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How the Trump boom can break through Washington gridlock | World Tribune Life

How the Trump boom can break through Washington gridlock

Special to WorldTribune.com

Stephen Moore

By Stephen Moore

The stock market has risen about 9 percent since the election of Donald Trump, with an increase in wealth of nearly $2 trillion. Is this the start of a big bull-market rally?

Investors are, rightly, euphoric over Trump’s pro-business/pro-investor policies. But Wall Street is coming to grips with the political reality that gridlock is the default mode in Washington.

Democrats have announced that they are preparing an all-out defense against Trumpism, as if they were trying to repel the Normandy invasion. So the market has been jittery in recent weeks, rising on Trump successes (such as the regulation rollback) and falling into despair when his economic agenda seems bogged down or he pursues bearish policies (such as tariffs on Mexico).

To get a sense of where the market is headed, it’s wise to look at the historical parallel of the early years of another presidential disruptor: Ronald Reagan. Trump can learn from Reagan’s mistakes and successes.

In the tumultuous first year and a half of the Reagan administration, the stock market fell. By the summer of 1982 the Dow Jones, which had been at 1,000, had fallen to below 800.

Adjusted for inflation, that was more than a 25 percent decline in asset values. People were declaring Reaganomics dead.

Why were the first 18 months so negative for stocks and output Part of the explanation is that then-Chairman of the Federal Reserve Paul Volcker wrung 14 percent inflation out of the economy, which caused a gut-wrenching recession. (But it was a medicine we had to take.)

Another big contributor was the delay in the Reagan tax cuts. Cuts that were supposed to be put in place in 1981 weren’t completed until the start of 1983. Worse, there was constant talk of suspending the tax cuts mid-course because of budget-deficit worries, so investors couldn’t even bank on the scheduled tax cuts.

But once the tax cuts were fully phased in — with income tax rates slashed from 70 to 50 percent and then eventually down to 28 percent and the capital gains tax slashed from 28 percent down to 20 percent — stocks experienced one of the greatest rallies in history.

The market doubled under Reagan, and later, under Bill Clinton, it tripled. In 1982 the Dow was at around 800. In 2000 the Dow was above 10,000. The net worth of all U.S. assets rose from $18 trillion to $60 trillion.

That’s called prosperity.

The stock market did very well under Barack Obama, but most of that was the recovery from the 2008-2009 collapse. Stocks aren’t much higher today, adjusted for inflation, than they were 17 years ago. So there is plenty of opportunity for a big, prolonged rally like we saw in the 1980s and ’90s.

What does Trump need to do to ensure this bull market?

First, declare, as soon as possible, that his tax cuts will be made retroactive to Jan. 1, 2017, so that businesses start investing now.

Second, suspend the Obamacare investment-tax hike. This would cut capital gains and dividend taxes from 23.8 to 20 percent — and those lower rates would be capitalized overnight into higher stock values for investors and pensioners.

Third, don’t wait on the tax cuts or the 10 percent repatriation tax. Demand that Congress enact this agenda in the first 100 days. There’s no reason to delay until the second half of the year. This is making investors nervous that the tax cuts may not happen at all.

If Trump does all of these things — and soon — the corporate tax will be cut in half, investor taxes will be down about 15 percent and money will flow back to America from a lower repatriation tax. This would be the most bullish change in tax policy since the early 1990s. And if all that happens, the lower taxes will translate into trillions of dollars of gains for investors and pension funds, with wages and GDP surging, too.

That sounds awfully bullish to me.

Stephen Moore is a columnist for WorldTribune.com, an economic consultant with Freedom Works and a senior economic adviser to the Donald Trump campaign.

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