At the time of this writing legislation that would overhaul federal income taxes was still winding its way through Congress. We will assess the implications for investors if and when legislation becomes law.

In the meantime, investors should be wary of claims made by politicians of all stripes and by the media. These voices for the most part miss the bigger picture. We and our parent, AIER, submit that what is most “taxing” to your well-being, as a consumer and as an investor, is the steady encroachment of government spending itself.

As AIER has pointed out, both sides of the political spectrum have promoted their own panacea. But these doctrines have only served to distract from, if not amplify, the underlying problem:

“From the 1930s until the 1970s, left-wing politicians and economists thought they had found the Holy Grail of fiscal alchemy: deficit spending funded by a combination of money printing and future generations. However, in the 1970s the machine ground to a screeching halt: double digit inflation coupled with high unemployment put an end to alchemy. Keynesians run out of luck. It seemed that an opening for a small government alternative was clear.

But, it was not to be. Convincing Ronald Reagan to accept supply side economics not as a temporary fix (which it is, in the conditions of very high marginal rates), but as a governing philosophy, represented a faithful derailment of such hopes. It provided a convenient “free-market” smokescreen for the indefinite abandonment of the agenda of rolling back the federal government…”

Economic resources can be devoted to consumption, investment, or government spending. The growth of federal spending poses the real threat to prosperity. It diverts to government, which spends far less efficiently than the private sector, resources that would otherwise be directed to you immediately, in the form of present consumption, or to you as an investor in the form of future returns.

The current public debate over tax reform is really a question about how to finance the steady encroachment of government spending – through immediate taxation, borrowing, or, though less often described, through monetary inflating. In our estimation the financing question, while important, should be secondary to the far weightier matter of spending itself.

Also In This Issue:
The Trouble with Valuation
The Uncommon Average
A Reader Inquires
Seven Things You Should Know About Social Security
The High Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked by Yield
Asset Class Investment Vehicles