Man Page Writing: Life/Times of Man Page Writer

I'm cool--I would never actually say that, but I'll write it--with my supposition that most people in the money management business are politically conservative and, likely, members of the Republican Party. (Question: If the Democratic Party is now the "Democrat Party" do the Republicans now make up the "Republic Party"?) Though I might not agree with their political philosophy, I don't see a problem with their running my money.

This is my build-up to a quote from the semi-annual report from Western Asset Funds, an outfit that runs a bond fund in our 401K. Just got the report in the mail yesterday; it covers the 2007 through Sept. 30, so it's a bit dated. (Incidentally, Sun offers a very good menu of low-cost 401K options, with the Western fund being among the good alternatives.) In these periodic reports, managers (or their ghost writers) get to expound on macroeconomic themes like they were back in college. I enjoy reading them because I like to get a feel for the way a guy (or gal) who's managing my money thinks and because I occasionally learn a thing or two. Here's the quote:

Looking ahead, there are two new things to worry about: higher taxes and a weaker dollar. Democrats are pushing hard for higher taxes, at a time when the U.S. has the highest corporate tax rate in the developed world and many countries are discovering that lower and flatter taxes can attract new business investment. This is a genuine threat to future growth, but higher taxes, if they happen, are still on the distant horizon.

Fine to worry about higher taxes, though higher taxes' negative consequence to bond performance is not obvious to me. I infer that the writer believes that, at this time in our economic history, higher taxes would be a brake on growth. Generally, bonds do better in periods of slow growth, so I'm left unsure as to the basis of the writer's worry, but, hey, he's worried. I worry a lot. I'm OK with worrying.

It's really with the rest of the quote ("Democrats are pushing hard...") that I have a gripe. The "official" Democratic proposal was published by Charles Rangel, Democrat of New York and chairman of the House Ways and Means committee. The proposal does increase taxes on families with incomes greater than $200,000, to what the top rates were during the Clinton years. It keeps the estate tax, with higher exclusions than were in effect in the Clinton years. It lowers the top corporate tax rate from 35 to 30 percent. Further, Rangel wants to take the corporate rate even lower and has discussed eliminating it altogether.

In fairness to the writer of the quote, the Rangel plan might not have been published at the time of publication. However, if it were not, who are these Democrats that are pushing and what are they pushing?

I love the phrase, "...many countries are discovering that lower and flatter taxes can attract new business investment." Where are these countries on whose soil, until recently, no economist had ever set foot? Certainly no nation on the planet Earth. Is the writer referring to low-wage, developing nations, using tax breaks to compete with their peers for big factories, much as states in the US do? Maybe he's thinking about France, where Sarkozy wants to create a more business friendly environment. I just can't tell.

I don't have a quarrel with an assertion like "lower taxes can attract new business investment". It's the "countries are discovering" that comes out of left field.

I'm also scratching my head over the "flatter" bit: lower, sure, but why would a prospective investor care about the progressivity of a country's tax rates? I understand that the marginal rate is the key piece of data and, with a flat tax, the flat rate is the marginal rate. But a country could have progressivity with an overall tax burden that is lower than the tax burden in a country with a flat tax.

Finally, to the last sentence:

This is a genuine threat to future growth, but higher taxes, if they happen, are still on the distant horizon.

To this I'd say: given current entitlement levels (especially Medicare) and current military commitments (Iran and Afghanistan), there will be some combination of spending cuts and tax increases over the next decade--or, well, the US goes into default.

The comments are signed, "Western Asset Management Company". No individual writer is identified.

As I said at the top, I have no problem with an enthusiastic partisan (Republican or Democrat) running my money. I wouldn't want, though, that person's ideology determining his/her investment decisions.