IMF Researchers: US Budget Gaps Endanger Global Economy (Euro trash has a cow)

Dow Jones Newswire via Yahoo! News ^ | 1/7/2004 | Joseph Rebello

[playball0]

IMF Researchers: US Budget Gaps Endanger Global Economy

By Joseph Rebello, Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--Economists at the International Monetary Fund (news - web sites) on Wednesday expressed alarm at growing U.S. budget deficits, saying continued deficits could hurt the global economy by roiling currency markets and driving up interest rates.

In a report on U.S. budget outlook, IMF researchers described the state of government finances as "perilous" in the long run and urged Congress and the White House to take steps to quickly rein in the deficits. Although federal tax cuts and spending increases since 2001 bolstered the global economy in the short run, the report said "large U.S. fiscal deficits also pose significant risks for the rest of the world."

A key risk is that the recent slide of the U.S. dollar against other major currencies could become "disorderly," the researchers said. The dollar has declined sharply since early 2002 against both the European common currency and the Japanese yen, complicating the task of European and Japanese monetary policymakers, said Charles Collyns, who heads the IMF team that monitors the U.S. economy.

"We feel there is a substantial risk that the foreign investors' appetite for U.S. assets, and in particular U.S. government assets, will over time diminish," Collyns said in a news conference. "We think to some degree over the past year this has occurred, and this is one of the reasons why there has been weakness in the U.S. dollar." So far, he said, the decline hasn't jeopardized the economic recoveries in Europe and Japan, but the danger to the global economy could grow if the U.S. budget deficits aren't shrunk.

The White House has said it expects the budget deficit to expand to a record $ 475 billion in fiscal 2004, exceeding 4% of the gross domestic product. U.S. Treasury Secretary John Snow on Wednesday described that level as "entirely manageable," and said the Bush administration expects the deficit to shrink to 2% of GDP (news - web sites) within five years.

But the IMF researchers said that won't be enough to address the government's long-term fiscal problems - including financing the Social Security (news - web sites) and Medicare programs over the next 75 years. In their report, they said the government faces a $47 trillion shortfall in its ability to pay for those and all other long-term obligations. Closing that gap would require "an immediate and permanent" federal tax increase of 60% or a 50% cut in Social Security and Medicare benefits.

The dollar's recent decline, the researchers said, suggests that foreign investors are starting to worry about the U.S. government's ability to resolve its long-term fiscal problems. "The United States is on course to increase its net external liabilities to around 40% of GDP within the next few years - an unprecedented level of external debt for a large industrial country," they said in the report. "This trend is likely to continue to put pressure on the U.S. dollar."

The IMF report said the ratio of U.S. public debt to GDP is expected to increase by 15 percentage points over the next decade. If that occurred, global interest rates, adjusted for inflation, would rise by an average of 0.5 to 1 percentage point. "Higher borrowing costs abroad would mean that adverse effects of U.S. fiscal deficits would spill over into global investment and output," the report said.

Congress and the White House can avert those dangers by acting immediately to balance the budgets, the researchers estimated. Allowing the recent tax cuts to expire by 2013 would reduce the budget shortfall by nearly half. The researchers also said Congress should consider a tax on energy consumption, arguing that it would "help meet the administration's environmental objectives while also providing substantial support for fiscal consolidation." Such tax increases, they calculated, would have a minimal effect on U.S. economic growth.

-By Joseph Rebello, Dow Jones Newswires; 202-862-9279; joseph.rebello@dowjones.com

[HostileTerritory]

Thank you for adding some sense to this discussion. It seems like people are reading this report, seeing it as an attack on President Bush, and then writing it off out-of-hand. They're making a big mistake.

The problems the report addresses are real. Blame pervades our entire system. We can't ignore the deficits. Maybe it's because I'm in my 20s, but I am worried about the time when these bills come due.

[Fenris6]

I would worry instead whether I will be ALIVE when these bills come due.


We are at war.

[HostileTerritory]

Yeah, and that subsidized HOOTERS restaurant in Shreveport is the key to our defense. Give me a break.

Higher defense spending is only a small component of the big fiscal problems we're facing right now and in the future. Stop making excuses and do the research yourself.

[Fenris6]

"We can't ignore the deficits."

Actually we can. See Recovery, Reagan.

Want to list a few of these "big fiscal problems" you've found?

[longtermmemmory]

Tax harminization is a big issue with the EU. Low tax rates draw unfair advantages.

It seems they are upset about the low dollar making tarrifs unnecessary. They also probably don't have the ability or the desire to prop up the dollar.

The EU is trying to do the same failed social policies and achieve a different result

[ancient_geezer]

We will not export more Maytags which are now made in asia, we will not export more Lifesavers, we will not export more Stanley tools, we will not export more Cross pens, etc.etc. etc.

