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Bruce Bartlett on Where the Right Went Wrong from BillMoyers.com on Vimeo.

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Source:
Bruce Bartlett on Where the Right Went Wrong
Moyers & Company, February 10, 2012
http://billmoyers.com/segment/bruce-bartlett-on-where-the-right-went-wrong/

To see a certain category of spending provisions, click on one of the following: Accountability | Aid to People Affected by Economic Downturn | Aid to State and Local Governments | Business | Education | Energy | Health Care | Other | Science and Technology | Transportation and Infrastructure

Too see full list click here

Source: Pro Publica

Catherine Mulbrandon updated her 2010 graph on top marginal tax rates.

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Click to enlarge:

(Top Marginal Tax Rates graph is also available for sale as a tabloid size 11″x17″ poster).

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Source:
Comparing Income, Corporate, Capital Gains Tax Rates: 1916-2011
Visualizing Economics by Catherine Mulbrandon

Government Debt – How Much Is Too Much?
Satyajit Das
January 23, 2012

Economists and policy makers like simple nostrums. Popularised by Economists Carmen Reinhart and Kenneth Rogoff, the unsustainability of a sovereign debt level above 60-90% of a country’s Gross Domestic Product (“GDP”) has become accepted wisdom.

But government or corporate debt rarely ever gets repaid. The real question is whether that debt can be serviced and investor confidence maintained to allow it to be refinanced.

The level of tolerable sovereign debt depends on a multitude of factors.

One factor is the currency of that debt. Where it borrows in its own currency, a sovereign’s capacity to borrow is only constrained by the willingness of investors to purchase its securities and the cost of that borrowing.

Where the borrowing currency is also a major reserve currency, used in global trade or favoured as an investment by central banks, the scope for borrowing is commensurately higher. The combination of these factors has enabled the USA to continue to borrow large amounts to finance its budget and trade deficits.

The inability to print money to service debt has been a significant issue in shaping the European debt crisis.

Where a country has a large domestic saving pool, like Japan, the ability of the government to finance its expenditure is significantly enhanced. A country reliant on foreign investors for its funding is far more restricted, limiting its debt levels.

A significant portion of government debt of weaker European states is held by foreign investors –Greece (91%), Ireland (61%), Portugal (53%) and Italy (51%). For some stronger nations, the level of foreign ownership is also high – Belgium (58%), France (50%) and Germany (41%). In contrast, only 28% of Spanish debt is held by foreign investors. Most of this debt is held within the Euro-Zone as the average holding of government debt outside the area is 25%.

The portion of government debt of other large economies held by foreign investors is lower – US (30%), UK (19%) and Japan (15%).

Significantly, when the net external liabilities of the economy (external liabilities adjustment for foreign assets) is considered, only Japan, Germany and Belgium are owed more by foreigners than they owe externally. All others have a net external liability. Interestingly, Spain’s relatively low level of foreign ownership of government debt is replaced by net external liabilities equivalent to 88% of GDP reflecting high levels of overseas borrowing by Spanish financial institutions and businesses.

The level of interest rates also determines the level of acceptable debt. Higher interest rates and the resultant larger claims on public revenues to service the borrowing limit the level of debt. Extremely low interest rates, such as those in Japan and more recently in the USA and Europe, enable higher level of borrowing.

A further consideration is the maturity structure of the debt. Short term debt increases vulnerability to market disruptions, limiting the level of borrowing. Conversely, longer maturities and low concentration of maturing debt in an individual period can increase debt capacity. The inability to re-finance maturing debts was a crucial catalyst in the European debt problems.

Sustainable debt levels also depend on the size and economic structure of the country. A large, varied economy with a substantial potential tax base can sustain far more debt than a narrowly based and tax revenue poor country. Peripheral European economies, such as Greece, Portugal and Ireland, are heavily dependent on few industries and also a limited tax base.

But perhaps the most important determinant is the level of current and expected economic growth. A dynamic economy capable of high levels of growth, with the attendant ability to generate additional tax revenues and attractive investment, can maintain a higher level of debt than one with lower growth prospects.

