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Tax cuts and the Government “Mess”

June 22, 2017

If you were to take today’s headlines about taxes and Kansas Governor, Sam Brownback, as Gospel, you would be persuaded that cutting taxes doesn’t encourage economic growth.

Chicago Tribune-“Epic fail of Kansas’ Tax Cut Plan a Lesson for Us All”-”

Los Angeles Times–“Kansas’ Tax Cuts are an Epic Failure.”

Thank goodness President Donald Trump’s dyslexia keeps him from reading newspaper reports.  But his Treasury Secretary, former Goldman-Sachs executive, Steven Mnuchin, does read newspapers and is not going to make Sam Brownback’s mistake.

Sam Brownback is a believer in Supply-side Economics which is founded on the idea that tax rates, particularly capital gains taxes, directly affect the performance of the economy. So, cut those taxes fast and wait for the economy to spur economic growth.

That, unfortunately, isn’t really the point.

Yes, lowering tax rates will spur economic activity, if those cuts permit those with significant income to reinvest in businesses and take risks in financing entrepreneurs to start businesses. But this process takes time and requires a culture of private enterprise, savings and investing.

In 2012, Gov. Brownback thought he could jump start the economy of Kansas quickly and ended up with significant deficits. Five years later, Kansas has a budget deficit of $900 billion and the GOP controlled state legislature overrode Brownback’s veto of a measure that would raise taxes.

Brownback’s optimism got the best of him and he expected quick results. Had he planned to spur growth by lowering taxes over eight years instead of four, we wouldn’t be reading about his failure.

But, even if Brownback had been more moderate in his approach, the national economy is working against him. Spurring entrepreneurs to take risks requires capital and willingness to take risks.  The banking crisis of 2008 dried up risk capital and regulations instituted more than 80 years ago when the U.S. Securities and Exchange Commission was created closed one source of investment capital.

The SEC segregated American citizens into two classes:  “accredited” and “non-accredited.” We have lived under that limitation, carried over from the New Deal, and it needs to be removed.

Today, if your total assets are less than $1 million, excluding the value of your personal residence, you may not invest in non-registered securities. Only the wealthy, “accredited,” investors may invest in a new startup, or take impulsive risks by investing in non-registered securities of local people you may know and trust. These regulations are so “tight” that even if your brother-in-law asks you to buy stock in his startup, you better qualify as an “accredited” investor.

That’s why the IPO for Krispy Kreme was phenomenally successful.

For the first time, ordinary people, non-accredited investors, could buy stock in a company whose product  they enjoyed eating.

Trump’s head of the National Economic Council, Gary Cohn, former head of Goldman-Sachs, is not a “Supply-sider” so middle class tax relief is as much as he’s willing to budget in a Trump Administration tax reform.

Neither Mnuchin nor Cohn, bankers who made a fortune on Wall Street, seem to be aware of the attempt in the JOBS Act of April 2012 —five years ago–that was designed to remove restrictions on non-accredited investors that would enable them to invest in business startups and other non-registered securities. The SEC, backed by the deep state, brokerage industry and Wall Street bankers, decided that was not something that should be permitted.

I must conclude that the Trump Administration’s efforts to spur economic growth through tax policies will fail.

What are the consequences?

Going into the 2018 Congressional elections and the 2020 Presidential election, President Trump will not have an effective economic plan, and he is likely to have a healthcare plan that expands the federal deficit. In foreign affairs, he will find it difficult to resolve foreign policy issues with Russia, the People’s Republic of China and its client, North Korea, and Iran.

How can this be avoided?

One way is to flood the Trump Administration conservative experts to fill the more than 500 critical positions throughout the U.S. government that require Senate confirmation. In other words, Trump must put together a government and stop trying to run the United States as if it were a private company. His statement that “we have too many people” is absurd.

He must immediately nominate as many conservative experts as are willing to serve in a Trump administration and encourage them to formulate policies that can be implemented immediately and he must nominate conservative experts to serve in vacant positions at regulatory agencies such as the Federal Trade Commission and the Securities and Exchange Commission.

President Trump is right. He inherited a mess, but after six months in office that “mess” is one that he created. If he doesn’t clean up his act, the voters will say “You’re fired.”

 

 

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