Clock is Ticking on Tax Reform

By: Royce W. Medlin - Chief Investment Officer

Clock is Ticking on Tax Reform

The most recent GDP print of 0.7% growth underscores the real need for economic reforms. Subpar growth last quarter was primarily a function of slower consumer spending even though business investment picked up materially since the election. Economic growth of 2%, which was the average over the last 8 years, is not high enough to sustain the current rate of government spending. With the new administration’s goal of 3% growth per year, many of our problems can be solved. However, there are good arguments that this level of growth is no longer realistic due to structural changes like slower population growth and lower productivity gains. But, there are also good arguments that higher taxes and increased regulation have reduced investment and that a reversal in those trends would spur job creation and wage gains.

To perpetuate the recent gains in investment spending, Trump and Congress need to move quickly on tax reform which underpins the new optimism. Lowering corporate tax rates, which are the highest in the developed world, and the cause for U.S. companies parking billions of dollars abroad rather than bringing those profits home is the low hanging fruit with surprisingly high bi-partisan support. The more cantankerous tax battle will be on the personal income tax side where political parties are more polarized and less willing to compromise.

The U.S. could prolong its sub-par economic expansion beyond its current 8 years by adopting pro-growth policies that encourage business investment. But, unfortunately, these policies must be enacted by our elected representatives whose track record dismal. The clock is ticking.

Royce Medlin
Chief Investment Officer