Taxes, Tariffs and Investing
By Maurice Stouse
By 1913, the United States began imposing a tax on income. Up until that point, the main source of federal revenue came from tariffs. Today, the majority of federal revenues come from income taxes. According to Quartz Media, tariff rates were as high as 30 percent on average at the beginning of the 20th century and now are much lower, averaging closer to 1.5 percent. There has been a lot in the news and on the national scene about higher tariffs regarding national security, protecting American jobs and placing our nation on a more even footing with many parts of the world. The tariff debate is nothing new; readers can study history back to the revolutionary war and see the impact of tariffs on the economy.
The records from the United States International Trade Commission (USITC) show that there were higher tariffs imposed at the end of the revolutionary war, near the end of recessions in the late 1800s and the spring of 1930, to name a few. Some would argue that tariffs brought about or prolonged recessions and even depressions, while others point out that the drop in world production was several fold vs the impact from tariffs. Did those tariffs make things better or minimize the decline?
Ronald Reagan, George H.W. Bush and Bill Clinton took steps toward freer trade and, hence, lower tariffs during their administrations. What was the impact on economic growth and was that positive or negative? These are important considerations for savers and investors.
As the economy and earnings have steadily grown, we are beginning to see the effects of low unemployment (3.9 percent at this writing) and increasing prices. (The Consumer Price Index was recently growing at 2.5 percent). This ultimately is resulting in higher interest rates as the Federal Reserve attempts to keep the economy from overheating. The effects of higher rates raise borrowing costs for companies and could slow down or restrain earnings. Higher rates can also hurt the current price of bond holdings; bond prices have declined while interest rates have increased. Oil prices have steadily increased and higher prices at the pump have taken billions out of the spending economy, but moved it into greater growth and potential earnings for the energy sector companies and its workers.
So back to tariffs and taxes. Are tariffs a tax and thereby an added source of revenue for the federal government? Do they help domestic producers maintain or increase pricing power and hence earnings? Do they preserve or even expand jobs? Or, do tariffs merely increase prices for onc sector of the economy while hurting another? And what about reciprocity from other nations? No one is quite sure of outcome. But savers and investors, in working toward their goals and working their plan, should reflect on these and continue to focus on three key things: cost of investing, an allocation and rebalancing strategy and tax efficiency.
Maurice Stouse is a financial advisor with Raymond James and resides in Grayton Beach. He has worked in financial services for more than 31 years. His office is located at Raymond & Associates, Inc., 34851 Emerald Coast Pkwy, Suite 200, Destin, Fla., 32451. Raymond James advisors do not offer tax advice. Please see your tax professionals. Raymond James & Associates, member of New York Stock Exchange/SIPC. You can reach Maurice at 850.460.1995 or Maurice.email@example.com.
Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts will occur. Investing always involves risks and you may incur a profit or a loss. No investment strategy can guarantee success.
Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences.