Government Tax Rates Create Moneymaking Opportunity
That is if you consider that economics is the study of incentives.
I have been writing over the past two weeks about the current phenomenon called "inversion."
The subject of inversion has to do with American tax rates on corporations, which are among the highest in the developed world, and the movement of United States firms to buy companies in another country and then move their headquarters out of the United States into the home of the acquired firm.
[Read: Hedge Funds Hate These 5 Stocks – Should You?]
[Read: Inflation Pressures Abate, at Least for Now] Over the last 50 years or so, a lot of individuals in the investment community have gotten very good at finding ways to take advantage of government policies. For example, in the early 1960s, the federal government began a policy of credit inflation based upon a foundation of deficit spending. This policy was aimed at keeping the labor force as fully employed as possible. The problem is this credit inflation ended up producing consumer price inflation, which in the early 1970s got people moving into gold and other assets that would appreciate in price in the face of the excess demand going around. The credit inflation was continued, and it was found that asset price inflation, such as the rising price of houses, underwrote the wealth of a lot of people going into the 1980s and 1990s. This credit inflation also resulted in an incredible amount of innovation in financial instruments in the 1990s and 2000s. Many investors have become very sophisticated in identifying opportunities to make large amounts of money created by government programs and policies. And, with the evolution of hedge funds, private equity funds and asset management groups, there are individuals who are trained and ready with the money to move into these situations arising out of the incentives produced by the government. Going forward, governments will have to think more and more about not just the good that might be done through specific programs and policies, but the unintended consequences of those programs and policies. Maybe the government needs to take a look at itself in the mirror when it starts discussing all the income/wealth inequality that has been created over the past 50 years.
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