Tax cuts

My text for this morning's Ewell Village anti-clockwise was the fact that stock markets react in a positive way to tax cuts, tax cuts which are thought by many to be a bad thing. So why should this be?

First thought was that tax cuts were spending neutral, they just moved spending from one place to another, often amounting to a redistribution of wealth towards the already wealthy. But total spending was about the same, companies were doing about the same amount of business and were making about same amount of profit. So again, why should the markets care?

Second thought was that corporation tax might be cut, which would improve company profits at a stroke, which should result in increased dividends, which should be reflected in increased share price.

Third thought was that corporation tax cuts were often irrelevant as corporation tax was often used as an offset for personal taxation. I think that is what franking in Australia is all about. Some might argue that his makes corporation tax pretty much irrelevant altogether.

Fourth thought was that tax cuts often favoured the rich who would not spend them, just stash them away in some tax haven, which was not going to do anything for business at home. Indeed, I think that the habit that rich people had of stockpiling bullion under their mattresses was seen as something of a brake on economic activity in the 18th and 19th centuries.

Fifth thought was that tax cuts were often funded by increased government borrowing, rather than by spending cuts, that is to say by cutting jobs in government and by cutting services to poor people. So spend now, pay later. But his would be good for business in the short term, which is probably good enough for the stock market.

Sixth thought was that this was all getting far too complicated. Perhaps the markets just guess.