Ray Dalio’s latest research on Biden’s proposed tax plan, similarities to Roosevelt’s New Deal, and how it represents where we are in the Big Cycle Swing at this moment. The piece explains how what is happening is cyclical as part of the left-right pendulum that swings back and forth between calls for more and less government.
Q1 2021 hedge fund letters, conferences and more
Biden's Tax And Spend Proposals Are A Big Gamble
Ray outlines how the Biden tax and spend proposals are a big gamble that the Democrats have to make now within their window of opportunity to have a revolutionary impact as soon as possible. While he is not sure how this will play out, it is clear that it could have been just as risky to not make this bet because the consequences of the lack of reforms are very dangerous and growing.
Ray’s major takeaways from the proposal include that:
- Absent extraordinary efforts to evade the tax, the Biden tax package (as proposed) would probably be the largest single tax increase on the wealthy since FDR. Through an exercise of modeling the taxes people would face over the course of their lifetimes, Bridgewater roughly estimates that Biden’s plan, as proposed, would represent a roughly 4-6% tax rate increase or a 10% or so decline in after-tax lifetime earnings (including regular income and returns on assets).
- Still, those taxed most heavily, the ultra-wealthy, will face lower tax rates than they did at the height of tax burdens in the 1960s and 1970s. Since that period, the ultra-rich have had their effective tax rates decline over time as the average American has seen their taxes stay flat or even slightly rise. Biden is reversing a portion of that decline.
The Big Picture: Where We Are in the Big Left-Right Cycle
What’s happening is classic and cyclical—i.e., we are seeing the left-right pendulum that has big swings back and forth between 1) more government, more redistributions of wealth and income, and less fiscal and monetary discipline, and 2) less government and fewer redistributions of wealth and income swing sharply to policies of type 1) (left) from policies of type 2) (right) for logical reasons that have timelessly and universally caused these swings. To put where we are in the cycle in perspective by looking at where we have come from over the last 100 years, that cycle has transpired as follows:
- The peak in the policies of the right occurred in 1929-32 when...
- ...in 1932 there was a big cycle swing to the left (when Roosevelt and the Democrats came in) that continued until around 1980 when it peaked and...
- ...there was the big cycle swing to the right (when Reagan and the Republicans came in), which continued until 2020 when it peaked and...
- ...there was the big cycle swing to the left (when Biden and the Democrats came in).
- By the way these presidents didn’t lead the changes as much as they were chosen by people who changed their approaches as they reacted to the consequences of the excesses of the swings.
Continue reading the full article by Ray Dalio On LinkedIn
