Paul Ryan’s Economic Policy: Who Pays?

'Path to Prosperity' would be a big blow to the middle class

   

investorpoliticsletters2 Paul Ryan's Economic Policy: Who Pays?Gallup revealed last week that the expected bounce in popularity of the Republican ticket thanks to the addition of Paul Ryan as Mitt Romney’s running mate failed to materialize. Americans yawned at the news.

Ryan, whose budget plan the Los Angeles Times has said will destroy the middle class, should make certain companies apprehensive about the prospects of Ryan in the White House. Let’s take a look:

The Basis

Ryan’s major platform is widening the tax base. I think we all can agree on this basic premise. However, the way in which he intends to do this is a big concern.

Ryan wants to reduce the current six tax rates down to two — 10% and 25%. In addition, he wants to eliminate the alternative minimum tax. By doing so, Congress’ Joint Economic Committee suggests it will reduce federal revenues by $4.5 trillion over the next 10 years.

It goes on to suggest that if Ryan’s plan doesn’t eliminate the preferential treatment of capital gains and dividends (think Warren Buffett and Mitt Romney) to make up the difference but instead chooses to eliminate the deduction of state and local income taxes, mortgage interest, charitable contributions and 401k contributions, the wealthy win and the middle class loses. Specifically, those earning between $50,000 and $200,000 could see an annual tax increase of between $1,358 and $2,681 while those earning over $1 million would on average see a tax reduction of $286,543. Republicans blame the Democrats for being too friendly with Wall Street, but who benefits most from a tax cut for the very wealthy and the preservation of the capital gains and dividend taxation status quo? Wall Street, of course.

I live in Canada; I have no stake in November’s election. Personally, I consider myself socially liberal while economically conservative. I support ideas and policies on both sides of the aisle. However, Ryan’s plan to simplify the tax code, while admirable, fails to address the major problem all developed countries face: how to treat different types of income.

The fairest system in a perfect world is one where no deductions exist and all income, however earned, is treated equally. That will never occur in my lifetime as both the Canadian and U.S. governments and our elected representatives appear ideologically opposed to tax fairness. As a result, the middle class will continue to suffer while the rich capture an even bigger piece of the economic pie.

Who Loses Out?

Currently, we’re in a bit of a housing revival. New housing permits in July jumped to the highest level in four years. A combination of lower prices and record-low mortgage rates has consumers looking at new homes once again, and that has prompted companies like PulteGroup (NYSE:PHM) to raise their 2012 profit outlook. At the end of July, D.R. Horton (NYSE:DHI) delivered its best quarter of pre-tax income since Q2 2007. Builders are getting more confident. Unfortunately, it might be short-lived if the tax increases supported by Congressman Ryan are implemented.

The average household income of Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) shoppers is $40,000 and $60,000, respectively. While Ryan’s plan in terms of taxes likely won’t hurt those earnings less than $50,000, his plans for Medicaid will. As many as 27 million people, many of them living at or below the poverty line, could find themselves kicked out of Medicaid if Ryan pushes for a “block grant” system to deal with each state’s poor and uninsured. This definitely would affect Wal-Mart’s customers and their ability to shop there — or anywhere else, for that matter. As for Target, it too could see lower spending by its core customer as a result of the $1,358 increase in taxes. On the other hand, both ironically could potentially benefit from customers looking to save even more on groceries. It will be interesting to see how this plays out.

Who do you think is the main customer of McDonald’s (NYSE:MCD) and Burger KIng (NYSE:BKW)? It’s not the poor. A study by two researchers at the University of California, Davis found that the patronage of fast-food restaurants peaks around $60,000 in annual income. They found out that, “McDonald’s and Burger King don’t cater to low-income families simply because they are not going to make that much money.” I don’t eat at McDonald’s more than a handful of times a year, but every time I do, I’m amazed at how much I spend. For the quality of food, it’s not cheap. At an average of $10 a meal, a $1,358 tax increase would mean I’d have to refrain from eating at McDonald’s for 27 years based on my usual number of visits. Obviously, I’m not the average customer, but I think you get the idea. Ryan’s plan will seriously hurt the Golden Arches.

Lastly, I’m going to throw out the auto industry. Recent statistics show that Americans are badly in need of replacing or updating their cars. At the same time, negotiations in Canada between the Detroit Three and their unions is heating up, and it’s looking like a strike will occur at Ford (NYSE:F) or General Motors (NYSE:GM). Any kind of shutdown would hurt the industry. A tax hike south of the border would kill it — at least in terms of speeding up the modernization of the fleet on the road.

The likelihood of Ryan’s budget proposal getting through Congress as it stands is slim to none. Nonetheless, investors need to pay attention to what happens here because a middle-class scalping would do nothing but hurt the economy and the companies serving this large demographic.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities. 

The opinions contained in this column are solely those of the writer.

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