The occasions were a media breakfast on March 8 and meetings among Caldwell officers and Dr. Arthur B. Laffer, the father of supply-side economics and longtime consultant to Caldwell Trust Company.
At the breakfast, I told reporters that we are extremely focused on policies, not politics. A fiduciary money manager can’t control what happens in Washington, but we do have to manage investments in keeping with the resulting policies, and Art Laffer tells us the consequences of those policies. So don’t get bogged down in politics; focus on the policies.
I then introduced Timothy J. Videnka, Caldwell’s vice president of investments, who said, “We hold ourselves out to the community with the words ‘Personal, Traditional, Independent.’ Here is why independence matters: We scan the universe of investment providers and choose the best, and Dr. Laffer is one of the best in the field of economics.”
A rock star in the field of economics
In introducing Dr. Laffer, Tim said, “In 1974, Art Laffer drew a simple curve on the back of a napkin and that changed economics in this country forever. It started a tax-cutting wave that boosted a lot of growth. It was a lot of fun for me to meet someone I consider a rock star in the world of economics.”
Dr. Laffer’s remarks
Before taking questions from reporters, Dr. Laffer spoke about the “huge repository of information” he has culled for his forthcoming book, Eureka!, which details how California can regain its star status. “We now have 60 years of data for 50 states, along with aggregate date from the Internal Revenue Service. Any policies you can think of, these states have tried and tested, multiple times in multiple states. We also have mitigation patterns from the IRS, not only for federal income taxes but also for estate taxes and gift taxes.”
Below are a few comments from Dr. Laffer’s wide-ranging talk.
Taxes. “There’s no way to balance the federal budget without fixing the tax code,” he said, suggesting a flat tax with few deductions. States also need tax reform: 19 states have estate taxes while two have gift taxes. Tax records show that people migrated from higher-taxing states to lower ones, and that states with no earned income tax outperformed the highest-tax states.
The Bush-era tax cuts were extended through the end of this year, but not the estate tax. It has been modified to go forward at 35 percent for two years instead of zero. Congress increased the exemption from $1 million to $5 million for a person and spouse, so you can do a once-in-a-lifetime gift of up to $5 million tax-free, but only until December 31.
“Eleven states have introduced a progressive income tax recently. Compared with their performance five years before, every state has since declined. For example, in 1965, New Jersey had no income or sales tax and was one of the fastest-growing states in the nation. Now, after years of raising taxes and slow growth under then-Governor Jon Corzine, they are ranked 50th for Business Tax Climate in 2011 and 2012,” he said. Florida, a right-to-work state with no earned income tax, had a big crash because of its previous big boom. It will make it up quickly,” Dr. Laffer predicted.
“You are seeing a revolution in the states. It’s exciting, but states cannot make changes easily because their services are contractual.”
Bipartisan cooperation. As a member of President Ronald Reagan’s Economic Advisory Board, Dr. Laffer saw Reagan win approval for his unprecedented tax cut program through bipartisan cooperation. “President Reagan would not allow legislation to be written in Congress, which is partisan by nature. All bills had to be co-authored by a Republican and a Democrat,” he said.
Dr. Laffer espouses tax reform with flat tax and comprehensive codes, free trade, less government
The election. “Nothing is going to happen until November,” Laffer said. “Republicans are trying to find a candidate, and they will find one who will focus on President Obama instead of each other. An election is really a referendum on the incumbent. When you close the curtain to vote, you ask yourself, ‘Do I want four more years of this?’ In 1980, it was not Ronald Reagan who won but Jimmy Carter who lost. In 1992, people voted against then-president George H.W. Bush.”
Dr. Laffer said, “I’m much better at forecasting the past than the future.” However, he said that under a Republican administration, he would expect a flatter tax at a lower rate, a more comprehensive tax code, spending restraint and free trade. “I sort of trust the American people.”
Banana independence and free trade. “The term ‘energy independence’ offends me. Some nations are awash in oil and some are not. And there’s no reason we shouldn’t use it. For example, it’s like Minnesota having banana independence from Nicaragua. You don’t use trade as a political weapon,” Dr. Laffer said. Instead, governments should trade freely, selling what they have and buying what they need from nations that have that product.
Stimulus spending. “Government doesn’t create resources; it redistributes them. Consider Farmer A and Farmer V. If Farmer B gets a stimulus, who pays for it? The answer is Farmer A. All government spending is taxation,” he said.
CONCLUSION
Don’t get caught up in the politics; pay attention to the policies. As we have said in the past, good policies will lead to better market returns. If it seems good policies will emanate from Washington, you can expect equity returns closer to historical norms. We are currently emphasizing stocks over bonds when appropriate and aligning sector weightings to a more cyclical bias.