Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

20
Part II: Macroeconomic Shocks and Stock Prices

VICTORA. CANTO AND ARTHUR B. LAFFER

Over the past decade, research at A. B. Laffer Associates has focused on measuring the effects of macroeconomic shocks on specific industry stock returns. Our CATS (Capital Assets Tax Sensitivity) strategy predicts the relative performances of individual industry stocks in the aftermath of these economic shocks. 1

The CATS strategy classifies industry groups into High-CATS and Low-CATS categories. This classification is based primarily on how stocks performed following tax rate reductions in the 1960s. 2 Stocks which performed best when tax rates were low and falling are designated as High-CATS. In contrast, Low-CATS industry groups are those which performed poorly, on a relative basis, when tax rates were low and falling. It follows that Low-CATS stocks tend to outperform High-CATS stocks (and the market) during periods when tax rates and other production disincentives are increased.


CLASSIFICATION TECHNIQUE

The specific criterion used for the High-CATS/Low-CATS border was whether the industry's stock return outperformed the S&P 500 index during the base period 1962-66. These five years were selected because they encompass the trough to the peak of the bull market which followed the Kennedy income tax rate reductions. 3 Depending upon the individual industry's stock performance during 1962-66, the industry received a CATS classification of either High-

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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