IMF Review And Suggested Tax Increase For The USA

583 views

Published on

IMF Team Suggests a 60% increasde in USA Tax Rates to Stem Economic Risks and Default Probability

1 Comment
1 Like
Statistics
Notes
No Downloads
Views
Total views
583
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
1
Likes
1
Embeds 0
No embeds

No notes for slide

IMF Review And Suggested Tax Increase For The USA

  1. 1. © 2010 International Monetary Fund July 2010 IMF Country Report No. 10/248 July 12, 2010 January 29, 2001 January 29, 2001 January 29, 2001 January 29, 2001 United States: Selected Issues Paper This selected issues paper on United States was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on July 12, 2010. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of United States or the Executive Board of the IMF. The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund  Publication Services 700 19th Street, N.W.  Washington, D.C. 20431 Telephone: (202) 623-7430  Telefax: (202) 623-7201 E-mail: publications@imf.org Internet: http://www.imf.org International Monetary Fund Washington, D.C.To our valued Clients and Business Partners:Pacific Asset Management has excerpted from the most recent IMF report their proposed tax increaseinformation (strongly recommended to the United States) which, if enacted, would bring tax increases of+60% in order to pay for the current level of Federal spending, either under the "current" scenario or the"alternative" scenario as proposed by our own Congressional Budget Office and the Office ofManagement and Budget. The IMF is using our own numbers in formulation of their opinion.We feel that it is important to understand the underpinnings of this necessary increase. The proposedincrease is deemed "imminent and necessary" given the level of spending in place which in many waysmust continue due to legislation that will not change, given the unfunded liabilities which are rolling upannually, not to mention the recent healthcare legislation.This environment should be one of opportunity for those who choose to be more well prepared. We inviteconcerned/interested colleagues and Clients to give us a ring in order to consider investment alternativeswhich could be exceedingly prudent given the environment we will be exposed to for the foreseeablefuture.All the Best,Shawn A. MesarosPacific Asset ManagementTwo Union Square601 Union Street, Suite #4200Seattle, WA 98101(206) 933-1600 Direct(206) 600-3175 Fax(877) 637-2767 Toll Free
  2. 2. INTERNATIONAL MONETARY FUND UNITED STATES Selected Issues Prepared by Nicoletta Batini, Oya Celasun, Thomas Dowling, Marcello Estevão, Geoffrey Keim, Martin Sommer, and Evridiki Tsounta (all WHD) Approved by Western Hemisphere Department July 12, 2010 Contents PageI. The Great Recession and Structural Unemployment ....................................................4 A. Introduction ...............................................................................................................4 B. Methodology .............................................................................................................5 C. Policy Implications ....................................................................................................7II. Prospects for the U.S. Household Saving Rate ............................................................14 A. Introduction .............................................................................................................14 B. Experience of Nordic Economies ............................................................................14 C. Cross-Country Models of the Saving Rate ..............................................................15 D. What is the New Optimal Wealth Level? ...............................................................16 E. Conclusions .............................................................................................................16III. Production and Jobs: Can We Have One Without the Other? .....................................22 A. Introduction .............................................................................................................22 B. How Does this Recession Compare to Previous Ones? ..........................................23 C. How Will the Recovery be Like? ............................................................................24 D. Conclusions and Policy Implications ......................................................................26IV. The Financing of U.S. Federal Budget Deficits ...........................................................37 A. Introduction .............................................................................................................37 B. Post-Crisis Financing Patterns ................................................................................37 C. Baseline Projections of Demand for Treasury Debt................................................38 D. A Model of Saving-Investment Flows ....................................................................39 E. Conclusions .............................................................................................................41V. The U.S. Government’s Role in Reaching the American Dream ................................44 A. Introduction .............................................................................................................44 B. Impediments of the Current System ........................................................................45 C. Lessons from Other Countries.................................................................................46 D. Conclusions and Policy Implications ......................................................................48
