The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- It's an election year, which means we should all expect plenty of tax policy, debt and deficit rhetoric. And rhetoric can get heated -- but before getting swept away, here are some important factors to keep in mind.
First, as we've written in the past, if put in context, the U.S.'s debt and deficit aren't as alarming as many fear. Our debt level has been relatively elevated lately, but our debt interest costs are low -- historically so.
In fact, U.S. debt interest costs are much lower now than they were at any point in the 1990s -- generally a period of vibrant economic growth and strong stock market times. When it comes to debt, what matters most is the debtor's ability to repay the principle and interest, not the full balance in one fell swoop.
Meaning, in short, the U.S. isn't anywhere near like Greece when it comes to our debt situation, despite many media headlines implying a fearsome parallel.
As for tax policy in 2012, expect a lot of acrimony but little action. The GOP recently released its budget proposal, including a tax plan -- primarily aimed at lowering and overall simplifying the tax code for individuals and corporations. In general, we agree lower and more transparent is the way to go with taxes -- and we believe the private sector is overall and on average a far more efficient and effective spender than the government.
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New tax schemes also effectively change money ownership, which can lead to uncertainty and legislative risk -- two things markets don't historically like too much. So a simpler and overall lower tax code would likely help ease some of those concerns, minimizing one (of myriad) possible sources of market discomfort.
But like or hate the GOP plan, it's not likely to be enacted this year -- given Democrats control the Senate. What's more, in election years historically, politicians have typically been hesitant to legislate sweeping change. By the same token, that means Democratic proposals are also unlikely to pass this year.
Beyond worrying about just this year, though, an important question to ask is whether and how much tax policy really matters. Interestingly, through history, there's been enormous volatility in U.S. tax rates -- the top tax rate has been as
-- yet tax collection rates have never varied much as a percent of GDP, typically hovering somewhere between roughly 18% and 20%.
Why would that be the case? Well, as the top rate increases toward 100%, folks who earn in that range are increasingly incentivized to minimize what they owe -- maybe some decide to work less, maybe some decide to spend more on tax preparation in order to find ways to reduce their taxable income, and so on.
While a lower tax rate can be an incremental economic benefit, it's important to keep in mind tax rates are inherently a national issue, local to the U.S. -- but for stocks, global matters first and most. This is why the history of tax-rate moves and stock returns is mixed -- a tax hike isn't an automatic negative for stocks, nor is the reverse true. There are just too many other inputs in a fully globalized marketplace for any single factor to have that much influence.
This election year (as with any other), everyone will no doubt have their opinions about what tax policy is best. But capital markets are incredibly complex -- it's critical to not overstate the impact of relatively marginal tax-rate moves.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.