Impractical Proposals

RCM Managed Asset Portfolio 

By Christopher Chiu, CFA

Impractical Proposals

I.

There has been some alarm about Trump’s tariffs proposals if he is elected. His comments suggest a 10-20 percent import tax on all foreign goods and a 60 percent import tax on goods from China. The effect of the tariff proposal would make foreign goods more expensive with the goal of protecting American producers of the same goods. However, a 10-20 percent tax on all imported goods would result in extremely negative outcomes for American consumers and producers of these products. Not only would these goods become more expensive to consumers, there would also be retaliation from the tariffed countries, which would harm American exporters. 

While across-the-board implementation of tariffs on all imported goods would be challenging, there may be selective implementation of these tariffs as happened in 2018 and 2019 when Trump was in office. Tariffs are authorized by Congress. And when Trump instituted tariffs selectively in 2018 and 2019—on solar panels, washing machines, steel, and aluminum, he did so on the basis of existing legislation, the Trade Expansion Act of 1962, especially section 232 of the Act. This section allows the President to raise tariffs on certain imports if they pose a threat to national security. In other words, the maintenance of certain domestic industries—such the auto industry or aerospace--may be deemed so vital to national security that they can be protected as going concerns. Selective protectionism seems increasingly necessary for all industrialized countries as mainland China seems unwilling to change from an export economy.

However, there is a question of whether tariffs can be instituted on all imported goods on the basis of national security. Enacting an import tax on even one type of good typically requires a specific investigation and determination by the Department of Commerce. As you may remember these cases in 2018 and 2019 were headed by Wilbur Ross, Trump’s Commerce Secretary, who was prominent in the news at the time, campaigning for their enactment. Tariffs on imported goods would need to be justified on a case-by-case basis to demonstrate that each category of goods poses a threat to national security.  Because of these procedures, imposing tariffs on all imported goods seems unlikely.

II.

But if Trump’s across-the-board tariff proposals are extreme, on the other end, we have Kamala Harris with her own basket of extreme proposals. The most extreme of which is a 25% taxation of unrealized capital gains. If enacted, the government presumably would tax gains on paper at the end of year without a qualifying action on the part of the investor. The triggering event would not be an act on the part of the investor but rather simply elapsed time—the year’s end. One can already see how this mechanically runs into problems. Suppose at the end of the year there was a paper gain on an investment. But then at the beginning of the next year the market started to have a huge downturn. If the investor had most of their savings in the market, the money to pay for this tax would have to come from this portfolio, resulting in forced sales, further reducing its value.

This kind of taxation policy would naturally make any would-be investor balk at putting money into the market since he or she would be responsible for paying taxes as a result of tax events that they had not caused. Ultimately such a proposal would discourage the long-term commitment of capital it would be antithetical to the mechanics of long-term investing. Among other things, it may force people who want to be long-term, committed investors into annual sellers just to comply with the tax law. This would in turn insert unnecessary volatility into a sometimes-shaky equity market. Because most of the negative consequences of such a proposal have yet to be explained to or understood by the broader public, it seems unlikely that such a plan would achieve the broad consensus it would need to get it approved in Congress. 

Because both candidates’ proposals are impractical and would cause severe consequences if they were enacted, many keen observers don’t believe the proposals from either Presidential candidate are sincere, that they float them to the public in order to energize their base. But this kind of loose talk has consequences. They may sound good but floating unworkable ideas just to generate excitement results in more than just verbal fantasies. It acclimates people to extreme proposals. It normalizes them and inches them closer to reality. Then they risk becoming enacted simply because they have this built-up momentum. But what they wind up doing is creating more harm than good for the majority of people.