Any bid for the Presidency of the United States, from the tight race to the outcome, will surely affect both the U.S. economy and the capital markets at large. The 2012 election is no exception.

Follow our blog series for regular updates on the election and how each candidate’s strategy could impact the markets.

Today’s post focuses on tax policy.  
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As we look forward (if that’s the right phrase) to the upcoming presidential debates, I’d really appreciate, though not really expect, some candor from the candidates about their plans to deal with the $16 trillion mountain of public debt. We’ve all heard their respective aspirations: President Obama would retain many costly programs and fund them with increased taxes on capital and higher income earners. Governor Romney would cut spending more deeply and restructure the tax system by eliminating deductions and preferences in sufficient amount to lower everyone’s tax bracket.

Unfortunately, these are aspirations, not plans. I don’t believe Obama can make the arithmetic work without deeper cuts than currently envisioned, and I don’t believe Romney’s proposal to redistribute the tax burden (another way to describe closing loopholes) works at lower marginal rates unless we give up deductions on such things as employers’ contribution to employee healthcare premiums and interest paid on home mortgages.

An actual, workable plan would likely step on everyone’s toes, which is why we probably won’t hear details until well after the 113^th Congress is sworn in and the President inaugurated. Since I’m not running for office, I’ll repeat my view that a one year commitment along the lines of the Simpson-Bowles Commission’s recommendations will be the course we eventually follow. Isn’t Simpson-Bowles a dead letter? After all President Obama pretty much shelved it when it was released though he’s since paid it lip service, and Republican Vice Presidential candidate Paul Ryan, as a member of the commission, voted against it. The plan isn’t a politician’s dream because it cuts spending sharply—to the tune of up to 80% of the budget problem—and raises taxes to pay for the remainder. What it has going for it is its resemblance to fiscal discipline strategies countries around the world including the U.S. after World War II) have used to resolve unsustainable debt accumulation such as we now face. Those experiences aren’t any more pleasant for being necessary, and although the credit markets tell us we have time to resolve the problem, experience also tells us that it takes time for these policies to work.

We all hate the idea of paying more taxes, and we fear that raising taxes even a little bit will damage our economy. But if a marginally higher rate of tax collection is the medicine we must take to heal ourselves from the debt we’ve already incurred, we CAN manage it and stay competitive. According to data compiled by the Organization for Economic Cooperation and Development (OECD), to which the world’s most advanced economies belong, at 24.1%, the U.S. ranks 32^nd out of 34 member countries in total taxation of all kinds and at all levels relative to GDP.¹ Our low level of taxation is one of the reasons our private sector remains remarkably adaptable and profitable even in tough times, so let’s keep it that way. But those of us who worry that even a modest increase in taxation would crush our economy’s competitiveness and take our investments down with it should take some comfort in knowing we have a bit of wiggle room. Just don’t tell Congress.

1. OECD, 2009. Denmark is most heavily taxed at 48.1%, Mexico least at 17.4%. The U.S. collects 24.1% of GDP in taxes

Read more from the series Election Insights 2012 at http://blog.oppenheimerfunds.com/tag/election2012/

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