  3. 3. 2VI. The U.S. Fiscal Gap: Who Will Pay and How? ...........................................................52 A. Introduction .............................................................................................................52 B. Methodology ...........................................................................................................52 C. Results .....................................................................................................................54 D. Conclusions .............................................................................................................56 A. What is the Fiscal Gap? ..........................................................................................63 B. What Are Generational Accounts? ..........................................................................63FiguresI. l. Increase in Skill Mismatch Index Since Onset of Recession .........................................9I.2. Labor and Housing Market Dispersion ........................................................................10I.3. Change in Foreclosure Rates, 2005–2009 ...................................................................11I.4. Estimated Equilibrium Unemployment Rate at End-2009 by State ............................12II.1. U.S. Household Saving Rate Adjustment Could be Protracted ...................................19III.1. Real GDP Growth and the Change in the Unemployment Rate, 1902–2009 ..............28III.2. Long-Term Unemployment Across U.S. Postwar Recessions ....................................28III.3. Rolling Okun’s Law Coefficients and Growth Compatible with Stable Unemployment, 1915–2009 .............................................................................29III.4. Comparing the Steep Recessions and Job-Rich Recoveries ........................................30III.5. Comparing the Most Recent Recessions and Jobless Recoveries ...............................31III.6. Comparing the Great Depression and the Great Recession .........................................32III.7. Stock Market Volatility versus Rolling Okun’s Law Coefficients ..............................33III.8. Impulse Responses from a Tri-Variate SVAR.............................................................34III.9. Unemployment Scenarios ............................................................................................35V.1. Housing Finance in the United States and Other OECD Countries.............................50VI.1. U.S. Debt in Percent of GDP (1930–2083)..................................................................60VI.2. U.S. Federal Fiscal Overall (solid) and Primary Deficit (dotted) in Percent of GDP (1980–2083) .....................................................................................................60VI.3. Total Revenues andTax Revenues in Percent of GDP—Advanced G-20 Countries...61TablesI.1. Explaining Changes in State-Level Unemployment Rates ............................................8II.1. Household Saving Rate: Baseline Regression Results ................................................18III.1.Estimating Labor Demand and Okun’s Law for a Panel of Countries ........................27IV.1. Projections of Baseline Demand for U.S. Treasury Securities and the Impact of Excess Supply on Long-term Bond Yields..................................................42V.1. United States and Canada: Housing Finance ...............................................................49VI.1. Macroeconomic Assumptions Underlying Budget Projections ...................................57VI.2 U.S. Fiscal Imbalance in Terms of the Present Discounted Value of GDP .................57VI.3. Fiscal Imbalance in Terms of the Present Discounted Value of GDP, 3 Percent Discount Rate ...................................................................................................58VI.4. Lifetime Net Taxes as a Share of Present Value of Labor Income under Different Scenarios, 3 Percent Discount Rate .................................................................58
  4. 4. 52 VI. THE U.S. FISCAL GAP: WHO WILL PAY AND HOW? 1This chapter quantifies the fiscal adjustment needed to stabilize debt/GDP over the very longrun and also examines the generational imbalance (the difference in net taxes faced bycurrent versus future generations). Both the fiscal and generational imbalances are large:we estimate an adjustment between 7 ¾ and 14 ½ percent of every future year’s GDP torestore sustainability and fiscal equity. A permanent cap on the growth of Medicarespending, along with the 2 ¾ percent of GDP adjustment advocated in the Staff Report,would eliminate 40 percent of the fiscal gap. The needed adjustment would rise if delayed. A. Introduction1. The United States is facing major fiscal and generational imbalances. Thecombination of high fiscal deficits, an aging population and rapid growth in government-provided healthcare benefits have put the fiscal accounts on an unsustainable path. Staff andCongressional Budget Office forecasts imply that U.S. debt will rise rapidly relative to GDPin the medium to long term (Figure 1). B. Methodology2. To measure the U.S. fiscal imbalance we compute the “fiscal gap”. Over a finitehorizon, it measures the reduction in the deficit required so that the debt-to-GDP ratio in aparticular year is the same as today. Over an infinite horizon, it measures the adjustmentneeded for the government to meet its intertemporal budget constraint, e.g., so that thepresent value of the excess of future expenditure and current liabilities over future receipts iszero. It has been argued that when fiscal pressures are concentrated in the long run, as in theUnited States, using the infinite horizon definition is preferable because finite horizonmeasures of the gap can underestimate the necessary adjustment (see Gokhale and Smetters,2006).3. To measure the U.S. generational imbalance we compute a set of generationalaccounts for all current and future U.S. generations. Generational accounts indicate thenet present value amount that current and future generations are projected to pay to thegovernment now and in the future. The accounts can be used to assess the fiscal burdencurrent generations place on future generations, and thus offer a measure of the fiscaladjustments needed to make the fiscal structure generationally equitable (the Appendix offersdetails on the methodology used to compute the generational accounts).1 Prepared by Nicoletta Batini, Giovanni Callegari and Julia Guerreiro. Laurence Kotlikoff served as aconsultant on this project.
