Already the U.S. economy has grown at a faster pace than economists predicted under President Trump’s administration, certainly faster than the anemic numbers of the eight years of Barack Obama. For second quarter of this year GDP grew at a blistering 4.1 percent pace, which liberal economist poo-pooed and predict cannot be sustained. Minority employment figures are at the best numbers in history. Yet to boost performance further, former Speaker of the House Newt Gingrich is speaking out for indexing capital gains taxes against inflation.
Writing for Fox News, Gingrich says that this next step will prevent business from being taxed on increased value of assets that is purely from inflation rather than a genuine increase in intrinsic value. Inflation is caused by government and central bank mismanagement of monetary value. When business is taxed on inflated values, the government is essentially punishing business for its own monetary malfeasance. Indexing for inflated valuations irons those inequities out, keeping much needed money in business coffers for reinvestment and other profitable ends. Says Newt:
Before Larry Kudlow became the director of the National Economic Council, he wrote: “Former Treasury economist Gary Robbins estimates that indexing capital gains for inflation this year would, by 2025, create an additional 400,000 jobs, grow the U.S. capital stock by $1.1 trillion and boost GDP by roughly $500 billion. That all translates to an additional $3,600 for the average household.”
Gingrich goes on to cite legal analysis by tax attorneys that the U.S. Treasury Department already has it under its authority to “’reinterpret cost” and “take account of the economic reality that a “gain” attributable solely to inflation adds nothing to the taxpayers real wealth or purchasing power.’”
Another shackle broken from business
The Trump Administration has already liberated American business from stifling policies that dampened economic growth. The unprecedented rollback of regulations and lowering of corporate taxes have boosted business confidence, lead to repatriation of billions in corporate money from overseas and produced stellar earnings reports.
Indexing capital gains taxes will roll back unfair inflation taxes and free up money which businesses can use to do research and development, produce more and hire workers. Already employment is so good that worker shortages are appearing across the country. One more shackle holding back business growth will drop, further freeing growth.
Helping America to weather the storm ahead
As Jerry has been saying for some time on his Smart Money Radio program, Trump has been putting policies into place that are benefiting and will continue to benefit the American economy for decades to come. However, monetary policy, higher oil prices and a tight labor market are combining to drive inflation higher. The Federal Reserve, in turn, is raising and will likely continue to raise interest rates. As Jerry has often said, the party is going great until the Fed takes the punch bowl away.
The proverbial punch bowl is the low interest rate environment which helps fuel growth. As the Fed nervously eyes rising inflation, it historically raises rates too high and too fast and suffocates the growth so long sought after in the economy. We enjoy a brief period of prosperity, only to see the Fed choke it back down.
But the good news is that with these fundamental changes to how American business can prosper, the eventual next recession will be weathered by an underlying business sector made much stronger, better able to withstand recessionary impact, than we had under the stultifying polices of the Obama Administration.
We believe that this market, long in the tooth, is vulnerable to further interest rate increases despite spectacular earnings. Toss in media hyperventilation over “trade war tariffs” between the Trump Administration and our economic allies, and we can forsee a stiff bear market ahead in the next year.
Your portfolio cannot withstand another blow as happened in the 2008 meltdown, and there’s a good chance it’s not prepared for a return to 1970s style inflation. America hasn’t seen such inflation in 40 years, so few advisors out there are positioning their clients for it. We are.
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