To Boost Consumption, Simplify the Tax Code

Equity Update

09.21.2016 - Carin L. Pai

One of the campaign issues we have been following this election season is tax reform, a perennial favorite among politicians because of its popularity with US voters.

Republican Donald Trump has proposed reducing the number of tax brackets from seven to three (12%, 25% and 33%) and capping the corporate income tax rate at 15%. Democrat Hillary Clinton recommends allowing small business startups to deduct their expenses immediately instead of amortizing over multi-year periods as now required.

While it is still early in the election cycle and tax reform proposals are still rough, we believe a comprehensive tax reform package could stimulate the economy in a number of ways.

Consumer Confidence
A previous increase in taxes along with the rising cost of healthcare, insurance, education and other obligations have weighed heavily on the minds and pocketbooks of consumers by reducing the amount of discretionary income left over to spend on other goods and services. So individuals are cautious about their finances. As a result, consumer confidence has stalled despite an increase in spending (CHART).

A simplified tax code could go a long way toward improving confidence among all consumers. It could also have a multiplier effect: According to the Congressional Budget Office, every $1 in tax cuts for middle-income earners contributes $1.50 to GDP.

Tax reform could be particularly helpful for Millennials, 75 million consumers between the ages of 19 and 35. Because Millennials spent their formative years in a landscape of economic uncertainty, including a housing market collapse and financial crisis, they are cautious about making long-term financial commitments like purchasing homes or cars.

Improving Productivity

Both leading presidential candidates have expressed an interest in streamlining and simplifying the US tax code, 74,000 pages of rules and regulations that cost American businesses more than 8.9 billion hours in lost productivity each year, according to The Tax Foundation in Washington. That’s the equivalent of 4.3 million full-time employees working exclusively on tax returns.

An easier-to-understand code could free up valuable resources for more productive uses like purchasing new equipment, jobs, expanding distribution pipelines or other large investments.

Of course, the likelihood of comprehensive tax reform depends on a range of economic and political variables, including which candidate occupies the Oval Office and which party controls Congress. If the package calls for tax cuts, deciding how to balance the budget could be a long and contentious process.

But we know that tax reform has been successful in the past. During the Reagan era, for example, tax reform was one of the contributors to a long stretch of economic expansion and employment gains.

Focusing on Fundamentals

While the possibility of tax reform offers hope for economic activity, our investment ideas do not depend on it. We continue to focus on share-grabbers, companies that appear well-positioned to capture a larger share of wallet by providing products and services that are top of consumers’ minds and high on corporate spending priorities.

As always, we continue to look for companies that are agile, innovative and financially secure enough to push new products and services through the full research, development and distribution cycle. Oftentimes, this leads to companies that can successfully build brand loyalty, develop a competitive edge and protect those advantages in a rapidly changing market.

This communication is intended solely to provide general information. The information and opinions stated are as of September 26, 2016, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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