  5. 5. 534. Two main fiscal scenarios are used (Figure 2): • The staff’s baseline fiscal scenario (hereafter ‘Staff Scenario’), based on the IMF’s staff macroeconomic forecast (see Table 1). • An alternative scenario (hereafter ‘Alternative Scenario’) based on the Congressional Budget Office’s (CBO) June 2010 Alternative Long-Term Scenario.5. Both the Staff and Alternative scenarios are based on CBO’s concept of “currentpolicies”, in line with the 2010 CBO Alternative Long-Term Scenario. Both scenariosincorporate the budgetary impact of the Final Healthcare Legislation until 2020 asdocumented in CBO (2010d). Post 2020, the scenarios make identical assumptions aboutmandatory spending on health care, namely that several policies enacted in the FinalHealthcare Legislation that would restrain growth in spending would not continue in effect(see CBO, 2010e). Both the Staff and Alternative Scenarios incorporate the limit beginningin 2015 on Medicare spending on a per capita basis, to a fixed growth rate, initially set at amix of general inflation in the economy and inflation in the health sector (in line with CBO,2010d). However, the scenarios do not incorporate the upper limit on Medicare spending tobe set by the IPAB permanently at per capita gross domestic product growth plus onepercentage point starting in 2018. Likewise, both scenarios assume that the extra revenuesenvisaged under a full enactment of the Final Healthcare Legislation will not increase as ashare of GDP after 2020. These assumptions have a potentially large effect on the size of thefiscal gap because the full implementation of such policies—according to OMB estimates—could reduce the fiscal gap by some 2 to 3 percentage points of GDP. However, they reflect aview, incorporated in CBO’s Alternative Long-Term Scenario, that changes to the currentlaw are likely to occur or that some provisions of law may be difficult to maintain for a longperiod. Finally, both scenarios assume that healthcare spending remains stable in terms of percapita GDP after 2083.6. The main differences between the Staff and the Alternative Scenarios are: (1) theStaff Scenario is based on lower growth and higher real interest rate assumptions between2011–2015, reflecting the staff’s assumption of a permanent output loss after the crisis, andhigher debt financing costs in the medium term; (2) the Staff Scenario assumes, in line withthe Administration’s FY2011 budget, that the tax cuts enacted in the Economic Growth andTax Relief Reconciliation Act of 2001 (EGTRRA), the Jobs and Growth Tax ReliefReconciliation Act of 2003 (JGTRRA) expire only for higher income households, and anextension of some of the tax relief provisions in the American Recovery and ReinvestmentAct of 2009 (ARRA, Public Law 111-5) in line with the Administration’s FY2011 budget(the CBO alternative scenario assumes that the EGTRRA and JGTRRA are madepermanent).
  6. 6. 54 C. Results7. The U.S. fiscal gap associated with today’s federal fiscal policy is huge forplausible discount rates (Table 2). Using the same discount rate (3 percent) used by theTrustees of the Social Security Administration (2009) in their own Social Security-specificfiscal gap analysis and by CBO (2010e), and the infinite horizon definition, the U.S. fiscalgap is about 14 percent of the present discounted value of U.S. GDP under the Staff’sScenario. This implies that closing the fiscal gap requires a permanent annual fiscaladjustment equal to about 14 percent of U.S. GDP, that is to say that fiscal revenues andspending would need to change so that the primary balance predicted under that scenarioimproves by this amount every year into the indefinite future starting next year. 2 Using theAlternative Scenario the fiscal gap increases to about 14½ percent of the present discountedvalue of GDP (owing to the assumption that tax cuts are made permanent).8. The fiscal gap under a finite horizon definition, or a larger discount factor, issmaller (but still sizeable) (Tables 2 and 3). Using a 6 percent discount factor reduces thegap to 7¾ to 8½ percent of GDP. 3 Targeting a return to the 2008 federal debt-to-GDP ratioby 2083 under the Alternative Scenario, for example, implies a fiscal gap of about8½ percent of GDP. 49. The main drivers of the fiscal gap are rising healthcare costs that under currentlaw will boost mandatory spending to above 18 percent of GDP by 2050. 5 Since thefederal government has historically collected about 18.4 percent of GDP in tax revenues, thismeans that mandatory programs may absorb all federal revenues sometime around 2050, oras early as 2026 when the cost of servicing the debt is added. As a result, future entitlementreforms will be necessary to restore fiscal sustainability.2 Technically, the ratio of the fiscal gap to the present discounted value of GDP shows how much of the gapadjustment can be apportioned to each year from now to infinity to ensure intertemporal solvency.3 A higher discount rate indicates a low propensity to save now for future consumption, a form of spendingimpatience, implying that the current government attaches more weight to the welfare of current generationsrelative to the welfare of future generations. In this sense, the discount rate is different than the cost of financinggovernment borrowing that is embedded in our two fiscal scenarios. In general, the higher the discount rate, thelower the present value of future cash flows—hence a lower fiscal gap.4 This number is close to the figure (8¾ percent of GDP) derived by CBO (2010) using a 75-year-horizon. Thesmall difference is due to the fact that the CBO calculations employ a variable real interest rate, while Fundstaff uses a constant rate throughout.5 Population aging is also an important driver but far less than the increase in healthcare costs; the increase inhealthcare costs is in turn due to various factors, the more important of which is technological change. Thisfactor is summarized in CBO’s “excess growth component” of health-care costs growth (see CBO, 2010).
