Embracing Low Taxes and Economic Freedom Is the Path to Prosperity

• Redistribution of wealth through taxes and government spending reduces economic growth and prosperity
• Raising tax rates leads to tax avoidance and reduced incentives to work and invest, resulting in lower tax revenues
• Understand the relationship between tax rates and tax revenues, with rates that are too high leading to reduced economic activity
• Sound economic policy focuses on low tax rates on a broad base, spending restraint, stable money, minimal regulations, and free trade
• The current U.S. economic policies are moving in the wrong direction on taxes, spending, money, regulations and trade

Negative Consequences of Wealth Redistribution on Economic Growth

The debate over the impact of redistributive economic policies like higher taxes on the wealthy and increased government spending on economic growth is a contentious one. Such policies ultimately reduce prosperity and economic growth. As investors consider the long-term implications of government economic policy.

Five Areas of Economic Growth

The five areas of prosperity are: taxes, government spending, monetary policy/inflation, regulatory policy, and international trade. Arguably the US is currently moving in the wrong direction on all five fronts.

On taxes, rates should be low and applied to a broad base to minimize avoidance and maximize revenue.

On spending, restraint and limiting it to essential functions.

For monetary policy, the US needs stable money and prices.

On regulations, should be minimized to their core purpose to avoid economic harm.

And on trade, free trade should be implemented.

The Impact of High Tax Rates

In studying the relationship between tax rates and the revenue collected by governments, it suggests that there is an optimal tax rate to maximize revenue. If the rate is set too high, it leads to diminishing returns as people are disincentivized to work and invest, and engage in more tax avoidance.

If you tax people who work and you pay people who don't work, we're going to get less people working

For example, if you have two locations A and B, if you raise taxes in B and you lower them in A, producers, manufacturers and people are going to move from B to A.

You just have to look at historical examples of high tax rates, such as 91% under Eisenhower, not generating proportional increases in revenue compared to much lower top marginal rates. Raising taxes on the highest earners ultimately leads to less revenue and economic activity.

The Failure of 'Stimulus' Spending

It is hard to point at the positive impact of increased government spending as "stimulus" based on Keynesian economic theory. In the example of the government giving $600 to each citizen, it demonstrated why it didn't work.

While that $600 transfer will increase spending by the recipient, it will equally reduce spending by whoever the $600 was taken from (either through taxes or borrowing). The net effect is zero, and that sum economic activity will be lost in the process of transferring or redistributing the money. The multiplier effect in both directions cancels out. Every single time you redistribute income, you have transfer payments, you reduce total income. The more you redistribute, the greater will be the reduction in total income.

Actionable Advice for Investors

• Monitor government economic policies closely, especially regarding taxes, spending, monetary policy, regulations and trade
• Consider investing in lower-tax states and countries, as they outperform over time
• Be cautious of investments dependent on government stimulus, as the impact is often overstated
• Maintain a long-term perspective, as short-term policies can have negative consequences that compound over time
• Diversify globally to mitigate policy risks in any single country

This economic worldview is grounded in incentives, the power of markets, and the negative consequences of government intervention. Redistribution, high tax rates, and excessive spending ultimately undermine long-term economic prosperity by reducing the incentive to work, invest, and engage in productive economic activity. For investors, monitoring the direction of economic policy is critical to inform long-term investment strategy and mitigate risk.