“Insanity: doing the same thing over and over again and expecting different results” – Albert Einstein
Countries in Europe are trying to tackle their economic problems with announced austerity measures. Some of the proposed austerity measures include:
- Increase the VAT (Value Added Tax on goods consumers buy) from 21% to 23%.
- One time tax on income of companies
- One time tax on net worth of individuals
- Additional tax of 10% on tobacco and alcohol
- 10%-40% tax on luxury cars
All of these austerity measures were put into effect by Greece in April of 2010. These measures had a fantastic effect on Greece’s economy as real GDP fell -8.6% in 2010 and -7.5% in 2011.
Using Greece as an example, Spain and France are trying to get their budget deficits in order by using almost the same approach. Below are their announced austerity programs:
- Raise the VAT from 18% to 21%
- Tax on utility companies (for energy usage)
- A new income tax bracket of 75% on income over $1.25 million ($1 million Euro)
- New tax on stock dividends and stock options
- One time tax surcharge on accumulated wealth
- One time tax on oil companies due to excess profits
When Greece announced their plans, financial markets breathed a sigh of relief thinking that those measures would solve Greece’s financial problems. As France and Spain announced their programs, interest rates in Spain fell for a day or two, but recently spiked up. The Euro continues to slide in value. Not surprisingly, the financial markets learned their lessons from Greece’s measures – too bad the politicians have not.
What the world needs now is someone as bold as President Truman. In 1945 and 1946, shortly after World War II ended, he signed legislation that repealed the corporate excess-profits tax, cut the corporate income tax rate and cut the top marginal income tax rate on individuals. Once those tax cuts had been implemented, the tax rates at that time were still higher than rates today, but the important aspect of the cuts was that Truman’s move signaled to the business community that the government was business and tax friendly. It also gave the business community incentives to expand their businesses. Over the next decade, unemployment remained low at approximately 4%.
So what does this mean for the market? Until we get clarity on the Euro and tax policies in the US, the market will remain volatile with some significant downside risk over the next few months. It is still imperative to manage risk in this environment. Be prepared, however, to invest as events unfold -which could happen shortly.
Your THOR Team