April 25, 2021

Give Growth A Chance

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Bottom Line:


Rising levels of wealth inequality within the US over the last few decades have stoked political energy for corrective actions.  Unfortunately, President Biden’s proposal to raise taxes on corporations and investors to reverse inequality lacks empirical support as the highest taxed states in the United States of America also have the highest levels of income inequality.  Alternatively, pre-pandemic economic growth, through previously ascribed maximum employment levels, seriously reduced inequality and poverty metrics.  The economics clearly favors policies that max-out growth, not those that restrict it.  The stimulus and vaccines coursing through our economic veins will drive GDP growth rates, incomes, and household net worth to historic levels.  To reduce inequality within the USA, all we are saying is… give growth a chance!


The Full Story:


This week, President Biden announced his proposal to raise capital gains taxes from 23.8% to 43.4% for those with earnings (wage income + investment income + capital gains, etc.) above $1,000,000.  This follows his previous proposal to raise corporate tax rates from 21% to 28%.  In percentage terms, this translates into a 33% increase in corporate taxes and an 82% increase in capital gains tax, the highest level in US history. Some may argue that few Americans statistically make more than $1,000,000 in a year, and that’s true.  But it’s also important to note that the top 10% of Americans by net worth own 87% of the stock market.  Therefore, while the tax may only impact a small percentage of households, it impacts a large percentage of markets.   With the government recently stumping for $2 trillion more stimulus to offset COVID’s economic impact, why now increase taxes at such an historic degree?


The GINI Coefficient


Economists often measure wealth distribution across an economy using the GINI coefficient.  Without digging deeply into the math, a GINI coefficient of zero means everyone earns the same thing, while a GINI coefficient of one means one person earns everything.  If a nation’s GINI coefficient rises over time, then quantitatively, its income inequality is rising.  If a nation’s GINI coefficient falls over time, then quantitatively, its income inequality is falling.  To help baseline, economists estimate a global GINI coefficient of around .6.  The image below details trends in income inequality globally:


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Income inequality globally grew meaningfully up to the year 2000 as economic growth among advanced economies outpaced economic growth among emerging economies.  This trend reversed as China ascended and emerging economies began growing faster than the developed economies.  According to the GINI coefficient, not only has the world gotten richer over the past two decades, it has become more inclusive as well.  Therefore, one way to shrink your GINI coefficient is by disproportionately enriching your poor.  Another way to shrink your GINI is by restraining your rich.  For instance, the Ukraine boasts the world’s lowest GINI at 25.  However, average household wealth in the Ukraine totals $8,792 compared with $432,500 for the United States.  Lastly, if you really want to decrease your GINI, just highly tax larger estates.  Japan has the world’s highest estate tax and a GINI coefficient roughly half of the world average.


Bringing it Home


Here in the United States, while our overall inequality score bests the world averages, our coefficient has been rising somewhat consistently:



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The increase in the GINI coefficient and the disproportionate increase in visible wealth for the top 1% correlate with the rise in political animosity around wealth inequality.  Class struggles throughout history have led to conflicts, revolutions, and regime changes.  The pressure within the US isn’t novel.  Fortunately, we use ballot boxes rather than bayonets to adjust course… and so we have.  Biden’s tax proposals aren’t aiming at deficit reduction, they are aiming at GINI coefficient reduction.  To evaluate the use of the tax code as a regulator of GINI coefficients, let’s compare the GINIs of each state:



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Based upon the state rankings, New York State has the highest income inequality while Alaska has the lowest income inequality (State-Local Tax Burden Rankings | Tax Foundation).  New York also has the highest state tax rates while Alaska has the lowest.  A quick glance at the rankings makes it clear that overall tax rates have little at best, or negative at worst, correlations with GINI coefficients.  Therefore, on their own, higher taxes don’t seem to reduce wealth inequality.  For further evidence, in the most progressive tax locations, inequality measures have risen more rapidly on average:


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Given that higher tax rates do not seem to cure income inequality, we need to identify policies that do.


Prior to COVID, the US unemployment rate dropped to 3.5%, its lowest level in more than 50 years.  For the full calendar year of 2019, median household incomes across America grew 6.8%.  Incomes for white Americans grew 5.7%, while incomes for black Americans grew 7.9%.  Incomes for women grew 7.8%, while incomes for men grew 2.5%.  Poverty levels across the US, overall, fell 1.3% to 10.5%, the lowest level since 1959.  Poverty rates for blacks and Hispanics reached their lowest level ever recorded.


Policies that promote economic growth have the best record of reducing poverty and income inequality.  The Federal Reserve fully understands this.  Their insistence that the economy exceed previously ascribed maximum employment thresholds, and run higher than previously tolerated inflation levels, directly targets poverty reduction and income inequality.  If the economy could repeat its recent anti-poverty performance for an extended period, real structural improvements would occur organically across the economy.  Tax revenues would rise naturally as a result and employers would deliver job training driven by scarcity and necessity.  If you want to defeat poverty…you have to enrich it with capabilities, opportunities and self-sufficiencies.


Have a great weekend!



David S. Waddell 
CEO, Chief Investment Strategist




David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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