Some Common Cents for April 28th, 2017

A lot of folks have asked my opinion on the Administration’s tax reform proposals. I think I have surprised them with my less than sophisticated response: anything is better than doing nothing. As the old saying goes, if you are standing still, you are falling behind.

In helping run a trust and wealth management department, our Byzantine tax code benefits me professionally. I couldn’t argue otherwise and keep a straight face. Folks will go to some lengths to either postpone or try to avoid paying a hefty tax bill, and this often includes various trust accounts and other tax deferred vehicles. That shouldn’t come as a shock, but as I tell everyone: “the IRS will eventually get its money, even if it has to wait a while.”

I guess you can say I have seen how some of the sausage is made, and it detrimentally impacts the free flow of capital throughout our economy.

With that caveat out of the way, I did some math a little while ago regarding Federal tax receipts as a percent of Gross Domestic Product (GDP). I ran the numbers as far back as I could easily get the data, which was slightly before World War II. This was after the worst of the Great Depression, but before the boom in economic activity the war engendered.

Over all those years, regardless of the marginal tax rate structure, it seems Washington collects anywhere from 18-19% of our overall economic output. This percent goes down during periods of economic distress, but rights itself as the economy improves. Of course, tweaks in the code can lead to changes in Washington’s portion, but we are ordinarily talking basis points as opposed to percentage points.

Basically, there is a strong correlation, almost perfect, between economic growth and absolute tax receipts. They go up together, and go down together. Duh. Therefore, Washington’s focus should be on economic growth, as it collects more money when the economy is making more of the stuff. Again, duh. …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.