Why would we ever want to, create new products and new factories, which is what we do the best.

You cant export what you dont make.

Make something new. Even them ole buggy shops I remember as a child had to give way to the horseless carriage my friend. The world is hardly at the end of it capacity to want that which is better, more efficient, and useful. Figuring to maintain some fixed status quo and a stagnate set of industies is a certain path to decline and ultimate failure.

[ancient_geezer]

Not when you close your factories and move your manufacturing to asia.

But then you might try to make it worthwhile for those factories to stick around, and come back again.

Rep. Bill Archer, Chairman, House Ways and Means Committee:

• "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."

[waterstraat]

That is very interesting, and if true, I can see why the ssles tax replacing the income tax should be given a closer look.

[ancient_geezer]

Consider that federal taxes alone make add more than 30% to the price consumer goods and services. Addin the costs imposed by trying to comply with the income/payroll tax system we have today and we are hitting more than a 50% burden added to costs over a taxfree business environment.

 

The following article covers the mechanism on how the current Federal tax system propagates and is embedded into consumption expenditure.

DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation

The full impact of the federal tax system(taxes in gross wage/salaries & other compensation + business income/payroll taxes) added onto the base price(without taxes) of retail consumption goods and services is 36% for federal taxes alone. Why? Because all wages and the taxes on them are paid for out of sales receipts to business,(i.e. consumption expenditure).

• Total fed taxes as reflected through gross family income is 23.5% (taxfoundation)
• Total state taxes reflected through gross family income is about 10.2% (taxfoundation)
• The current net personal savings/investment rate is about 1.2%.(BEA)

Federal tax revenues collected as % of current family expenditure = fed/(1-state-fed-savings) =

23.5/(1-.235-0.102-0.012) = 36.09%

If we add in the cost of federal tax compliance & enforcement, the percentage that truely represents the burden on the family due to the Federal income payroll tax system increases by nearly 55% of tax free prices.

Where Have All the Dollars Gone?
How the government robs Peter to pay him back.
By James L. Payne, Reason Magazine February '94

When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue.

Current total Federal tax revenues are about $1900billion, more than $1,000 billion additional dollars are added on onto consumption prices due to the business costs of complying with the federal income/payroll tax laws.

(Payne '97, Pilla '95, AGCCA 2000, Williams 2000)

Percent total current federal burden (taxes + compliance costs) of consumption dollars = 36*(1900+1000)/1900 = 54.95% economic burden added on to base retail prices.

 

---

 

Reduce the taxes on business and simplifying them ultimately means a lower price and higher standard of living for the citizen as well as a better economy and foreign trade environment.

Consider the effect of reducing the cost of doing business with respect to exported goods, the cost reductions (approximately 22% at producer level) that go along with just a change in how we tax, provides the ability to sell exports at much stronger competitive position in foreign markets, while imports that are not now tax in any appreciable sense would be taxed at the retail level providing a excellent environment for business to operate in this country as opposed to others.

Go one further step and reduce the regulatory environment imposed (approx 13% of the cost of production) on business and we would indeed be a formidable business friendly envirnment providing exceptional incentives to return manufacturing back to this nation.

[Skip Ripley]

It is karmically evil to tax production. Taxing consumption is harmonious. Therefore, we should have a sales tax rather than an income tax.

Do you think that rationale would convince the lefties?

[ancient_geezer]

Do you think that rationale would convince the lefties?

I doubt it but making sure there is an equivalent to the standard deduction & personal exemptions of income taxes might:

 

Let all legal residents receive a "Family Consumption Allowence"(FCA) equivalent to the retail sales tax paid on essential goods and services. Pay the FCA in advance, in equal installments each month. Determing the size of the monthly FCA etermined by the Poverty Level for a particular family size, multiplied by the tax rate.

Every year, the Department of Health and Human Services [HHS] determines the "poverty level" for each family size based on a minimal basket of goods and services adjust for inflation.

The 2001 "FairTax" Family Consumption Allowance Figures
Family Size	HHS Poverty Level	Annual FCA	Monthly FCA
One	$8,590	$1,976	$165
Two	$17,180	$3,951	$329
Three	$20,200	$4,646	$387
Four	$23,220	$5,341	$445
Five	$26,240	$6,035	$503
Six	$29,260	$6,730	$561
Seven	$32,280	$7,424	$619
Eight	$35,300	$8,119	$677

1) Federal Register: February 16, 2001, Pages 10695-10697).

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

A family of four, for example, could spend $23,220 per year free of tax because they will have received over the course of the year rebates totaling $5,341. $5,341 is the amount of sales tax paid on $23,220 in expenditures. A family spending double the "poverty level" or $46,440 per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.

