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Welcome to Stagnation

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I would scrap corporate taxes all together. It’s the fastest way to kick-start this economy. As Art Laffer and Nicholas Drinkwater point out at Investor’s Business Daily

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According to Larry Gatlin of the legendary country group the Gatlin Brothers, the definition of bankruptcy is: “When your outgo exceeds your income, your upkeep will be your downfall.” And boy, does Detroit fit that definition.

But the origins of Detroit’s bankruptcy are far from unique or exclusively Detroit’s fault.

And while Detroit’s corruption-ridden city government and unfunded pension-fund liabilities are the proximate cause of the Michigan city’s bankruptcy, the root causes are far deeper.

Detroit is the first of a number of triple witching events.

First of all, Motown is part of the American economy, which is experiencing the slowest recovery from the second worst recession/depression in the past century.

The prolonged downturn and its depth are consequences of the massive expansion of stimulus spending during Bush’s second term and Obama’s first term.

Milton Friedman was quick to remind people that government stimulus spending is taxation and a prosperity killer. Governments don’t create resources; they redistribute resources.

While tax rates were raised during the Great Recession, they were raised a lot more during the Great Depression, which explains the difference in severity between the Great Depression of the 1930s and the modern Great Recession.

To push this point home, the highest marginal income-tax rate in 1931 was 25% and by 1938 it was 83%. Whoever heard of an economy being taxed into prosperity?

Obama Tax Hikes

President Obama raised the highest personal income-tax rate to 42%, raised the federal estate tax, upped the payroll tax — and now we have the prospects of greatly increased taxes as a result of ObamaCare.

The U.S. has the highest corporate tax rate in the OECD at 35%, which is the only corporate tax levied on global income, meaning that profits earned abroad by U.S. corporations have to pay the full U.S. tax upon repatriation after a credit for foreign taxes paid.

As a consequence, total employment as a share of the U.S. population has hovered in the 58.5% range for four years now with no sign of improvement, down from well over 63% in 2006.

Real GDP growth over the past four years since the economy troughed has averaged only 1.8%, well below the 2.5% rate needed for the economy to show improvement.

Steering The Motor City Wrong

The U.S. corporate tax structure is especially important for Detroit because the auto industry is global.

German, Japanese, Korean, Italian and French autos sold in countries other than the U.S. pay at most the highest corporate tax in those countries, while U.S. companies are always liable for their U.S. 35% corporate tax rate plus city and state corporate taxes, which in Detroit are serious.

No real solution for Detroit’s bankruptcy is possible without a solution to our nation’s stagnation.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.

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