February 16, 2016
During this month's Republican presidential primary debate in New Hampshire, businessman Donald Trump took high taxes to task for stunting job growth in the U.S., claiming that "we're the highest taxed country in the world."
Several critics and pundits were quick to find fault with The Donald's comment, pointing out that many other countries have a higher tax rate than the U.S. If you look at tax revenue as a percentage of GDP, the U.S. actually ranks 27 among 34 developed countries, according to the Organization for Economic Cooperation and Development (OECD). (Denmark tops the list, followed by France, Belgium, Finland and Italy.)
It's not the first time Trump has made a wild claim, but in this case he's right, by one very important measure - the corporate statutory tax rate. Since 1990, this rate has hovered around 39 percent, making it the highest among OECD nations, and for the largest GDP in the world.
Even when compared to 162 other countries, the U.S. still has the third highest corporate tax rate, following the United Arab Emirates (55 percent) and Chad (40 percent), where collecting taxes formally is very difficult.
To his larger point, Trump is right again. High taxes-both in the U.S. and abroad-stand in the way of global growth and create economic friction. But these taxes aren't the only hurdle, and lowering them would be just the first step in a series of steps to lighten the burden placed on businesses.
The other hurdle is what the Competitive Enterprise Institute (CEI) calls the "hidden" tax-regulation. Complaining about income taxes is an American pastime in its own right, but regulatory costs run much higher, eating up 11 percent of the country's $17.4 billion GDP.
The $2 Trillion Hidden Pathogen, with No End in Sight
The CEI calculates that in 2014, the annual cost of federal regulation and intervention amounted to a jaw-dropping $1.8 trillion, a figure that exceeds the $1.3 trillion collected in federal income taxes that year. Nearly $400 billion had to be spent on economic regulation alone, $316 billion on tax compliance.
Because these numbers are so large, they can be hard to conceptualize. It isn't until you look at cost per employee that you realize just how burdensome these hidden taxes really are. In 2012, the last year such data is available, companies in every industry paid an average $9,991 per employee per year. That means if you run a business with 100 employees, you pay close to $1 million every year just to comply with federal laws and regulations. That's $1 million you could be putting instead toward salaries and benefits and new business growth.
This has helped fuel runaway legal and compliance costs. The Wall Street Journal reported last week that fees at some of the nation's largest corporate law firms have climbed to an unbelievable $1,500 per hour. That's 200 times the minimum wage of $7.25, and includes only salaries, not benefits or options.
And the rules keep piling up. The chart below shows the number of proposed regulations that cost more than $100 million per year. In 2000, for instance, there were 87 new regulations costing upwards of $100 million, to say nothing of those costing less.
Following the 2008-2009 financial crisis, regulations in the banking sector spiked exponentially, as you can see in the Deutsche Bank chart below. The increase in regulations, not to mention legal costs associated with them, has caused fiscal drag and prevented the formation of capital.
In a 2014 survey conducted by the Centre for the Study of Financial Innovation, global financial leaders cited regulatory pressure as the number one impediment to financial growth right now. We have excessive anti-money laundering laws mandating that every transaction be scrutinized and accompanied by supporting documentation. It's currently easier to buy marijuana in Colorado than it is to open an investment account. If government can streamline the purchase of weed, why can't it do the same for investing? The regulators seem to be saying there's more risk in investing than in smoking dope.
But this is a global phenomenon, a contagion that knows no borders. The countries that place the heaviest burden of regulation on businesses, according to the World Economic Forum, include many in Europe (Serbia, Croatia, Italy) and South America (Argentina, Brazil, Venezuela). As money managers, we see fiscal drag all over the globe as a direct result of taxation through regulation, which tends to favor government work and compliance, not innovation. Private businesses end up paying the price.
The U.S. should be a leader in this area and commit itself to reducing the blockades that impede growth and innovation. A good model for such a task is Canada's "One-for-One Rule," introduced in April 2012 during former Prime Minister Stephen Harper's administration. The rule requires that when a new or amended regulation is introduced, another must be removed.
However it's accomplished, the time has come to reverse this economy-dragging trend. We also remain encouraged by the Trans-Pacific Partnership (TPP), which promises to eliminate 18,000 tariffs around the globe and unleash trade.
Gold Fear Trade Crackles as Recessionary Worries Hit Market
In times of economic uncertainty and market turmoil, investors have tended to reposition into so-called "safe haven" assets, including gold and municipal bonds. Today is no exception. With talk of a global recession rattling markets around the world, gold had its best start to the year since 1980, putting to rest last year's speculation that the yellow metal has lost its haven appeal.
Gold is currently up 20 percent year-to-date, compared to a loss of 10 percent for the S&P 500 Index, which adds weight to the belief that the metal works well as a diversification instrument.
Fears of negative interest rates have also spurred record gold investing and retail buying, as the metal acts as a better store of value in an environment where it costs interest to have the government hold your money. Negative rates seem to be the new favorite trick of central banks, from Sweden to Switzerland to Japan, and during her Congressional testimony last Thursday, Federal Reserve Chair Janet Yellen commented that negative rates in the U.S. "aren't off the table." Gold shot up $50 by the end of the day.
Demand was robust in 2015, with investment up 8 percent from the previous year, according to the World Gold Council (WGC). Central banks continued to add to their reserves, resulting in the second highest annual demand in the WGC's records. In the fourth quarter, central bank purchases, led by China and Russia, were up an impressive 25 percent over the same quarter in 2014.
The smart money seems to think this gold rally isn't over. As of February 2, money managers' net long positions surged to a three-month high while short bets declined dramatically, according to data from the Commodity Futures Trading Commission (CFTC). And last week billionaire Mark Cuban, owner of the Dallas Mavericks and "Shark Tank" investor, told CNBC that he had just bought "a lot" of call options in gold, saying: "When traders don't know what to do, they go where everybody is. And I thought that would be gold."
Many investors, sensing additional risk in stocks, are likewise seeking shelter and tax-free income in muni bonds. Munis also come equipped with attractive tax advantages, shielding investors from taxes at the federal level and often at the state and local levels too. That means they can help "Obamacare-proof" your interest from the 3.8 percent Affordable Care Act tax on investment income (applicable to those who make more than $200,000 in taxable income per year).
In 2015, munis, as represented by the Barclays Municipal Bond Index, were actually the top fixed-income asset class, beating both Treasuries and corporate debt. But they also outperformed S&P 500 stocks, gaining more than double what equities delivered.
Billions of dollars fled domestic equity funds on a near-weekly basis in 2015 as investors anticipated a rate hike, which the Fed finally implemented in December. Meanwhile, muni fund inflows have been positive since October, according to Morningstar, with no signs of slowing in the near-term.
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