate (perhaps 10%) for cash repatriated from foreign shores
Eliminate most deductions, credits, net operating losses, et al, to eliminate loopholes and other financial planning mischief
By significantly reforming the corporate tax process, companies should all pay their fair share of income taxes. By lowering corporate tax rates (from the current top rate of 35%) … i.e., emulating competitive countries such as Ireland … this would provide incentive to multinational companies to keep, or move, their operations to the United States. This would mean more jobs, in both manufacturing and services, in the U.S. Even with lowered rates, corporate tax receipts by the government should be higher in the first year, and grow as more companies re-locate to our shores from year to year.
2. Social Security and Medicare Reform
Reform Social Security Eligibility – including, raising retirement age to a minimum of age 70
Raise the taxable wage base on Social Security taxes so that more higher-paid employees are paying into the system
Government insurance and healthcare systems must be allowed to use their bulk buying power to negotiate lower costs on all drugs, devices, and medical services
When Social Security was instituted in the 1930s, average life expectancy was less than 65 years. Since the origins of the program, average life expectancy has increased by at least 20 years, but little has been done to change the retirement age. That has to change immediately in order to save and extend the retirement system.
Retirement and healthcare are the most expensive parts of the federal budget, and costs continue to skyrocket. The President and Congress will either have to find ways to find ever-increasing funding for these programs, or reform the programs themselves so that they become less of a drain on the economy. And, they will have to stand up to the “special interests” (pharmaceutical and other healthcare companies, insurers, et al) and their lobbyists.
We have seen a proposal to eliminate the existing taxes which provide for Social Security and Medicare, and replace the funding scheme with a 15% Value-Added Tax dedicated to all retirement and healthcare. Although an interesting idea, VAT tax schemes are highly regressive; we would improve the existing system.
3. Infrastructure Programs
Encourage local and municipal governments to undertake infrastructure improvements and capital construction in their local areas, utilizing local labor and public/private partnerships
Establish a new type of Infrastructure Bond – federal government guarantee, interest rate equivalent to 30-year Treasury Bonds – to support the local projects
Federal program (like the federal highway system) to build out national projects
Most infrastructure projects are inherently local, such as roads, bridges, water systems . These should be handled locally, with little interference from the federal and state government. Some projects are more regional, such as ports and airports, and may require state or multi-state action.
Then there are truly national infrastructure projects, such as establishing a coordinated electrical grid. This country should have a technologically-advanced, EMP-hardened, secure SmartGrid.
General (Common Sense) Rules of Governing
Finally, here are two rules to apply to all levels of government:
Compliance — All levels of government (federal, state, and municipal) must comply with all laws promulgated by their legislatures … retroactive application to laws already on the books. There will be no more regulations on citizens or businesses unless the government (including the legislature) is required to comply equally.
Congressional Legislation — Before the House or Senate can vote on a bill, the members must have a minimum amount of time to read and consider its provisions … let’s say a legislator has to have one day for every page of the legislation. Perhaps this would eliminate legislation of several hundred pages being rammed through Congress in 24 hours!
This list is a cursory first attempt to “think outside the box” … to consider alternative methods of governing and changing the culture of government. We welcome input from our clients and colleagues … what would you do to improve government? We will have more suggestions … and will reprint your comments … in future issues.