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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
MARCH 29 , 2017
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Before we continue a discussion of Tax Reform here in IntelDigest, we’d like to offer a sobering assessment from David Stockman. You will recall that Stockman was the budget chief in the Reagan Administration, who often found himself at odds with the Republican establishment. After government service, he spent two decades on Wall Street, and is now a raconteur and contrarian pundit.
Stockman’s opinions on the state of things:
“There is no Republican “majority” on Capitol Hill. There’s only a gang of factions that will form a circular firing squad around President Trump. The Republicans will bring Trump’s legislative agenda to a thundering halt before it even gets launched.
“The immediate case in point is the campaign pledge that Obamacare would be subject to “repeal and replace” within days of the inauguration. That didn’t happen. And it’s not going to happen within these vaunted first 100 days. Or even this year or next. Instead, the so-called Republican majority will splinter. They’ll bog down the legislative process in prolonged maneuvering and wrangling ….
“The plain truth is that if Ronald Reagan couldn’t drain the swamp way back then, how in the world can Donald Trump do it now, after 36 years of massive growth in government and debt?
“The implications for the Great Disrupter could not be any clearer. His predecessors have used up the nation’s public balance sheet …. Reagan inherited a debt-to-GDP ratio of 30%. He had wide-open space to accidentally implement giant deficits. But Donald Trump has no running room at all with debt-to-GDP at 106%.”
We are not as pessimistic as Stockman; but, it is important that Our Leaders address all these matters. For our part, we will continue to focus on issues of economics, finance, law, and policy on a weekly basis in IntelDigest.
The Republican Plan – A Better Way?
Last week, we set out the Tax Reform proposals of the House Republicans, as published by House Speaker Paul Ryan in a document titled “A Better Way.” If Congress can form a consensus over many of the business-related incentives contained in that plan, we can be encouraged that Tax Reform can contribute to kick-starting the economy. Tax Reform actually has the interest of Congresspersons across the political spectrum, so (unlike healthcare) there is a much better prospect of garnering enough Democrats and Republicans to pass a Tax Reform Bill.
We have deliberately not addressed a much-discussed feature of the Republican plan, the proposed Border Adjustment Tax (BAT) … primarily because the chance of adopting this provision is slim. If its chances improve markedly over the next few months, we will analyze the proposal and the underlying reasons for it.
Today, we discuss WHY Tax Reform is important. Over the coming weeks, we will study matters which relate to American Taxation, such as the state of Work (Employment) in the U.S., the size of government, budget deficits, etc. For today, we reduce the question to one simple truth.
The Importance of Tax Reform in 2017
Success at passing Tax Reform this year could set the tone and direction of the U.S. economy for years to come. A comprehensive package … reached by consensus in the Congress … will affect jobs and healthcare, as well as taxes and the economy.
Here is an essential argument for lowering taxes:
Spending by governments in the United States … federal, state, local … now amounts to 35% of the American Economy! Governments provide a small amount of their own support. They rely on taxes paid by the private sector. In past decades, the private sector comprised 80% of the economy, so it was four times the size of the government. Now, the private sector is barely two times the size of government.
Every private Dollar which goes to paying taxes and supporting the government is a Dollar that cannot be invested in new businesses or creating new jobs. On the other hand, greater tax-saving by Americans who are capable of re-injecting those savings into U.S. businesses is a boost to the U.S. Economy.
Capital feeds entrepreneurial activity, which is the biggest creator of new jobs in the United States. If lower taxation frees up more Capital to create more jobs, that is a good thing.
This is why Tax Reform is so important. We are at a Tipping Point. Over the last 40 years, under both Republican and Democratic Administrations, the size of government has grown relentlessly, putting greater burdens on taxpayers. And the National Debt has exploded over the last seventeen years.
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!
We need the Economy to grow faster than the Debt, and growth in the Economy … like the growth in employment … comes primarily from the entrepreneurs and other business owners who put Capital to work every day.
If Tax Reform can release more Capital into the Economy, allowing businesses to grow and create the jobs of the future, we have a much better chance of working our way out of the hole which our politicians have dug over these last few decades.