Trump is Not a Conservative (at least economically)

 While President Trump would be considered a conservative in areas such as national defense, Supreme Court nominations, and various social issues, he most definitely would not be considered an economic conservative in the traditional sense as embraced by the Republican Party for the past 170 years. Trump's economic policies, in particular those espoused in his second term, fundamentally reject core free-market principles. Instead of championing free-trade, fiscal restraint, and limited government, his platform relies heavily on protectionist tariffs, massive deficit spending, and government intervention in private enterprise.

By weaponizing across-the-board tariffs, Trump effectively betrayed one of the basic tenants of the conservative philosophy that Republicans have long claimed was a pillar of their party - free trade. For a mature economy like the United States, protectionism makes no sense whatsoever. Economists generally view tariffs as a tax on domestic consumers that distorts the free market rather than allowing it to operate efficiently. Tariffs are a sales tax that inflates prices for consumers. We know from decades of experience that tariffs reduce employment, productivity, and output. Trump loves tariffs partly because companies come begging him for relief, and he can extract more tribute from them. Both the tariffs and the jockeying for special favors ought to be abhorrent to the party that holds itself as the defender of the free market. Trump has consistently made claims that tariffs can build a trade wall around America while also raising trillions of dollars in revenues to replace the income tax. This is a seriously flawed claim. A tariff cannot raise revenues from imports if those goods are no longer being imported. Tariffs can either lock out imports or collect revenues from them, but they cannot do both.

Fiscal conservatism traditionally prioritizes balancing the federal budget, reducing the national debt, and limiting government spending. Under Trump's administration, the U.S. national debt has grown significantly due to a combination of tax cuts and increased spending. Should we be surprised that the self-proscribed "King of Debt" doesn't give a rat's ass about the level of our national debt ($40 trillion), and more importantly, the fact that the government's debt is growing faster than its economy. Interest payments now consume 20% of federal revenues and have surpassed defense spending. The vast majority of politicians promise things during a campaign, and then fail to deliver when elected. It seems that Trump takes that approach to a whole different level. During his 2016 presidential campaign, Trump promised not only to balance the federal budget, but even to pay off the entire national debt. Then, during this first term, he signed legislation and executive orders adding $7.8 trillion more in red ink. Through his first 18 months in office the second time around, he is well on pace to surpass the cumulative deficit levels for his first term. His questionable fiscal policies cannot escape the mathematical reality that deep tax cuts and spending expansions cannot reduce surging budget deficits. Trump has continued his predecessor's economic errors. Either on Trump's watch, or that of his successor, there is an above-average chance of a severe shock to the economic system. Problems will first surface in the sovereign bond market with contagion subsequently spreading to the equities market. As they always do in a crisis, The Fed wll open the spigots and flood the financial system with liquidity. The proverbial can will be kicked down the road. The inevitable reset of the monetary system will be deferred again, buying time, but increasing the severity of the eventual demise of the fiat world.

Trump has steered the Republican Party away from long-standing support of free-market capitalism to a bastardized form of state corporatism that features crony capitalism. Rather than letting the free market dictate business success, Trump has advocated for heavy government involvement. He has repeatedly squeezed or lured corporations into doing his bidding. Eleven companies have given the federal government a stake in their ownership, making the government in some cases their largest shareholder and giving the president leverage over them. Imagine the outrage among Republicans if a Democrat had done that. In the past year, in exchange for an export license needed to sell advanced AI chips to China - a license previously denied on national security grounds - Nvidia secured Trump's approval by agreeing to pay the government 25% of the proceeds. Trump has taken "pay to play" arrangements to a level rarely seen in the executive branch of government.

The majority of business leaders are frustrated by Trump's apparent desire to micromanage the U.S. economy. Trump has called for CEOs who do not support him to be fired. He will stop at nothing to ensure those who cross him are punished, whether it is by their businesses failing or the CEOs being sacked. Trump does not want companies that oppose his rule to succeed. Trump's ever-changing trade policies, whether it be across-the-board tariffs, or the U.S.-Mexico-Canada Agreement (USMCA), is creating a climate of economic uncertainty that will disincentivize business investment. The main value of a trade agreement is that the rules and provisions stay stable long enough for companies to make plans and act on them. Per former Undersecretary of Commerce, Dr. Robert Shapiro - "Every investment is based on an assessment of the likely future demand for whatever you're investing in, and how much it's going to cost to produce it. So there are assumptions about labor costs, material costs and other input costs - and again about demand."

In conclusion, for the most part, Republicans have gone along with the betrayal of conservatism because they relish the power and care more about results than long time, fundamental standards. The jury is still out insofar as determining the efficacy of Trump's economic policies. My concern is that this departure from free-market principles will accelerate an eventual economic crisis. As mentioned previously, problems will start in the sovereign bond market and then contaminate the equities market. Like the 2007-2009 Great Financial Crisis, it will be a global phenomenon. And a nasty one. Unlike the 2007-2009 GFC, I see the current fiat system being replaced by a new monetary system that will take away the printing presses from spendthrift governments.

