© 2017 BY CANNON CAPITAL MANAGEMENT, INC.

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Cart Before The Horse

November 7, 2017

 

 

Tax reform is a popular topic these days.  After all, who doesn’t find the idea of lower taxes appealing?  It seems as though virtually every politician is the champion of fair taxes and touts themselves as the only one with the capability to ensure that we will enjoy lower taxes under their tenure in office.  Regardless of promises and hype, we hope the tax reform that is underway in Washington will indeed yield a meaningful improvement in the tax structure for individuals and businesses alike. 

 

For nearly 10 years the U.S. and global economy has struggled to generate consistent, solid economic growth.  Loud have been the lamentations that while the economy is growing it just doesn’t seem to be able to get out of second gear on a consistent basis.  Tax reform is now being touted as the panacea to fix this middling economy and serve as a catalyst to finally get the economic engine purring as it should. 

 

Taxes have been such a central point of our country – they served as a springboard to start the revolutionary war.  The question of taxation authority was a point of intense debate and near anarchy following the revolutionary war.  One of the key points to establishing a lasting and strong government for our new nation was to establish the federal government with a taxing authority that super ceded that of the individual states.  It was critical for our fledgling nation to be able to repay its debts. 

 

Significant legislative action that has a lasting impact requires an energy to see it through from conception, debate, passage and implementation.   While tax reform is very alluring, it will require enormous energy to move it forward.  We wonder if there is a more productive use of time and energy for our congress and administration to engage their resources on – that of fiscal discipline. 

 

The Federal debt is now over $20 trillion; but perhaps a better way of measuring that debt is to compare it as a percent of GDP.  The U.S. debt as a percent of GDP has broken over 100% only twice in our history – the first time following WW II and then again after the financial crisis of 2008; we are currently around 110% of GDP.  Ultimately, if we as a nation wish to maintain our position of financial independence and ongoing economic vitality we need to demonstrate our ability to manage our finances – one need only look at our neighbor Venezuela to see the potential horrors of undisciplined fiscal management.  It is for that reason that we wonder if we have the cart before the horse regarding tax reform.  Economic growth is gaining momentum, unemployment stands at just 4.1% and interest rates and inflation are at historic lows. We think the timing is right to focus on fiscal reform first and then tackle tax reform.  Let’s fix the leaks in the roof of our financial house before we remodel the kitchen with new cabinets, floors and appliances. 

 

With a congress and administration that seems bent on applying a Ready, Fire, Aim approach to legislation reform, we are simply asking about our aim before we fire our guns.   Fiscal and tax reform both have the capability to do good things for our economy and the financial markets, we just wonder if fiscal reform is the horse and tax reform is the cart.   

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