As we move further into 2021 and see the policies of the new administration unfold, it will be good for investors to keep a close eye on the intended, and perhaps more importantly, the unintended consequences of the various actions.
One of the Biden administration’s stated policy goals is to revoke the Trump tax cuts and raise the corporate tax rate. The almost unlimited ability to tax is one of the greatest powers of government and is regularly used to alter consumer behavior. An example are the tax credits for buying electric cars, which increase demand for those vehicles. Government can also reduce demand for products by raising taxes on them. In Europe very high gasoline taxes reduces driving as well as demand for large vehicles. Cigarette taxes are used to reduce their consumption. Ronald Reagan summed this up when he taught that if you tax something you get less of it and if you reduce taxes on something you will have more of it. By using this simple principle, a new administration with different policy goals can get people and businesses to redirect their financial resources by altering the tax code. Investors who pay attention to these changes might find clues as to where money flow might increase. They might ask themselves, what will the new tax code lead to “more of?”
Consider the following story: A man named Jeremy drove an ice cream truck as his family business. He parked it near the community playground on warm days where there were lots of children. One day a lady was at the park handing out dollar bills to all the kids, who immediately ran to buy ice cream. This resulted in a lot of happy people. The children were happy with their free ice cream. Jeremy was happy with his dramatic increase in business. And the lady was happy because both Jeremy and the kids loved her for “stimulating” the playground’s ice cream economy.
But there was a problem with the scenario that went unnoticed. While Jeremy was not paying attention, the lady was actually taking some dollars out of his cash drawer and giving them to the children. The increase in his sales was from his own money coming back to him. In this story think of the lady as the federal government taking tax dollars from Jeremy and handing them out to the kids so they could buy ice cream. Though this action benefits the kids, and even the lady who became the most popular person on the playground, it doesn’t help Jeremy’s profits at all. But it does help someone. Who would that be? A wise investor would look to the company that was supplying the ice cream to Jeremy’s truck.
As the year proceeds, I will be watching for changes to tax policy that will have the effect of redirecting money flow and see if that opens up investment opportunities that we can get in front of.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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