The federal government is set to embark upon some good old-fashioned nudging as the White House is considering new tax incentives to push more Americans to become bulls and bears on the New York Stock Exchange. The fiscal manipulation to encourage the common man to flirt with equities has its advantages and drawbacks. The best economic policy, of course, is just to let everyone keep more of their money and decide what they want to do with it, either purchase shares of McDonald’s or the company’s iconic Big Macs.
Will Americans Buy Low and Sell High?
The stock market ended a pretty good trading week on some great news. According to CNBC, the Trump administration is mulling over a proposal that would allow Americans to invest in the stock market tax-free, citing four unnamed senior White House officials.
One of the chief ideas is to permit households earning up to $200,000 per year to invest $10,000 tax-free outside of a 401(k) plan. Larry Kudlow, director of the National Economic Council, was asked about the report and said the policy could extend to bonds as well.
The business news network reported that the numbers may change, and the tax incentives being discussed might be a key plank of an overall economic stimulus package. Kudlow added that the administration is looking at establishing universal savings accounts that would merge education, health care, and retirement savings into one primary vehicle.
Overall, President Trump has been hinting at the second round of tax cuts for the last few months, something that could add fuel to the boom phase of the current business cycle. Kudlow noted that any variant of the “tax cuts 2.0” initiative might be published during the president’s re-election campaign.
The latest 2019 data show that 55% of households own stocks, up from 52% just after the Great Recession. Would this tax policy encourage more Americans to scoop up equities? Stephen Moore, an economist at the conservative Heritage Foundation and close confidante of the White House, believes this would expand ownership of stocks.
Long Live the Laffer Curve?
Seminal economist Milton Friedman famously wrote in Capitalism and Freedom: “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” Any conservative or libertarian would agree, but with a caveat: A tax cut needs to be followed by a spending reduction.
If the administration is willing to give the people more of their money back, or there is an opportunity for Americans to earn an income without having to give Uncle Sam a share, then this is a positive development for both the economy and for freedom. However, if the government is sacrificing potentially billions in lost revenue that would partially finance these $4 or $5 trillion federal budgets, then it needs to be offset with a slash to spending. Otherwise, the budget deficit will balloon, the national debt will spike, and debt-servicing payments will only increase. The future generation will be left with the bill.
And, no, the Laffer Curve will not save the public purse. It might be counterintuitive for leftists, but a tax cut can often lead to higher revenues. But the additional injection into state coffers is typically never enough to decrease the deficit or cover the tab.
Is libertarian paternalism an oxymoron? Yes, but this is the compromise that Swamp figures have come up with to ensure they continue ruling over you while giving you the illusion of freedom and liberty.
Big government acolytes have conjured up this ingenious strategy and are applying a particular tactic called the nudge. Cass Sunstein and Richard Thaler promoted this measure in a 2008 book, titled Nudge: Improving Decisions about Health, Wealth, and Happiness. They posited that “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives” can benefit anyone who is nudged while still maintaining their liberty since they are not mandated to act. It is clever, and it is certainly something you would expect emanating from the minds of the creatures of the black lagoon.
Generally, most people will agree that it is a good thing to own a home, attain a college degree, save for retirement, and invest in the market. Does the government need to intervene and push the population in this direction? Politicians and bureaucrats socially engineer the citizenry to act in a way these public servants deem fit. They do this by using the tax code, imposing reforms that nudge folks to head in a certain direction. A novel approach is to bring the levy rate to zero and allow the people to decide.
Buy on the Rumor and Sell on the News?
The stock market is a complex institution where billions of dollars regularly change hands. While the uninitiated may call it legalized gambling, participating in the stock exchange is a bit more intricate than a game of craps. Buying or selling shares of Kramerica Industries requires a stellar acumen of the process, an abundance of research, and good timing that is accrued from reading the market and gathering trading experience – it is not for the faint of heart. Critics may say that it funnels money to Wall Street, and the finance industry will love the idea because it is a fresh injection of cash and investors. Plus, it will create new demand for professional money advice. For a society that detests bankers, the optics may not be sound for the White House. For people who want to keep more of their dough, however, this might be a winner among voters come Election Day.
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