On October 22, 1986, Congress passed the Tax Reform Act of 1986 to simplify and tweak the income tax code. This was the second part of the Reagan Era tax cuts. In the weeks preceding signing the Act into law, stocks anticipated the event and rose sharply the first three weeks of the month, up 1.4%. Critics denounced the stock market’s reaction and asserted that stocks had risen too far, too fast, and that valuations were excessive, and an imminent selloff or something far worse was in the offing. The naysayers argued that the Dow Jones Industrial Average had already risen 16.7% and that all positive news was already baked into the price. They were wrong; by mid-December the Dow increased an additional 8% and posted a total return of 25% for the year.
It has been 31 years since our elected officials passed pro-growth fiscal policies that stimulate the economy. During this period there have been three recessions: 1990, 2001, and the financial crisis of ’08-’09. Gross domestic product grew fourfold from $4.5 trillion to $19.5 trillion, yet Real Median Household Income in the U.S. is up less than 10%. The decades have been golden times for some, and dross for others. Detractors and enthusiasts of tax reform have their own axes to grind. Politicians, Republicans and Democrats alike, serve their respected constituencies; the media and its cohorts are interested in ratings. At times, I find the lot disingenuous.
Here’s my point of view: I have worked in the world of finance since 1986. I worked for large companies and founded and operated small businesses. Running a small company is not easy. Administration costs, implementing comprehensive compliance, managing personnel, paying rent, investing in technology and equipment, funding healthcare and retirement costs, and paying taxes is a long sentence to write. Somehow, I’ve kept the lights on for over two decades. Our company often needs more resources and funds to manage it all. Our team members have served a united front. When things are tough, really tough, everyone hunkers down and sacrifices. Small companies in our condition can use a helping hand. If tax reform does in fact take place, everyone in our small company will benefit.
The parallels of the stock market then and now are encouraging. Will Congress actually cut taxes? Will history repeat itself? Will December prove to be a green Christmas for Americans? I suppose we will find out soon enough.
-Chip
Author of Financial Fitness: The Journey from Wall Street to Badwater 135
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