  7. 7. 5510. The gap remains large even excluding the adverse fiscal effects from the crisis(Table 2). The crisis had a sizeable fiscal impact in deficit terms over 2008, 2009, and 2010.However, its impact is ‘modest when compared to the wave of future liabilities. 611. The U.S. generational imbalance is also large. Applying “generational accounting”to U.S. data indicates that—under the Staff’s Scenario—unless currently living Americanspay more in net taxes or unless government spending on current generations is curtailed,future Americans will face net tax rates that are about 14½–16½ percentage points of thepresent discounted value of labor income higher than those facing current newbornAmericans under our scenarios (See Table 4). 712. Implementing a fiscal adjustment equivalent to 2 ¾ percent of GDP by 2015 assuggested in the Staff Report reduces considerably the fiscal gap (Table 5). Were theadjustment to be followed by a permanent cap on Medicare spending, as mandated under theFinal Healthcare Legislation to the Independent Payment Advisory Board and entailing theadoption of a rule that controls the excess growth in healthcare costs from Medicare, thiswould eliminate 40 percent of the fiscal gap, going a long way in eliminating the country’sfiscal problems (Table 5).13. The fiscal adjustment would entail significant adjustments in taxes and/ortransfers. Under the Staff’s Scenario, for example, the federal government can restore fiscalbalance, conditional on the 2¾ percent of GDP fiscal adjustment by 2015 and the cap onMedicare spending by raising all taxes and cutting all transfer payments from 2015 onwardsby 18 percent (Table 6). This would raise the U.S. tax revenue-to-GDP ratio to just belowGermany’s, while still leaving it below that of many other advanced G-20 countries(Figure 3). A 5- or 10-year delay in the implementation of such residual fiscal adjustmentwould imply the need of ever larger additional increases in taxes/cut in transfers, equal to19 and 21 percent, respectively (see Table 6).6 To assess the impact of the crisis, individual and capital income taxes are set at the pre-crisis GDP ratio levelfor 2009–11. Unemployment compensation and food stamps are set at the pre-crisis GDP ratio for 2009–14.Discretionary spending is reduced in order to exclude fiscal stimulus and above-the line financial sector supportabove the line. Relatedly, IMF Staff Position Note SPN 2009/13 calculates that the PV of the impact of thefinancial crisis in only 7½ percent of the PV of age-related fiscal costs.7 As Table 4 indicates, projected transfers to current generations, particularly health care, have become sosubstantial as to drive the lifetime net tax payment of current generations negative.
  8. 8. 56 D. Conclusions14. Sizeable fiscal actions would be needed to close the U.S. fiscal and generationalimbalances. Under current policies, the United States federal debt is projected to growrapidly due to a combination of large budget deficits before and during the crisis, as well as,over the medium term, demographic factors and healthcare inflation. As part of the mediumterm adjustment, the authorities would need to raise taxes and/or cut transfers substantially toavoid an undesirable escalation of the debt-to-GDP ratio. The longer the wait, the larger thenecessary adjustment will be and the greater the burden on future generations.
  9. 9. 57 Table 1. Macroeconomic Assumptions Underlying Budget Projections Staff Scenario 2011–15 2016–20 2021–83 Real GDP growth 2.7 2.3 2.0 Real interest rate 2.7 3.9 4.1 Alternative Scenario Real GDP growth 3.6 2.3 2.0 Real interest rate 3.2 3.7 3.0 Table 2. U.S. Fiscal Imbalance in Terms of the Present Discounted Value of GDP Discount Rate 3% 6% 13.9 8.3Staff Scenario No Financial Crisis 13.8 7.7Alternative Scenario 14.4 8.6 No Financial Crisis 14.3 8.0Source: Authors calculations.Note: All calculations are obtained taking present values as of fiscal-year-end 2009, andinterpreting the policies in the FY 2010 Federal Budget as “current policies”.
