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Investment Perspective: Spending and Tax Cuts

| February 23, 2017
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Spending and Tax Cuts

            Out of all of President Trump’s proposals, the one that should help the economy the most is corporate tax reform. Typically, corporate profits are subject to two layers of tax: first, when the company earns the money; second, when that same money flows to shareholders in the form of dividends or capital gains. For example, $1.00 of pre-tax profits is reduced to 65 cents at the corporate level and then to 49.5 cents if the profits are distributed to high-earning taxpayers. In effect, these earnings face an effective tax rate of just over 50% (not even considering state income taxes)

Additionally, investors need to watch government spending. Every dollar the government spends ultimately has to be paid for by taxpayers, either through taxes today or debt, which simply obligates future taxpayers. Spending hit a 30+ year low in 2000 at 17.6% of GDP. Now federal spending is at 20.9%. The heavier load of government, as an overweight jockey, weighs down the private sector and prevents it from moving faster.

Back in the 1980s, President Reagan not only cut taxes but cut spending relative to GDP as well. President Clinton also cut spending. By contrast, spending went up during the presidencies of both Bushes and under President Obama as well.

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