[71] To illustrate the plan's progressive nature we can examine the tax burden that a family of four will have at various annual income levels (or in this case, annual spending levels).

H.R.25 "The FairTax Act

Not only does every family receive a FCA based on family size, not income, but they will also receive 100% of their paycheck:

Fedup Smith makes $39K per year...once the FairTax is the law of the land he will receive an instant increase in pay of $200.00 per week. Since he has a family of four, he will receive a FCA of $445 per month, for a total of $1,305.00 additional income per month that he can do with as he sees fit

[ruppertdog]

I would like to point out that deficits are not bad. Debt is important in maximizing growth and value if properly managed.

[CasearianDaoist]

I am sure that is true, but what is the "root cause" of this hatred? Well for one thing they thought they had us under Clinton. They were counting on their fellow travelers in the Democrat Party to sell us out. They are desperate now. They cannot compete with us directly - they must use the the machinery of the "International (Socialist) Community" to bring us down.

What a slap in the face to their abstractions (and thus their credibility with their own "citizens") if the US were to completely stand those abstraction on their heads. This is particularly true about the Euro. This was suppose to be a great weapon against us and coupled with their "Sensible and Subtle" policies allow them to level the field. Yet again we slip through their snares and are gone.

There is a more hidden problem. The Euros have over the last 20 year have been trying to build the same sort of Science and Technology "intellectual infrastructure" that we have over here. Part of this program involves counteracting the "brain drain" to the US from the EU of scientists, technologists, professionals and entrepreneurs. They have not really reversed this trend, only slackened it a bit. If our tax structure is substantially lower than theirs this brain drain can only worsen with time.

The Euros are at war with us, or at least their elites are at war with us. While I am sure that there is some personal element to their animus toward Bush, I would suggest that they are really focusing their hatred for the whole broader nation on Bush.

Have you ever help a drunk work through his addiction? In their narcissism they project their self hatred on you. It seems all to familiar too me.

They hate us because they hate themselves. They have destroyed their civilization and are too weak to undertake the hard work of building a new one.

And then they see us landing robots on the moon in the middle of a deadly conflict, while they cannot even cow Poland. Of course they hate us. But then the Democrat Party, who considers themselves to be somehow "European" hates us just as much.

And what they really hate is the notion of the common man working together in liberty and fellowship to accomplish uncommon things. That brings down the house of cards of their internal rationalizations of "superiority" to us and fills them with envy, bitterness and and the blackest hatred.

Let us hope that we are smart enough to ignore the "advice" of the IMF and proceed on our merry and "simplistic" American way.

Let us also keep our powder dry.

[CasearianDaoist]

I personally think that the whole bit about the deficit or long term macro economics is effecting the dollar vs the euro. Rather it is merely the Fed's rate. Why would one take a long term position in the economies of either the EU or Japan? It is rather comic to see them offering advice. They should start at home and get Germany and France to stick to the stability pact.

Of course we will be hearing from the media for months now about the IMF's "ruling." I wish that the Republican would make a concerted effort to debunk this.

[CasearianDaoist]

Of course they do. Quite literally. What do you think Hillie is doing over at the CFR giving speeches about the "International Community" for?

And of course the Republicans never stand up and point this out.

Wait for the WTO circus this spring.

The Dems need to have their treason outed on nation TV. It will never happen.

[fatso]

said the government faces a $47 trillion shortfall in its ability to pay for those and all other long-term obligations. Closing that gap would require "an immediate and permanent" federal tax increase of 60% or a 50% cut in Social Security and Medicare benefits

[HostileTerritory]

Sure: Social Security, Medicare, baby boom generation retirement.

Reagan looked at the same problems and responded by cutting or slowing domestic spending and raising taxes for SS and Medicare.

Bush, so far, has signed off on tons of increased domestic spending and added a NEW entitlement to Medicare.

[HostileTerritory]

The problem is that our debt is not properly managed and is set to grow substantially.

It's not just numbers on a piece of paper. Economics exists. At some point, investors get tired of lending money to the U.S. government at low rates and demand a higher return. We've already surrendered part of our standard of living by accepting a lower dollar. We'll surrender more in the future with higher interest rates and an even lower dollar. You're whistling past the graveyard.

[D Rider]

Actually, the dollar is down against the Euro. Which makes our products much more atractive. This should solve the trade deficit just fine. OR IS THAT WHAT THEY ARE COMPLAINING ABOUT?!

[optik_b]

"I would worry instead whether I will be ALIVE when these bills come due.

We are at war."

What are you worried about? Statistically speaking the odds of you dying in a terrorist attack are 10,000 times lower than dying in a car accident, having a heart attack or dying of cancer.