  10. 10. 58 Table 3. Fiscal Imbalance in Terms of the Present Discounted Value of GDP, 3 Percent Discount Rate Staff Alternative Scenario Scenario Finite horizon - Target: 2008 level of debt (44 percent of GDP) 25-year fiscal gap (2009-2033) 4.4 4.6 50-year fiscal gap (2009-2058) 6.1 6.7 75-year fiscal gap (2009-2083) 7.7 8.4 Memo: Infinite horizon - Full repayment of debt 13.9 14.4 Table 4. Lifetime Net Taxes as a Share of Present Value of Labor Income Under Different Scenarios, 3% Discount Rate Staff Scenario Alternative Scenario Zero year old -2.0 -2.0 Future new born 13.4 14.2 Table 5. Impact on Fiscal Gap (as % of PDV of GDP) of Fiscal Adjustment by 2015 and of Cap on Medicare Discount RateStaff Scenario 3% 6%2 3/4 of GDP Adjustment on Taxes over 2010–15 11.2 5.92 3/4 of GDP Adjustment on Taxes over 2010–15 AND Medicare Cap 6.9 4.52 3/4 of GDP Adjustment on Taxes and Transfers over 2010–15 10.5 5.72 3/4 of GDP Adjustment on Taxes and Transfers over 2010–15 AND Medicare Cap 6.5 4.3Memo: Staff Scenario—No Fiscal Adjustment 13.9 8.3
  11. 11. 59Table 6: Additional Percent Increase in Taxes and/or Cut in Transfers Necessary to Close the Fiscal Gap if Adjustment Starts In:1’ 3 2015 2020 2030 Raising taxes only on: Individual income 60 63 70 Payroll income 119 128 146 Individual and payroll income 40 42 47 2 Raising all taxes 34 36 41 2015 2020 2030 Raising all taxes and cutting transfers only on: Social security 27 28 32 Medicare 25 27 29 Medicaid 28 30 33 Medicare and Medicaid 22 23 25 Raising all taxes and cutting all transfers 18 19 21 1 Applied to both current and future generations. 2 Including all other taxes like capital income, excise etc. 3 Under Staff Scenario, after 2¾ of GDP fiscal adjustment by 2015 and Medicare cap, to close fiscal gap computed using a 3 percent discount rate.
  12. 12. 60 Figure 1. U.S. Debt in Percent of GDP (1930–2083) /11,4001,200 Staf f Scenario1,000 800 600 Alternative Scenario 400 200 0 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080Figure 2. U.S. Federal Fiscal Overall (solid) and Primary Deficit (dotted) in Percent of GDP (1980–2083) 20 10 0 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 -10 PB Alternative PB Staf f -20 Alternative -30 Scenario Staf f -40 Scenario -50 -60 -70 -80 -90
  13. 13. 61Figure 3. Total Revenues and Tax Revenues in Percent of GDP—Advanced G-20 Countries60.050.0 Tax Revenues Total revenues40.030.020.010.0 0.0 Italy Australia Canada United France Germany United Japan Korea Kingdom States Sources: IMF, Government Finance Statistics, 2009; International Financial Statistics; and World Economic Outlook. 1/ 2006 data for Japan and 2007 data for all other countries.
  14. 14. 62 REFERENCESAuerbach, A. J., Gokhale, J. and L. J. Kotlikoff, 1991. Generational Accounting: A Meaningful Alternative to Deficit Accounting, NBER Chapters in Tax Policy and the Economy, Volume 5, pages 55-110 National Bureau of Economic Research, Inc.CBO (2009a), “An Analysis of the Presidents Budgetary Proposals for Fiscal Year 2010”, Congressional Budget Office, June 2009.CBO (2009b), “Economic and Budget Issue Brief”, Congressional Budget Office, December 2009.CBO (2010a), “The Budget and Economic Outlook: Fiscal Years 2010 to 2020”, Congressional Budget Office, January 2010.CBO (2010b), “Budget and Economic Outlook: Historical Budget Data”, Congressional Budget Office, January 2010.CBO (2010c), “An Analysis of the Presidents Budgetary Proposals for Fiscal Year 2011”, Congressional Budget Office, March 2010.CBO (2010d), “H.R. 4872, Reconciliation Act of 2010 (Final Health Care Legislation)”, Congressional Budget Office, March 2010.CBO (2010e), “The Long Term Budget Outlook”, Congressional Budget Office, June 2010.Gokhale, J. B. R. Page and J. Sturrock (1999), “Generational Accounts for the United States: An Update”, in Generational Accounting Around the World, A. J. Auerbach, L. J. Kotlikoff and W. Leibfritz (eds).Gokhale, J. and K. Smetters (2003). “Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities”, AEI Press, Washington, D.C.IMF (2009), “The State of Public Finances Cross-Country Fiscal Monitor: November 2009”, IMF Staff Position Note, November 2009.

×