Following the November 2016 U.S. Presidential election, equity markets rallied in the bullish anticipation of the Trump Administration’s plan to lower corporate taxation while working to simultaneously eliminate extreme forms of regulation. Soon thereafter, on January 25th 2017, the Dow Jones Industrial Average closed over 20K for its first time. U.S. markets were seeing the largest injections of capital in years.
As time passed by, investors remained confident in the new administration and the actions they had taken for our country thus far. Things quickly became more speculative leading up to the healthcare vote, which ultimately failed to pass. US markets closed the trading session down 60 points, which is seemingly insignificant factoring in the recent rally. What was at first glance a failure by the congress quickly became what many considered an elimination of a major roadblock to tax reform, what investors saw as most important.
So why taxes? Why regulation?
Let’s start off with a few important details. The United States has the highest corporate income tax rate, a staggering 35% at the federal level, with the average tax on corporate income at the state and local levels adding an additional 4%, which brings the total tax rate to 39%. So what exactly does this mean?
· It murders the competitive edge most U.S. companies once had. The government has made it increasing expensive to employ labor – all the taxes, laws, wage requirements, occupational licensing, potential litigation, etc. have made it less attractive for U.S. companies to invest in domestic labor. The U.S. has one of the highest corporate tax rates around the globe, making domestic investment disenchanting to say the least. The problem isn’t a lack of American pride, but is rather an opportunity for our administration to protect the integrity of companies on our soil.
· Regulation can be seen as a “hidden tax” on individuals. For example, if the Department of Transportation sets a higher fuel efficiency mandate for motor vehicles, then vehicles become more expensive, just as if the government imposed a new tax on vehicle purchases.
· Some regulation is good, but the recent accumulation is NOT. In a study done in the June issue of the "Journal of Economic Growth" – authored by John Dawson of Appalachian State University and John Seater of North Carolina State University – estimates that federal regulations have reduced economic growth by approximately 2 % per year between 1949 and 2005. GDP, or gross domestic product, is a measure of the health of an economy during a specified time period. GDP is comprised of consumption, investment, government spending, and net exports less net imports. Economic growth is dependent on investment, one important measure of GDP. Economic growth in a particular industry is determined by investment in knowledge creation, such as R/D, and the way that such investment leads to innovation and increases in productivity. This means that regulatory interventions that affect investment choices have a much larger effect on the economy than the simple sum of static costs associated with regulatory compliance. In addition, if investing in capital becomes too expensive domestically, companies deploy their resources in foreign lands, taking away from our countries output.
· A company’s purpose is clear, but we limit the opportunity for goodwill. In any industry, a company’s primary objective is to bring a product/service to the consumer that is cheaper, more convenient, and of higher quality. With growing domestic competition, companies need to find ways to reduce their liabilities in order to reinvest in working capital and create profit margins large enough to operate. With the enormous tax burdens, many companies find foreign labor and IP ownership to be far more advantageous in maintaining their competitive nature. These very issues impact the core of the American economy, which is entrepreneurship and small business ownership. Today, turning your idea into a reality is much more than hard work and dedication.
A study done at George Mason University found some interesting data:
- If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.
- This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.
- This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.
If we truly want our economy to prosper, we must do so with less burden on American business. Although some regulation is crucial in any market, the benefits that could have been gained if an alternative course of action had been pursued are much higher than the costs of compliance. In order to grow our output, we need to invest in our young people. We must deploy all of our resources to ensure this great land retains its talent and prosperity.