Fiscal Cliff Economics


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

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Fiscal Cliff Economics

  1. 1. + US Fiscal Cliff CommentaryGnostam Economics Commentary www.gnostamconsulting.comDecember 5th 2012 Seattle, WA 98103 USA
  2. 2. + 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.
  3. 3. + Total US Debt
  4. 4. + US Income inequality
  5. 5. + Over last 40 years Top 1% pays less 250% in taxes
  6. 6. + Effective Tax rates on wealthy Taxes as % of GDP in USA are 27% in 2010 vs 43% in Italy and 49% in Denmark
  7. 7. + Top Individual Marginal Tax rates
  8. 8. + Taxes as % of GDP OECD nations
  9. 9. + Evolution of Fiscal Deficit in USA
  10. 10. + Revenues under alternative scenarios
  11. 11. + 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.
  12. 12. + We are an open international economy. Fiscal reform matters.
  13. 13. + 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”;
  14. 14. + Effective taxes paid by US Major Corporations in 2011 n  GE 5%; Corporations are NOT people: n  IBM 1%; •  They pay no taxes on worldwide n  Conoco 8%; income like individuals; •  They can deduct interest from n  Wells Fargo, JP Morgan 14%; taxable income, unlike individuals. n  Exxon 2%; Chevron 4%; n  Apple, Microsoft 11%; n  Walmart 19%
  15. 15. + Effect of Economic Growth on Tax Revenues
  16. 16. + 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.