SUMMARY
- Call it stagnation, stagflation, or ordinary performance, there are reasons economic growth has moderated including demographics, declining productivity, low savings, low investment, erosion of the middle class, devastating recessions, automation leading to slow job growth, and high debt levels.
- The need to reform international tax codes is recognized by the OECD and WTO and is an evolving process. Corporate tax reform will be beneficial to “adjust” for the U.S. tax system being based on income and the most of the rest of the world relying more on consumption (VAT) taxes. Tax reform may increase revenues by reducing the incentives to seek tax havens.
- High social entitlements and benefits enacted during periods of high growth cannot be supported during periods of slow growth.
- Reducing top tax rates and capital gains taxes will continue to benefit the wealthy more than the middle class, but will increase investment in the U.S. and reduce tax evasion.
- The trade imbalance is largely the result of low savings and capital flows and their impact on exchange rates. “Fair” trade is beneficial to the U.S. economy and to U.S. firms.
- The current reforms and stimulus are likely to provide a temporary boost to the economy, but long-term growth of 4% is highly unlikely.
INTRODUCTION
This article looks at two topics covered on the White House website: improving employment and economic growth through tax reform and renegotiating trade. I first look at the impact of high valuations on future returns, why economic growth has slowed over the past several decades, that entitlements set in motion during high growth periods are unsustainable during slow growth, the direction and impact of debt, why companies are moving abroad, the impact of tax reform and fiscal stimulus, the importance of trade, and likely reforms.
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