Posted on 12/07/2010 9:25:07 PM PST by TigerLikesRooster
Moody's Worried US Tax Cuts Could Become Permanent
Tuesday, 07 Dec 2010 01:37 PM
Moody's Investors Service is worried the extension of U.S. tax cuts agreed by President Barack Obama and Republican leaders could become permanent, hurting U.S. finances and its credit ratings in the long run.
Steven Hess, Moody's lead sovereign analyst for the United States, said on Tuesday doesn't foresee any change in the U.S. AAA ratings in the next 18 months to two years. He is, however, concerned about "what's going to happen in two years," when the extensions are set to expire again.
"The timing two years from now will be very complicated from a political point of view, with presidential elections in November 2012," Hess told Reuters in an interview.
(Excerpt) Read more at moneynews.com ...
Really? Why??
If you cut taxes on income, both corporate and personal, both have more money to spend in the economy, thus driving up consumer demand, augmenting hew hiring and putting unemployed workers on the payroll. Since those workers are once again paying taxes, tax receipts actually go up, especially if the private sector views the cuts as permanent.
The current tax extention is a mistake only in that they put an expiration date on them. This alters the psyche of the consumer from one of greater purchases in the market to one of taking that temporary income and using it to pay off debt, or save it for a rainy day...neither of which kick-starts the economy. Nope...permanent tax cuts for both corporations and individuals are what's desperately needed.
What does a triple a ranking mean?
As in a AAA rating versus a double A as in AA.
Think about it. Think about it like a business, not a state. Credit is tapped out, debt is piling up, and the creditors are getting nervous.
The first step is to cut costs, and layoff people. Which the states have been doing. After that, the bank will demand you raise prices (increase income) to try to bridge the gap. If that fails, you go bankrupt.
The fedgov is in trouble. Deep trouble. The massive measures that are causing riots in Greece and the UK will be here soon, and that means cuts and higher taxes. Sooner or later, that is what will happen.
It is going to be very painful, and it will deepen the depression, but you need to discharge debt, not try to inflate another bubble.
>>The money needs to come from somewhere. We need to cut spending and probably raise taxes.<<
Easy, reduce the budget. Shut down a few worthless agencies and you’ll have plenty of money to pay off the debt. May I suggest starting with the EPA and the NEA.
That is a start, and a good one, but the biggest spending is on entitlement and the military.
Those cuts will hurt.
>>>Easy, reduce the budget. Shut down a few worthless agencies and youll have plenty of money to pay off the debt. May I suggest starting with the EPA and the NEA.
It’s not that easy. When you consider the budget deficit for this year will be about $1.3T cutting the EPA and NEA doesn’t really move you very close to having plenty of money to pay off the debt. You pretty much have to go after everything that is not defense, social security, medicare or medicaid.
Discretionary spending in FY 2010 was $1.39 trillion, or 38% of total spending. More than half ($844 billion) was security spending, which includes the Department of Defense, overseas contingency programs and Homeland Security.
Non-security spending was $553 billion. So if you close down all the discretionary gov agencies (USDA, Energy, Commerce, Education, etc) immediately you find about $500B in savings. There is $135B in stimulus spending for FY11 that could be cut. We can find an additional $619B in savings from non-discretionary programs if we immediately cut these programs: Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, Supplemental Security for the Disabled and Student Loans. That gets you close to balancing the budget.
I guess my question is this. Is it a relative ranking or an absolute ranking?
Hmmmmm......
How about just cutting spending back to say 2006 levels for a start. That would cut a hunk out of the budget.
So why would the US government not be considered to have minimal credit risk compared with everything else out there?
Exactly.
Right now the debt servicing load to federal government revenue is 20 percent. This means that in order to prevent an irreverseable debt spiral, the government must collect 20 percent of the current taxes that it collects.
Tax revenue from it’s height has dropped by about a third. So even though tax revenue has dropped, debt servicing load is still only 20 percent.
Total Federal tax revenue is about 18 percent of the GDP of the US, so about 18 cents of every dollar goes to pay for the Feds.
Bah. Low taxes and High spending has worked wonders so far.
If Federal government spending had been held to a 2% annual increase for each of the past 10 years, we would not be facing such a monumental problem. Entitlement reform is still going to be required, too. Increasing taxes will not solve that problem without crushing growth and depressing corporate revenue, and thus leaving both Social Security and Medicare further in the red.
A relative ranking, I believe.
Lindsey’s report was published as the book ‘The Growth Experiment’ in 1991. Lindsey had been an economics professor at Harvard during the 80s and had had his students run the regression analyses that generated the data that the book is based on. I see that Amazon still has a new copy offered for less than $5.
Now it’s been a good many years since I read the book, but IIRC the 60% was recouped rather quickly. Businesses responded to the incentives of the Reagan program, which of course had more to it than just marginal tax rate cuts. Cutting the thicket of regulation was another major leg, as was supporting the Volcker Fed’s sound dollar policy. And there were investment tax credits.
Getting sacked by Dubya is probably a testament to Lindsey’s integrity. He simply wouldn’t let political calculus influence his cost estimate of the Iraq War. The numbers were what they were and he wasn’t going to alter them. I never saw Lindsey comment on getting sacked, he just kept his own counsel on the subject.
Here’s a tax curve that is a bit more valuable than Laffer’s curve:
Lindsey’s ‘Excess Burden’ graph:
Great article that I had not seen before...thanks for posting!
Interesting. Clearly not something many in Washington spend much time thinking about.
Here’s something else you might find interesting, Martin Anderson’s memoir:
click on ‘contents’, click on XXII which takes you to page 140.
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