Real Answers to Stimulate Our Economy
With President-elect Obama proposing that our economy is in diar need of a $700+ billion stimulus package. Our thoughts turn back to what we discussed in our year-end client letter. The thought of combatting this deepening recession that came as a result of having too much debt by borrowing even more…in our opinion, to get ourselves out of this slump by doing more of the same seems ludicrous! I once heard the definition of insanity is doing the same thing over and over expecting different results.
Over the weekend we read an excellent article in the January 12th, 2008 Barrons publication on page 41 titled “Stimulus for the 21st Century” written by Bryan Taylor. We felt his salient points were worthy of note.
Mr. Taylor says: “…the economy needs real change now. The best course is to promote growth and recovery by permanently removing taxes on business, particularly through the elimination of tariffs and the corporate income tax.”
What effect would this have? Well, first tariffs and corporate income taxes generate approx. $26 billion and $229 billion a year respectively. This is a lot of money that we would have to forfeit you might ask…but in reality it would be recouped very quickly by the effect of having these barriers removed. The U.S. government created more problems during the Great Depression of the 1930’s when it passed the Smoot-Hawley Tariff Act in 1930. And it seems to us that Washington could be traveling down the same misguided path again by adding to the problems as opposed to resolving them. Mr. Taylor suggests eliminating all tariffs which in turn would promote global trade and competition and bulster the U.S. economy and other world economies.
Our corporate income tax of 34% used to be the lowest, however, since 1986 that tax bracket now is one of the highest across the globe. While the rest of the world has lowered this tax, the U.S. has dug it’s heels like a stubborn mule and has been unrelenting as far as reducing this tax. Mr. Taylor highlights the fact that businesses view this tax as a cost of doing business in the United States and merely passes this cost onto the consumer, in other words, the consumer pays the taxes and not the businesses (of course, how much of the tax burden is passed onto the consumer would be different in each case depending upon the elasticity of each product).
In addition, the Bush tax cuts are due to expire in 2010, which would make up most of the lost $229 corporate tax revenues. With less taxes or costs for businesses, these corporate savings could be passed onto the consumer in the form of lower prices, higher wages, and as the economy begins to grow again, job growth will again be on the rise. At 0%, the U.S. would have the lowest corporate tax rate globally. This will naturally attract foreign and U.S. firms to invest in the United States bolstering up the economy and putting it back on track for prosperity and growth.
As Washington debates over the size of it’s stimulus bills, it would do well to remember the importance of stimulating the economy, not the government. It’s time for real solutions and eliminating tariffs and the corporate income tax should be the first steps this new administration undertakes. So on the eve of No.44 arriving at the oval office, let us remember the visionary financier, Spencer Trask’s motto: “Acts, not words.”
Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.