I catch a lot of flak for trying to remain politically agnostic. Which is deserved I guess. But when I talk about money and finance I generally try to remain operational in nature. That is, I try my best to speak objectively from what I know about the world and not what I want that world to look like. Well, I’ll deviate from that approach for this post, but let me be very clear that these are simply my personal opinions based on my understandings and someone who understands the world through the understandings that I generally espouse (see here) could come to very different conclusions.
That said, here are three things I think are absolute no-brainer policy changes. But they’re also three things that will almost certainly not happen because the political environment is too messy to actually get policymakers to act:
1) The government should implement a substantial infrastructure investment program. It’s well known that the USA’s infrastructure is falling apart. Our roads are old, our bridges are falling down and the substantial investments we made in past decades are depreciating rapidly. If the USA were run like a smart corporation it would reinvest in these projects and bring them up to modern standards. Of course, the US government has the luxury of not being a for-profit entity. And since the USA is the world’s reserve currency with no debt denominated in a foreign currency it has the luxury of being able to spend without having to worry about foreign creditors declaring it bankrupt. And with interest rates at record lows it only makes that much more sense that we would borrow the funds to implement these projects. After all, the US government can sell bonds at 0% today. The market is basically begging the government to issue more debt.
Why it won’t happen – politicians, pundits and economists are mostly convinced that the USA is bankrupt (which it most certainly isn’t). Nevermind that this can’t operationally happen. The US government’s balance sheet is nothing like a household’s balance sheet. But the misinformation on this topic is so vast that any project that adds to the national debt will be sold as some “burden” on future generations or something that will potentially bankrupt the country.
2) The government should pass broad middle class tax cuts. The middle class can’t seem to catch a break. The recent recovery has been uneven in a way that is most unusual. And the median earners in this country just aren’t seeing the benefits that many other groups are. A substantial middle class tax cut would reduce the balance sheet burden that many middle income earners continue to experience and help to drive more spending from what should be the engine of the economy. The ideal way to do this would be a tax cut for every working American by eliminating the payroll tax.
Why it won’t happen – See above. We are bankrupt, inflation is coming, the dollar will collapse, [insert failed prediction about negative impact of government debt here]. The Payroll tax is necessary to fund Social Security (no, it’s not because those dollars can come from other sources of revenue).
3) Raise taxes on secondary market “investments”. I have to apologize first to myself for this (because this would be a personal tax hike) and also to all of the people I work with who tend to be high net worth asset holders.
As I’ve explained before there is really no sense in taxing secondary market “investments” favorably because secondary market “investing” is not really “investing” at all. This idea exists largely because of the myth that secondary markets are where we make “investments”. Of course, primary market investments are important and we should encourage primary market investment as that drives funding towards innovative endeavors. But secondary market transactions are mostly just reallocations of saving between private parties that have no impact on whether firms make real investments in the future.
When most people “invest” in the stock market they’re really just allocating their savings. The corporation doesn’t obtain money and really doesn’t care who owns the shares on the secondary market. But because most people think of this as “investing” they think that this deserves special tax treatment because investment is so crucial to the prosperity of the country. Unfortunately, the low taxes on dividends and capital gains often drives firms NOT to invest because they can return cash to their shareholders in a more tax friendly manner. This policy of taxing secondary markets favorably doesn’t make much sense at an operational level, but it persists primarily because it helps the wealthy keep more from their primary sources of income.
As a superior alternative I would propose taxing all secondary market transactions less than 5 years in duration as ordinary income. Anything greater than 5 years should get favorable tax treatment. This would incentivize private market investors and reward long-term secondary market shareholders.
Why it won’t happen – raising taxes on the wealthy asset holders in this country would be a wildly unpopular move and since most politicians receive huge funding from the wealthy this move would almost certainly never happen.