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LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
APRIL 12 , 2017
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In recent issues of IntelDigest, we have discussed the prospects for Tax Reform in America this year. We have touched on the initial proposals by Congressional Republicans, and the reasons that Tax Reform is so important at this point in American history.
Today, we will conclude this series with a discussion of the roadblocks and political obstacles which could inhibit comprehensive Tax Reform. To take the pessimistic view, the following factors are headwinds against real Tax Reform:
Shakiness of the New Administration
Contrariness of the Electorate
Dysfunction of Congress
Trump Administration
After the initial shock of the election, the stock markets began a surprising ascent, which has lasted through the first two months of the Trump Administration. Why? Primarily because many investors see Trump as a successful businessman, a “can-do” guy. They reason that having a Capitalist in charge, rather than a politician, would quickly bring about much lower business taxes and a leaner federal bureaucracy. It has been the Trump Bull Market.
Now, almost three months into his presidency, that confidence is ebbing. It looks less likely that the Administration will succeed in the single most important program on the agenda: Tax Reform.
We have expressed our viewpoint on two occasions in IntelDigest … the Trump White House has been inept and naive in its waste of political capital … issuing provocative executive orders and rushing into the hornet’s nest of healthcare … rather than beginning with the most important programs which can increase jobs and grow the economy.
How can people who ran a successful American presidential campaign be so maladroit in the area of governance? How can a candidate who seemingly “heard” the common man so well during the campaign, now be so tone-deaf to the legislators with whom he must craft vital legislation?
As a result, Trump’s First 100 Days will pass without any forward progress on the most important issues of the day. Investors’ initial enthusiasm is being tempered, and markets will settle back into a “wait-and-see” mode while the Administration tries to form a rational agenda.
The markets are hoping for a miracle-of-sorts from this Administration. If the year ends without significant tax and regulatory reforms … and a job-creating Infrastructure package … markets will have a sharp fall. The 2016 Trump Bull Market will morph into the 2017-18 Trump Bear Market.
The Contrary Voter
Whatever tax proposals will come down the pike … from either Congress or the Administration … Public Opinion is sure to be ardent and loud. How will that influence the legislative process? Will the public support tax increases or benefit cuts?
The Average American Voter wants two things from the government: less taxes, and more benefits! All too often the attitude is: Taxes are too high! I want to pay less. But, don’t touch my benefits! Or my family’s benefits!
In order to reduce the Debt, a Tax Reform package will have to include incentives to grow the economy, and reductions in government costs. The annual budget deficit has been running around $500 Billion. Where do you cut?
Consider the current costs of government in the United States. Healthcare costs over $1.1 Trillion. Social Security is another $1 Trillion. Entitlement programs for seniors and low-income families (food stamps, disability, affordable housing, earned-income tax credits, childcare tax credits, et al) add another $550 Billion. Defense spending is at $620 Billion.
Congress
Where to cut, indeed? The one constant trait of U.S. Members of Congress over the last few decades has been the universal abdication of duty … by both Republicans and Democrats … to control federal spending. The National Bank Account was briefly in surplus during the Clinton Administration; however, over the last 17 years, Congress has allowed the National Debt to run wild.
Who thinks that Congress will make the hard choices to balance the budget now?
Needs To Be Addressed
The country’s needs are many, and comprehensive Tax Reform is needed to address these needs:
The National Debt creates a drag on growth, so the Debt has be brought under control.
Medicare and Social Security expenses are going to rise inexorably over the next 20 years as the Baby Boomer generation grows older and requires more services. Unfunded liabilities in the $ Trillions will come due. Only an American economy running at high speed … enabled by a favorable tax system … will make it possible to meet those obligations.
Entitlement programs will need to be re-structured in order to extend their useful lives. Yes, that means reductions in benefits, raising eligibility ages, means-testing, et al.
Our Healthcare system has been distorted for at least three generations, and healthcare costs have been skyrocketing … at double-digit annual rates … for at least 35 years.
Americans need jobs.
The ratio of the tax-paying private sector vs. tax-consuming government sector must rise again to at least a 3-to-1 rate.
The purpose of Tax Reform is NOT JUST to collect enough taxes to pay for government services. The Tax System should provide motivation and incentive to American businesses to hire more workers and grow our economy.
Comprehensive Tax Reform … which could take several years to enact … could eventually address each of the needs listed above. Start with bringing the federal budget into balance through budget cuts and business-growth incentives enabled by changes in the tax code.
Change the corporate tax structure to put our businesses on an equal footing with international competitors; better yet, the U.S. tax code could make American businesses dominant, and encourage foreign businesses to headquarter here.
Tax Reform can play a role in extending the useful life of Social Security and Medicare.
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Tax Reform can encourage efficiencies in the delivery of healthcare so that costs can come down.
Tax Reform can enable greater Job Creation by allowing small businesses and entrepreneurs to keep more of what they make and to increase their savings.
And, it is incumbent on Congress to seriously and maturely address the balance between the cost of government and the extension of needed benefits. Congress has been “kicking the can down the road” for far too long … we are at the end of the road.
Later in the year, when the debates on Tax Reform begin in earnest, we’ll address these issues in more detail. And, we’ll look at some radical tax revisions which could be on the table by then.
As an example, consider the possibility of replacing income taxes with consumption taxes. Consumption taxes, such as the Value-Added Tax and the recently discussed Border Adjustment Tax, would be profoundly foreign to the American Taxpayer, but they may deserve a look.
The country is in need of investments which will create new jobs. One solution would be to STOP taxing savings and income, and begin to tax consumption. We have plenty of consumption; taxing it would produce more income, which would lead to increased consumption and more jobs.
In any event, we will come back to Tax Reform when the government starts to get serious about it. In the next few weeks, we’ll look back at the markets, and begin a discourse on the nature of Work in our American Economy.