Don't Let the Tax Tail Wag the Dog

 The headline for this blog is one of the golden rules of personal finance. It means you should never make an investment or financial decision based solely on minimizing taxes. While tax-efficient investing is smart, making decisions purely to dodge the tax man (IRS) often leads to taking on needless risk, holding onto losing assets, or missing out on better returns. All too often, a smart, successful person holds on to a stock for far too long because selling would trigger a capital gains tax. Say a stock holding was up 400% at its peak. Then it falls in a precipitous manner, and now it's up 30%. They still won't sell because they are hopeful of a reversal back to their previous high level. Eventually, there is a realization that the reversal is not forthcoming. The stock is back to its cost basis. Our investor has lost years of potential returns, all to avoid a tax bill that would have been a fraction of the ultimate damage. This is the tax tail wagging the dog.

Before proceeding further, it probably makes sense to introduce the applicable income tax rates to the discussion. Capital appreciation (when investments go up in value and the gains are realized) is taxed at your capital gains tax rate. There are short-term gains and long-term gains. If an asset is bought and sold within one year, it will be subject to short-term capital gains. Generally speaking, this will be the investor's marginal income tax bracket. Investments that are sold after being held for more than one year will be subject to long-term capital gains. There is preferential tax treatment as it will be lower than your marginal income tax bracket. The applicable capital gains tax rates are itemized below. Please note the taxable income parameters are for single filers.

LT Capital Gain                                                                                                                                                  Tax Rate                                  Taxable Income    

-0-                                            $0 - $49,450                

15%                                         $49,451 - $545,500

20%                                          over $545,500

Besides the obvious example as detailed previously in the first paragraph, there are other common mistakes associated with holding on to securities at all costs. One risk is that it can get in the way of your overall investment strategy. Rebalancing a portfolio is a critical part of any investment strategy. Rebalancing goes hand in hand with asset allocation and diversification. Over time, certain asset classes will increase in value compared to others. This can disrupt the original asset allocation that was chosen when your strategy was determined. While this is a good thing, normally the advice is to return the portfolio to its original strategic asset allocation. This involves selling appreciated assets - which means paying some capital gains taxes. Paying taxes is the price you pay to participate in the equities market and, even more specifically, the price you pay to keep a strategic asset allocation over time. It is never enjoyable to write a check to the Internal Revenue Service. However, you're paying taxes because you made money (which is the goal) based on either a smart or lucky investment decision, and that sure beats being on the losing side of a trade.

Several years ago when I was a young banker and novice investor, my late father was always pestering me to purchase municipal bonds. Many investors buy munis because the interest income from these bonds is generally exempt from federal income taxes. My reluctance to buy municipal bonds at a fairly young age was supported by multiple considerations. First of all, I wanted the risk/reward associated with the stock market. Second, the commissions charged when buying munis can be fairly stiff. Lastly, I simply was not in a high enough federal tax bracket to justify an allocation to municipal bonds. Munis are inherently more valuable the higher your marginal tax rate is. Another consideration would be that changes to the federal tax code can draw investment monies into bad deals that would never attract attention except for the favorable tax treatment. Always run the investment through a non-tax filter first. Ask: Would I own this if there were no tax benefits? Still another example of chasing "tax-free' growth would be over-funding whole life insurance policies. The returns need to be evaluated honestly against alternatives. The question is always, "Is this a good use of my capital?"

Investors would be wise to consider future tax risk. There is a strong possibility that in the not-too-distant future, income derived from long-term capital gains will be taxed at a much higher rate than is currently the case. In the 1970s, long-term capital gains tax rates were over 30% - peaking at 39.875% in 1976. It would not surprise me in the least if we see a return to those much higher rates. With a national debt of $40 trillion and annual budget deficits consistently around $2 trillion (6.5% of GDP), there will be increasing pressure to increase taxes. The growing wealth inequality will reach the point where Congress will modify the tax code to address this issue before social unrest leads to violence on our urban streets. I expect the top 10% of income earners, especially the top 1%, will be paying significantly more in income taxes in the next few years. It might even be worse than I am predicting. Can you imagine the tax rates for wealthy Americans if President Mamdani has a Democratic House of Representatives and more than 60 Democratic Senators in the United States Senate?

I'll end this blog with a comment I came across when reading an article for research I was conducting on this subject matter. " The best tax shelter of all time is a great investment. Don't contort your portfolio into unrecognizable shapes trying to avoid taxes. A well-diversified, well-managed portfolio that grows steadily will always outperform a tax-optimized portfolio of mediocre investments."