Moving Beyond Interest Rates for a Renewed Economy
The current economic environment is being driven (as it always is) by employment numbers. The number of unemployed persons is on the increase. There are over 10 million people unemployed today. This doesn’t include the people who are no longer receiving unemployment benefits. Almost everyone knows somebody who is out of work.
The result of increasing unemployment, low consumer confidence, and substandard corporate balance sheets is that the Fed lowering interest rates is not working. Where does the government go from here? The federal government’s ability to pass legislation that will: improve the quality of corporate balance sheets, encourage credit, create jobs (civilian), increase consumer confidence, and motivate consumer spending are limited only by the creativeness of the minds in the federal government. The following action plans are examples of possible government strategies that have a high probability of realizing the aforementioned targets, and they are intended to be partisan-neutral.
1. Reduce Corporate Taxes
Currently, the maximum federal corporate tax rate is 35 percent. A reduction in corporate taxes increases the net profitability of a business. There are three things businesses can do with additional profits: (1) Increase dividends (2) Keep the profits in the bank. (3) Invest the profits back in the business. Executives are paid to man age and grow their businesses, and number (3) has the highest probability of achieving that goal.
2. Reduce Individual Income Taxes
The maximum federal income tax rate is 35 percent. In addition to providing jobs, another way to increase consumer confidence and consumer spending is to get more money into the hands of the consumers. If individual income tax rates are lowered, the consumers have fewer taxes to pay and more money to keep, save, and spend.
3. Reduce the Capital Gains Tax Rate and the Length of the Required Holding Period
Under current federal tax law, appreciated assets that are sold by an individual after being held for more than one year are considered long-term, and will be taxed at a maximum rate of 15 percent. Capital gains by entities taxed as corporations do not receive preferential treatment, and are taxed at a maximum rate of 35 percent.
If the length of time for the holding period and the current rate were both reduced for capital gains tax purposes, equity investments would become more attractive. More capital would become available for businesses, and more available capital would start the scenario of expansion, increased employment, consumer confidence, and consumer spending.
4. Increase Deductions on the Real Estate Depreciation Schedules
Currently, the depreciation schedule for income producing residential property is 27.5 years, and the schedule for commercial real estate is 39 years. The construction industry is arguably the largest industry and largest employer (combining immediate and support employees) in our country. Real estate is the biggest item (using market value) on the balance sheets of America’s companies.
If the current depreciation schedules were shortened, tax deductions would jump, cash flow would increase, and investor yield would go up. A change in depreciation schedules should be considered based on need. You don’t want to encourage capital and construction activity in the real estate industry if the need isn’t there.
5. Initiate the Privatization of Social Security
Privatization of social security means that the individual beneficiaries would become responsible for investing their funds. Obviously, this should be done under a set of federal government standards and guidelines.
The scope of this program is enormous. To put it in perspective, the 401K individual retirement program ultimately grew from zero to a point where it represented more than 20% of the entire stock market. The social security program would dwarf that in size.
The privatization of social security is an idea whose time has arrived. It will still take several years to get started, and will not happen all at once. There needs to be a transition period where investment responsibility moves from government investment to individual investment. Initially, the amount of money that the beneficiaries invest should be small and carefully monitored. The amount of capital this transition will provide to businesses is immense.
