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GMO's Grantham: Raise Taxes on Capital and the Rich

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While financial markets wait on President Donald Trump’s tax cut plan, money manager Jeremy Grantham is calling for tax increases on capital and the very rich.

In the latest quarterly report from GMO, the firm he founded and for which he is chief investment strategist, Grantham writes that “capitalism has lost its way … and has badly diluted the value of democracy along the way.”

He favors tax increases for the wealthy coupled with more training and education for workers to improve the “long-term job displacement” and reduce income inequality.

Grantham is very concerned about income inequality, writing that it harms the social cohesion necessary for a healthy society. When income inequality rises, life expectancy and literacy decline while homicides, drug use and imprisonment rise, writes Grantham.

“This country does indeed need to be saved from ‘the rich and powerful,’” writes Grantham.

Instead it has elected a “new strong leader …. who is surrounded by capitalists and billionaires who, to further advantage corporations and the super-rich, are apparently prepared to wage war on the already sadly diminished regulations that defend ordinary people (and, yes, with no regulations corporations would make more money),” writes Grantham.

“The war would also include direct tax cuts for the rich and corporations, which would further increase the share of the pie going to corporations.” Such a strategy “could not possibly be worse for the workers if he tried,” writes Grantham, noting that workers could feel betrayed or “bamboozled enough not to notice.”

Ironically, a Reuters/Ipsos poll of 45,000 people that took place in early evening of Election Day found that voters wanted “a strong leader to take the country back from the rich and powerful,” writes Grantham.

“Trump recognized this streak of strong opinion and played to it, clearly stating his intention to look after the forgotten workers.”

Grantham, 78, says he’s “fanatically well-disposed to democracy” having lived through the reigns of Hitler, Mussolini and Stalin, but he worries that younger people are not so disposed.

 “Of those born, as I was, in the 1930s, fully 75% gave a 10 out of 10 for extreme support for democracy but that percentage declines to 62%, 57%, 50%, and 43% for each younger cohort by decade. … By the time we get to those born in the 1970s …  extreme support is down to 32%! And this is not the worst of it.”

He notes that from 1995 to 2011, the percent of each age group believing that democracy is a  ‘bad’ or ‘very bad’ way to ‘run this country’ has been rising from 5.5% to 12% for those over 65 and “to a frightening 24%, up from 12.5% for the 16- to 24-year-olds.“

Despite his criticism of tax cuts for corporations and the wealthy, Grantham tells ThinkAdvisor that he doesn’t expect they will hurt the U.S. economy or stock market in the short term, and will more likely help stocks.

Longer term is a different story, according to Grantham. “Beyond a certain point, the overwhelming success of corporations and their enormous power has eaten into the social contract,” he said. “You have to have healthy middle class to keep demand growing and society in good shape…. It’s wonderful for corporate profits and pretty good for the stock market.”

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