Out-of-control tax receipts fringe
The below graph reflects the dramatic decline in US tax receipts as a percentage of gross domestic product (or GDP) since Bill Clinton left office in 2000. With historical tax receipts coming in at 18.1% of US GDP, current levels are catastrophically low. At 15.1 in 2009 and 2010, receipts haven’t been so low since 1950, at 14.4% (Tax Policy Center). This weak 1950 tax receipt data was simply the pullback from the post-War excess in investment, which passed very quickly, and was followed by strong growth momentum going into the 1960s. Even with 2012 tax rates picking up to 15.8% of GDP, you still have to go back to 1950 to find a lower figure. Make no mistake: this is the out-of-control fringe of tax collection data. Though Obama raised capital gains taxes from 15% to 20%, tax receipts hadn’t risen a full 1% in 2012, as the blue line below reflects. An additional 10% hike in capital gains could raise receipts from approximately 16% of GDP back to the historical average of closer to 18%, though it would be a matter of debate if such data would be due to an explosion of tax revenue or an implosion of GDP. This article examines the history of tax policy from Reagan to date, and considers the implications of past and present tax policy for US equity investors.
US tax history: Supply-side excess?
Tax Reform Act of 1981: Omnibus Budget Reconciliation Act
Tax Reform Act of 1986
1987 Balanced Budget and Emergency Deficit Control Reaffirmation Act
1990 Budget Enforcement Act
1993 Omnibus Budget Reconciliation Act
1997 Balanced Budget Taxpayer Relief Act: Clinton forced to repent prior tax hike
2001 Economic Growth and Tax Reconciliation Act
2003 Jobs and Growth Tax Reconciliation Act
2008 Emergency Economic Stabilization Act
2009 American Recovery and Reinvestment Act
A pair of star cross’d lovers take their life…
While tax revenues remain low, the budget battle rages on in Washington, with Democrats pursuing the Keynesian solution of stimulative spending, and the Republicans looking for equal and offsetting cuts, and a long-term debt reduction plan.
Kudlow: Spending cuts with real teeth
Larry Kudlow recently commented that the Simpson-Bowles deficit commission recommended $1 trillion in cuts over ten years, though expects that the Democrats will likely not even agree to a $20 billion-per-year reduction. If a deficit spending rule with “real teeth” can’t be created, then, “why not shut down the government?” It’s likely that “real teeth” would take a fatal bite out of Obamacare, which Robert Reich would consider policy suicide—standing in contrast to Larry Kudlow’s view of Robert Reich’s Keynesian solution: economic suicide.
Reich: I see poor people
As Robert Reich makes clear, the Republicans are bullies, just like the ones who took his Davy Crockett Cap and baseball bat in grade school. Reich strongly urges the Obama Administration to stand firm on Obamacare, and to allow the Keynesian solution to heal the damage done by too much deregulation in the financial sector, and Kudlow’s “free market capitalism.” Yes, Reich would agree that Kudlow’s free market capitalism is in fact the “best way to prosperity in America”—though Reich would argue, the best way for whom? Probably not for the people who needed Obamacare so badly that on its first day available to the public, the computer servers shut down due to astronomical demand. Apparently, that was not Chinese hackers. That was poor people (according to Edward Snowden, and Julian Assange)
Duel in Central Park?
If the budget deficit and Obamacare grudges are the focal points of this ideological dispute, it would appear from the posturing of both Kudlow and Reich that both men were ready for a duel in Central Park, or in Weehawken, as in the case of Alexander Hamilton and Aaron Burr. It’s unlikely that Larry Kudlow would take a plane to San Francisco, and he wouldn’t risk being caught dead in Berkeley.
Shutdown investing: Outlook
Should Congress and the President fail to make progress on budget discussions, investors may wish to consider limiting excessive exposure to the US domestic economy, as reflected more completely in the iShares Russell 2000 Index (IWM). Alternatively, investors may wish to consider shifting equity exposure to more defensive consumer staples–related shares, as reflected in the iShares Russell 1000 Value Index (IWD). Plus, even the global blue chip shares in the S&P 500 or Dow Jones could come under pressure in a rising interest rate environment accompanied by sequester-driven declines in consumption, investment, and economic growth. So investors may exercise greater caution when investing in the State Street Global Advisors S&P 500 SPDR (SPY), Blackrock iShares S&P 500 Index (IVV), or the State Street Global Advisors Dow Jones SPDR (DIA) ETFs. Until consumption, investment, and GDP start to show greater signs of self-sustained growth, investors may wish to exercise caution, and consider value and defensive sectors for investment.
Interested in IWM? Receive notifications on the latest research and sign up for a Market Realist account in one simple step: