By Alexander Green Investment analysts – including me – have cited all sorts of reasons for this year’s big move in stocks: low inflation, rock-bottom interest rates, globally synchronized growth, an accommodative Fed, cheap energy and rising corporate profits, to name just a few.
But in recent weeks, the market has rallied on something else: the prospect of tax reform.
I’m too much of a skeptic – or a cynic – to believe that the bill that eventually gets signed into law will be all it should be: a vastly simpler code with flat rates and minimal deductions.
But anything that moves us in that direction is a plus – and the market knows it. Hence the Dow’s 1,000-plus-point move over the past month.
Why are lower rates such a powerful tonic?
Because they generate more investment, greater productivity and higher wages. They promote economic well-being.
When JFK cut taxes in the 1960s, the economy boomed. When Ronald Reagan slashed them further in the ‘80s, it unleashed one of the strongest and lengthiest economic expansions on record.
We have a tax laboratory within the 50 states, too. Overwhelmingly, businesses and individuals are moving from high-tax states to lower-tax ones.
Texas is a good example. With no state income tax, it created more jobs from 2003 to 2013 than all the other 49 states combined.
The same principle holds true overseas. Countries with lower, simpler tax rates generally enjoy stronger growth and greater prosperity.
And the biggest winner is the middle class. They get more jobs and higher pay.
Since 2013, for example, the 10 developed countries with the lowest tax rates have experienced far greater wage growth than those with the highest.
Yet as Republicans unveil their tax proposal, expect to hear cannonades from the far left – along with the usual class warfare rhetoric.
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Unperturbed by the fact that our top corporate tax rate is the highest in the developed world – more than 10 percentage points higher than the median among members of the Organisation for Economic Co-operation and Development (OECD) – Senator Elizabeth Warren is already squawking about “tax cuts for the rich.”
Senator Chuck Schumer referred to tax reform – even before any specifics were known – as “fake math.”
And we will soon see the usual ground war between economists and think tanks on the right claiming that tax cuts are the solution to all our problems and economists and think tanks on the left claiming that they are unfair and counterproductive.
But rather than listening to all the economic sophistry, let’s rely on common sense.
Would a cut in the corporate tax rate make it more or less attractive for a foreign business to move to the United States or expand operations here?
Would it make it more or less likely that U.S. companies would repatriate their foreign earnings and put them to work in the domestic economy?
Would it give businesses more or less money to spend on factories, distribution centers, stores, equipment, technology, employees and wages?
This is not rocket science.
Lower taxes are an incentive. Higher taxes are a disincentive. To argue otherwise is to …read more
Source:: Investment You
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