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Just What Problem Are We Trying To Solve?                                                   Join our Monthly Newsletter                December 2020                                                                                              

Mark R. Hoffman

CEO, Principal



 Last month, my partner Trip Beaver wrote about Federal tax increases and the overhanging debt bomb in the US. For sure, record Federal tax expenditures must be paid for by something, and there are only two options: taxes and/or debt. Trip outlined the potential sources of tax increases under president-elect Joe Biden’s plan. We hope that got everyone thinking. Can those planned increases help solve our problem? I guess that depends on what problem you’re trying to solve.

To understand the implications of Biden’s proposed plan, I went to the most impartial source I could find: The Tax Foundation. The Tax Foundation is a non-profit started in 1937 with a mission to “educate taxpayers about sound tax policy and the size of the tax burden borne by Americans.” Of all the analysis and data that is published by the Foundation, I found myself focused in on two data tables. The first shows the distributional effect on after-tax income levels of Biden’s tax plan – by income group:

                               

The second shows the economic effect of the plan (long-run change in GDP) – by provision and in total:

                                  

There is a lot to unpack here. I could make 100 observations, but instead I’ll make just four:

  1. In the short-term (2021), Biden’s tax plan will increase after-tax income levels for the bottom 90% of earners in the US and decrease after-tax income levels for the top 10%. By far the largest increase in income levels would be the lowest earning quintile. I asked earlier, will this help solve our problems? If the problem you’re trying to solve is income inequality, this plan certainly aims to do that by increasing the tax burden in the upper income brackets and decreasing it in the lower brackets.
  2. One of the effects of the proposed changes is that overall after-tax income levels will decrease 1.2% in the short-term and 1.9% in the long-term. (I’m using the “Conventional” column data not the “Dynamic,” as the Dynamic view incorporates a heavy dose of assumptions and judgement).
  3. The short-term income increases at the lower end of the range fade over time as some of Biden’s programs expire (primarily driven by the temporary expansion of the Child Tax Credit provision). And in fact, the 2030 change at all ranges of income is negative.
  4. Finally, on the second table, I cannot help but observe the negative effect on long-term GDP of each of the provisions listed. Taken in total, The Tax Foundation estimates that these tax revisions would decrease US GDP by 1.62% per year. That is a huge percentage of the total desired (and required) GDP growth rate of 2%+. I don’t pretend to have all the answers, but I do know that if our spending is outpacing our tax receipts, the only way to solve the problem is through growth. And saddling that growth (that isn’t what it used to be) with an additional 1.62% burden/year is going to make things very, very difficult.

Sadly, there are no easy answers here. But what I observe in this tax plan looks like the rebound in the US economy is going to take a while. Maybe a long while.


Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.


November 2020: Federal Tax Revenues and the Debt Bomb (Continued)

October 2020: The Forever Growing Debt Bomb

September 2020: Are We Out of the Woods?

August 2020: COVID-19's Potential Impact to Deficits

July 2020: Random Musings in Our Random New World

June 2020: Does Anything About This Feel Normal To You?

May 2020: Can the Rebound Last?

April 2020: The Big Bear of Q1 2020

March 2020:  Where's the Bottom?

March 2020: A Perspective on Crises

March 2020: Is there Any Good News Out There?

February 2020: Is Diversification Dead?

January 2020: The Roaring (or Boring?) 20's Are Here!

December 2019: Providing 'Alpha,' The Holy Grail of Investing

November 2019: The Search for Yield: Chapter 2

October 2019: Given the Current Rate Environment, How Has the Search for Yield Changed?

September 2019: What is the State of your State?

August 2019: Volatility is back, but is it the end of the world?

July 2019: Is This the Year 2000 All Over Again?

June 2019: Concerns of an Economic Slowdown?

May 2019: Benefits of Hedge Fund Investing

April 2019: Yet Another Burden On The US Economy

March 2019: Capitalism vs. Socialism: The Debate is Alive and Well

February 2019: What Are the Most Important Factors for Investing in a 401k Plan?

January 2019: A Look Back and a Look Ahead

December 2018: The Inverted Yield Curve - In Layman's Terms

November 2018: A False Sense of Security

October 2018: Reflections From Over Four Decades

September 2018: A Decade of Assisted Recovery

August 2018: The Entitlements Train Wreck - Possible Solutions?

July 2018: Is Wage Growth In This Country Improving Over Time?

June 2018: The Impact of Corporate Tax Reform

May 2018: Kentucky Derby Talks - Bulls vs. Bears

April 2018: How Much Longer Can Interest Rates Stay So Low?

March 2018: Policies For Economic Growth

February 2018: Volatility

January 2018: So What's In Store For 2018?

December 2017: Tax Cuts and Jobs Act: Good or Bad for Me? It Depends.

November 2017: Whack-A-Mole - D.C. Style

October 2017: Should You Consider a Robo-Advisor?

September 2017: Alternative Investments - What and Why?

August 2017: The QT Quandary

July 2017: Quality of Life Influencers (Cont'd)

June 2017: Quality of Life Influencers

May 2017: Repatriation Myths and Realities

April 2017: Time to Invest in International Equities?  Let's Take a Look...

March 2017: Valuation - A History Lesson

February 2017: The Prince of Darkness

January 2017: Mountains of Debt - Does it Matter Anymore?

December 2016: Trumponomics: Reagonomics' Twin?

November 2016: Found Money

October 2016: Marrying Theory and Practice

September 2016: Do You Have a Sharpe Portfolio?

August 2016: Be Careful of High Dividend Stock Strategies

July 2016: "Die Younger" is Not a Strategy

June 2016: Blame Tina

May 2016: Would You Rather:  Tax Cut or Tax Increase?

April 2016: Father Time Demands Your Attention

March 2016: What Has the Last Year Taught Us?

February 2016: Winners and Losers of the Oil Battle

January 2016: Diversification Improves Returns and Lowers Risk