Fiscal Cliff Economics

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+ US Fiscal Cliff Commentary Gnostam Economics Commentary December 5 th 2012 www.gnostamconsulting.com Seattle, WA 98103 USA [email protected]

description

Why US tax structure means US is addicted to growth and low taxes.

Transcript of Fiscal Cliff Economics

Page 1: Fiscal Cliff Economics

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US Fiscal Cliff Commentary

Gnostam Economics Commentary December 5th 2012

www.gnostamconsulting.com Seattle, WA 98103 USA [email protected]

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+US Taxes and Policies

n  All US Government deficit projections depend upon projections: n  Of interest rates;

n  Of economic growth rates;

n  Capital Investment;

n  Demographics.

n  In 2010 biggest source of revenues for the US Government were: n  40% Payroll taxes;

n  42% individual income taxes;

n  Corporate taxes just 9%

n  During period from 2000 -2010 the incomes for high school graduates fell by 14%. Therefore, the source of much of US Government taxes has been shrinking because of ……… Inequality.

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+Total US Debt

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+US Income inequality

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+Over last 40 years Top 1% pays less 250% in taxes

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+Effective Tax rates on wealthy

Taxes as % of GDP in USA are 27% in 2010 vs 43% in Italy and 49% in Denmark

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+Top Individual Marginal Tax rates

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+Taxes as % of GDP OECD nations

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+Evolution of Fiscal Deficit in USA

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+Revenues under alternative scenarios

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+Number that matter n  Current budget deficit: US $ 1090 bn;

n  US GDP in 2012 projected at $15,090 bn;

n  Financed by Goodwill of China’s surplus and other countries with strong surplus’s;

n  CBO projects US tax revenues of $2,450 bn revenues in 2012 or 15.7% of GDP. Under Reagan tax revenues 18.2%, Clinton 19%;

n  Total US Debt: $16,235 bn. Obama projection, reduce by 7,100 bn by 2014, unlikely unless we have increase in tax revenues as % GDP.

n  Revenues raised: n  Under Obama plan: +65% (1,600 bn); n  Under Boehner plan: +32% (800bn); n  Deficit would be paid down in 3 years if revenues as % of GDP were

OECD average.

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+We are an open international economy. Fiscal reform matters.

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+The tax code must be reformed n  Industries that legally pay almost no taxes:

n  Biotech;

n  Internet Software;

n  Pharma

n  Banking and Financial Services;

n  87% of State and Local taxes are “indirect”;

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+Effective taxes paid by US Major Corporations in 2011

n  GE 5%;

n  IBM 1%;

n  Conoco 8%;

n  Wells Fargo, JP Morgan 14%;

n  Exxon 2%; Chevron 4%;

n  Apple, Microsoft 11%;

n  Walmart 19%

Corporations are NOT people: •  They pay no taxes on worldwide

income like individuals; •  They can deduct interest from

taxable income, unlike individuals.

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+Effect of Economic Growth on Tax Revenues

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+Deficits are a function of economic activity n  US tax revenues are the most leveraged to economic activity;

n  Cannot fix US deficit without fixing US employment and economic activity, [Under Clinton tax revenues were >3.7 pts more as % GDP than under Obama]. Overseas wars have huge detrimental effect on US fiscal responsibility and sustainability;

n  The economic crisis in 2009, -5.1% real GDP had a huge impact on tax revenues. Only Mexico and Chile collect less taxes as % GDP than US;

n  US must change its dependency on payroll taxes and move to a progressive tax system, two tax brackets, 25% 35%, with no taxes payable on single/married incomes below $22,000/$32,000 and mortgage interest deduction phased out for those with incomes >$250,000;

n  Corporations need to pay tax on worldwide income. Should have a one time tax amnesty for those who wish to bring funds back to US.