John Snow is a former Secretary of the Treasury. Anyone who has had that job is a far better predictor of the economy and how it will affect your personal portfolio than just about any writer. Mr. Snow recently wrote an opinion in the Wall Street Journal about the affect of future taxes on the economy and the stock market. His opinion is entitled “'Taxmaggedon' Is a Real Threat” and it is very enlightening.
I won’t reproduce the entire article here but I thought that these 4 points were worth repeating. These four points are his advice to policy makers and are reproduced from his commentary.
- First, remember the principle that you always get less of anything you tax. For this reason, society discourages undesirable activities by imposing so-called "sin" taxes. By the same token, high marginal tax rates discourage work, risk-taking and capital formation.
- Second, tax rates should be held as low as possible, consistent with maintaining fiscal balance. Low tax rates are not in conflict with fiscal sanity if the rate of government spending as a fraction of gross domestic product is reduced, or if the tax base is broadened with more fundamental tax reforms. It is encouraging to see so much interest gathering in support of changes to the tax code that would scrap many special tax breaks in favor of deeply lower marginal tax rates.
- Third, marginal tax rates should be as neutral as possible across different types of economic activities. Otherwise the tax code distorts behavior in ways that sap economic strength, as market participants rely less on market price signals and more on government commands to decide how economic resources are used. Social engineering through the tax code comes at a very high cost.
- Finally, policy makers should remember to "do no harm." A reversion to the kind of drastically higher marginal tax rates that existed in the past would be bad enough. It would only add insult to injury to use the economic crisis as an excuse to raise the tax burden on capital formation and thus reduce the lifeblood of America's job creators.
It is my belief as a Confident Investor that whenever things change dramatically, the repercussions are difficult to predict. It is like dropping a rock into the smooth surface of a puddle. You know that there are going to be ripples but you really don’t know all of the splashing that is going to occur and what else is going to get wet.
If tax law significantly changes, you should be cautious with your principal and perhaps hoard more cash for the short term. You can always start to invest again when the market stabilizes and the ripples are gone.