While not exact, the sustainable level of debt can be approximated by another formulation, which links the existing level of public debt (% of Gross Domestic Product (“GDP”)), the current budget position (% of Gross Domestic Product (“GDP”)), interest rates and growth rates:

Changes In Government Debt = Budget Deficit + [(Interest Rate – GDP Growth) times Debt]

Italy illustrates the relationship between debt levels and GDP growth. Assuming borrowing costs of 4% and a debt to GDP ratio of 120%, Italy needs to grow at 4.8% just to avoid increasing its debt burden where it budget is balanced. At current market borrowing costs of 6%, Italy has to grow at an unlikely 7.2% just to avoid increases in its debt levels.

Like most of Europe, Italy is projected to have anaemic growth of 1-2 %. Its current borrowing costs are elevated (around 6%) although its overall borrowing costs are lower as the bulk of its debt is at lower rates. This means that Italy must reduce its debt levels significantly to avoid the risk of insolvency.

Assuming interest costs of 4% and growth of 2%, Italy would have to run a budget surplus of 5% per annum for 10 years to reduce its debt to 90% of GDP. Alternatively, it must sell state assets to reduce its debt. Such sharp contraction in net government spending would reduce growth significantly in the absence of other helpful circumstances.

The relationship illustrates the problem facing many governments currently. A toxic cocktail of high levels of existing debt, large and seemingly irreversible structural budget deficits, low growth rates and high borrowing costs makes the position of many countries unsustainable. Europe’s beleaguered economies have to run a budget surplus (through spending cuts and tax increases), grow at very high rates, decrease its borrowing costs or combination of these to merely stabilise its debt.

The US is not immune from these problems. Assuming average borrowing costs of 3% and a debt to GDP ratio of around 100%, America needs to grow at 3.0% just to avoid increasing its debt burden where its budget is balanced. To the extent that growth levels are lower than the interest cost, it needs to offset the difference by running equivalent budget surpluses in order to keep its debt from increasing further.

The status of the US dollar as reserve and major trade currency, the ability of the Fed to print dollars and the flight to quality has allowed the US to avoid too much scrutiny of its own debt problems, at least for the moment. But the relationship highlights the vulnerability of heavily indebted economies. A combination of intractable, corrosive budget deficits, low growth rates and increased pressure on borrowing costs, as a result of investor concern of its creditworthiness, can result in a rapid slide into a debt crisis.

Following the global financial crisis, governments expanded their borrowing, replacing the private sector, especially consumer, debt, in a heroic bet to engineer a recovery. The increase in government debt will prove unsustainable if growth does not return quickly to high levels, driving a new phase of the global financial crisis.

Note: A shorter version was published in the FT previously.
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© 2012 Satyajit Das All Rights Reserved.
Satyajit Das is author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011)

Click to enlarge:

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Bloomberg’s Chart of the day (hat tip: Zero Hedge) ostensibly shows a relationship between the US debt ceiling extensions and price of Gold.

Color me unconvinced.

It has a few specific problems. First is the timing: The chart is dated August 1, 2011. Since then, the US credit rating was downgraded, and Gold took a big swan dive. Up 33% YTD at the time of that chart, it finished the year up 10% — certainly respectable, but no where near the home run it was as of August.

The second issue with this chart is that we only see a small slice of history. The correlation may or may not be spurious. We don’t see what took place prior — the pre 1997 era. Prior to this period, there was little correlation between the two. That sort of selective use of a time segment leads to questionable conclusions based upon that one time frame.

I bring this up today because last week, President Obama formally requested the raising of the debt ceiling (again). This is a different debt ceiling structure than the August debacle. Congress now has 15 days from that date to pass a resolution disapproving of this request before the limit is lifted.

