Market Commentary

e have entered a very early election season. And the favorite topic of politicians of every stripe is that of taxes. Too high, too low? Are they increasing economic activity or reducing levels of consumption, investment and saving? What is “fair” and what is not.

What has emerged over the past several years is a picture of the US economy and what the ramifications of existing tax policy has had on America versus currently proposed tax policy. We view this information within the context of client investments. The ramifications can be far reaching. First, what do the facts tell us about the current state of the US economy?

Since 2003, federal tax cuts have had an amazing stimulative effect on both our economy and government revenues. For example, total federal government revenues have increased from 16.5% of Gross Domestic Product in 2003 to 18.5% this year. A productive society logically pays more in taxes – although the effective tax rate on goods and services has declined.

As federal revenues have increased, the Congressional Budget Office reports that the US budget deficit has declined from $412 Billion in 2004 to an estimated $214 Billion this year.

Let’s add a few more statistics. Since the federal government reduced taxes in both 2001 and 2003, unemployment has declined from 6.1% to 4.5%. GDP has grown at a very healthy 3.5% per year over the past 4 years compared with a minimal 1% for the 2 years prior to the cuts taking effect.

However, and most important – and what you and I as investors really want to know – even with current market choppiness, the Dow is up 41% from 2003 levels. Interest rates are level, the Fed appears comfortable with inflation and economic activity by any measure is healthy with the exception of the previously overheated housing market.

What does this mean for the future? Perhaps most telling is business investment. These numbers have increased every single quarter for the past 15 quarters – reversing a nine quarter decline. That is the future of corporate America. A healthy investment in business future normally portends a rising market in the future.

The fear for any investor is that a congressional vote to increase taxes could easily derail the US economy. As has been witnessed by most, the dynamic US economy more then makes up for perceived government revenue losses with massive increases in productivity. The US economy is by far the most efficient when allowed to act within a free market framework. Money and investment will always flow to those areas that create the best return. That activitiy stands in sharp contrast to government dictated investment.

While it is too early to predict how the political winds of today may impact the investment fortunes of tomorrow, it serves all investors well to understand the facts regarding the impact of tax policy in America.