Now is Not the Time to Raise Taxes
In our current micro-managed economic world, one might argue that higher taxes are just what the doctor ordered—an antidote to a potentially emerging inflationary time bomb.
Raising taxes now would certainly slow economic activity and, in doing so, could alleviate upward pressure on prices. However, in my opinion (as I will explain later), raising taxes now would be a monumental mistake.
Why are we talking about increasing taxes?
We’re all too aware that the political differences amongst Americans have devolved from simple disagreements. We find ourselves in a situation where opposing sides now vilify the other in ways that shut down all civil conversation.
For professional services firms like Nicollet, this state of affairs is particularly problematic. Although what we do for our clients is apolitical, expressing an opinion can alienate half our clients who see things differently.
This is less an issue in matters surrounding our financial planning work for clients. Financial planning is genuinely devoid of judgments shaped by political opinion, instead relying on knowledge and perspective that transcends the political.
However, in managing money and investing, we must assess the impact of political decisions. How does a policy impact the markets? How does it affect the prospects for individual investments? In matters of investing, political decisions are all too often a critical component in the outlook. We have to have an opinion.
But here is where I want to draw a distinction. In this era of polarization, many issues discussed as political are not; they are economical. Unfortunately, we can no longer debate them as economic issues because they have become interwoven into specific political narratives.
This was not always the case. John Kennedy was able to champion tax cuts as a means to stimulate economic growth as a Democrat. As a Republican, Richard Nixon was able to impose price controls on businesses to combat inflation. George Bush (the elder) agreed to tax increases to help reach a budget compromise with the Democrats in Congress. Bill Clinton could sign on to Welfare reforms as well as tax cuts.
Neither party would tolerate these positions in today’s America; the lines have become too rigidly drawn.
So why do I broach this topic? Because I am concerned.
I look at the world through an economic filter. I believe the primary goal of monetary policy should be robust growth, as it’s only through economic growth that everyone’s wellbeing is improved. I try to be open-minded about economic policies and recognize that my opinion doesn’t matter. What matters is what works to create robust growth.
With this in mind, I will stick my neck out and express an opinion: increasing income taxes, capital gains, and estate taxes, whether on corporations or individuals, is a bad idea and counter-productive to all the goals we share as Americans.
The Administration’s goal is to walk back the tax cuts passed in 2017. Their narrative appeals to their base because it is discussed in language surrounding fairness. I don’t render a judgment on that, instead looking at the 2017 tax cuts and their positive effect on a host of economic outcomes we all value.
On the corporate side, the tax cuts of 2017 finally leveled the playing field for U.S.-based corporations competing in a world economy. The immediate impact of those cuts accomplished goals shared by both sides of the political spectrum.
We saw an end to U.S. companies relocating their headquarters to other countries. Under the new rules, it no longer made sense. No major corporation has moved overseas since the tax cuts were enacted.
We saw an end to companies holding cash earned overseas outside of the U.S. It was no longer onerous to bring foreign earnings back into the U.S. Companies that wanted to invest in their U.S. operations could now use foreign earnings without penalty.
The longer-term implications of the 2017 tax cuts are not yet realized. I’d contend that we have the potential for a multi-year period of robust growth simply based on the investment that followed those tax cuts.
In my opinion, if we raise taxes now, we eliminate that tailwind of growth. Raise them too high, and we’ll start seeing companies move their operations overseas again. Foreign earnings will once again be invested in overseas operations. Raise corporate taxes, and we will slow economic growth.
As for personal income taxes, the 2017 tax rules ushered in a period of simplicity to the tax code. Most Americans no longer itemized deductions; the higher standard deduction greatly simplified tax preparation. Lower rates benefited lower-wage earners far more than higher-wage earners. Taxpayers did not pay high tax rates until their incomes reached relatively comfortable levels.
Today’s economy is very robust. The main tailwind to growth today is a result of reopening. As we come out of the pandemic-induced shut-downs, economic activity is strong.
However, by early next year, the post-pandemic growth will wane. What will be the catalyst for growth then? If we leave income tax rates alone, I believe the tailwind of the 2017 tax cuts will sustain good economic growth. I worry that an increase in taxes now will put growth at risk as we get to 2022.
Now is not the time to raise taxes; it’s the time to encourage investment for the future. Doing so will help growth, wages, and general wealth, as we’ve learned from the past.
In the words of JFK, “an economy hampered by restrictive tax rates will never produce enough revenue to balance the budget, just as it will never produce enough jobs or enough profits.”
Should tax increases be implemented, we will reassess all our investments and suggest you do the same.
If you would like to discuss this, please give me a call.