David Semmens of Standard Chartered Bank gives us the details why that is unlikely to occur:

“It is important to note that a bill would have to be passed to stop the raising of the debt ceiling this time around – a far more straight forward mechanism that was built into the Budget Control Act of 2011 to ensure a relatively trouble free procedure.

The first hurdle will come in the House of Representatives which returns today (Tuesday 17^th Jan) and is expected to vote on Wednesday (18^th Jan), with the  Republican controlled legislative branch expected to pass a bill of objection which will be sent to the Senate. The Democratic majority Senate resumes after finishing its holiday break next Monday (23^rd Jan) and is expected to reject any move to block the extension, shortly after that. While we would expect that there will be some political posturing surrounding the vote with the House Republicans passing a bill to reject the extension, this would almost certainly be blocked in the Democrat controlled Senate and failing that receive a presidential veto. If the second reading of the bill were to follow a presidential veto, a two thirds majority would be required in both houses to override the presidential veto. A $1.2trn extension will see the debt ceiling raised to 16.394trn and given current projections see the US through until early 2013 before this issue is revisited.

There are plenty of good reasons to own Gold. I remain unconvinced that the debt ceiling is one of them . . .

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Source:
David Semmens, CFA
Gold vs. Debt Ceiling
Global Research, Europe
Standard Chartered Bank

He also has done stand up: Grover Norquist Doing Stand Up Comedy

Grover Norquist: ‘I Engaged In A Week-Long Drug-Fueled Orgy With Corporate Income Taxes’
President of Americans for Tax Reform Grover Norquist confirms that he carried on a 28-year salacious affair with taxes.

Grover Norquist: ‘I Engaged In A Week-Long Drug-Fueled Orgy With Corporate Income Taxes’
Newsroom (1:59)

Matt Trivisonno is an astute observer of tax withholding data. In advance of tomorrow’s NFP, he shares the following charts with us:

In the first chart attached, you can see the 21-day moving average of federal withholding-tax collections is on an upswing since the summer. But that happens every year, so let’s see how this year’s holiday upswing in payrolls looks compared to last year’s.

If you line up the second chart beneath, you will see that employment seasonality is almost identical to last year’s. Of course, we had a large payroll-tax cut this year, so it’s safe to assume that the first chart would be much stronger if not for that.

Now, if you look closely at the last two months worth of data on the charts, you will see that the moving average was slightly more perky in October and November this year. And that makes sense because we have 1.5 million more workers on payrolls than we did at this time last year. And those people have more money to spend this year.

While markets have been roiled by events in Europe, there does not yet appear to be any impact at all on the US economy using the withholding-tax collections as our yardstick. And there doesn’t seem to be much risk of a nasty surprise in Friday’s job’s report, though anything is possible of course.

Source:
Daily Jobs Update
by Matt

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The WSJ takes a look at a variety of taxes that are about to expire year end, the expiring tax cuts of 2012, and what new taxes go into effect or expire in 2013:

Expiring in 2011
• 2% Social Security payroll-tax cut for employees
• Alternative minimum tax patch
• IRA charitable contribution for people older than 70½.

Expiring in 2012
• Bush tax cuts of 2001 and 2003.
• top tax rate on wages reset to 39.6% from 35%
• top rate on long-term capital gains to 20% from 15%
• Special 15% rate on dividends
• estate-tax provisions.
• 10 million lower-income families and individuals restored to the tax rolls

Silver lining: The dysfunctional US government may end up leading to a lower deficits, as many of the expiring tax cuts are unfunded contributors to huge deficits.

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Source:
The Tax Mess Deepens
LAURA SAUNDERS
WSJ, NOVEMBER 26, 2011 
http://online.wsj.com/article/SB10001424052970203710704577054183310576476.html

Last week, I tossed up an infographic about corporate tax rates. There was fierce pushback, challenging the numbers.

So I set about to find out some more info on the subject. The results of that are seen in the reads this morning, but more significantly, the report from the Greenlining Institute, titled Corporate America Untaxed: Tax Avoidance on the Rise.

Its posted in the Think Tank, and makes for interesting reading.