Wednesday, September 29, 2010

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SgtWs

Wednesday, September 29, 2010

Post by SgtWs »

Watching the market try to climb this wall of worry. I don’t have anything to say today, but I found these articles very interesting…….
From CNBC………

Ideology, Not Economics, May Be At Core of Tax Policy

Tax cuts are good and tax hikes are bad for the economy. Or is it tax cuts are bad and tax hikes are good?

One of Washington’s most enduring policy dialectics is alive and well as Democrats and Republicans court midterm-election voters in the face of mystifyingly weak job market and threatening budget deficit.

Yet, for all of the political noise about the Reagan or Bush tax cuts, or the Clinton or Obama tax hikes, it may be hard to make a convincing case for either approach..

“I really don’t think you can,” says Dean Baker, co-director of the Center for Economic And Policy Analysis. “It’s really marginal.”

Baker’s analysis is rare for its candor and neutrality about a policy debate where cause and effect is usually one-sided and often over-simplified. Most participants can't recommend one school of thought without castigating the other.

The conventional wisdom of tax-cut proponents, best known as supply-siders, is that they free up capital, sparking both spending and investment, which leads to higher economic growth and job creation, thus raising government tax receipts. Tax hikes, however, have the opposite effect.

Meanwhile, members of the tax-hike school say they allow the government to redistribute income, which spurs spending, and raises tax receipts, a plus for the budget balance and lower interest rates. Tax cuts, however, are more often giveaways to the wealthy and/.or corporations—failing to trickle down or through the overall economy--and only aggravate the budget deficit by lowering tax revenue.

Yet for all of the intricacy of the arguments, the results are hardly crystal clear, based on GDP, payroll, budget and tax receipt data over the past 35 years.

What’s more, overlooked in the debate is that the composition, size, duration and timing of such tax initiatives is also a important determining factor in their effectiveness.

"[Tax cuts] have to be big and well directed," says Christian Weller, a pubic policy specialist at the University of Massachusetts and Center for American Progress.
In some cases even the biggest and best plans get lost in the economic shuffle.
“There's other macro factors skewing the numbers,” adds Weller. "War, inflation, oil prices.”

Take oil prices, for example. The Carter, Reagan and Bush I presidencies were all marked by oil shocks. Prices were relentlessly high for much of Bush II's second term and historically low during the majority of the of the Clinton administration. The high/low between the two periods was roughly $149 vs. $11 a barrel.

Reagan

More than anything, the policy debate has been shaped by the tax reform efforts of President Ronald Reagan in the 1980s, the first income-tax cuts since the Kennedy administration, when the top tax rate went from 90 percent to 70 percent.

Together, two separate acts (1981 and 1986) reduced 15 income-tax brackets into four, with the top one going from 70 percent to 28 percent, and the lowest one from 11 percent to 15 percent. The reform package also closed loopholes deductions and shelters, as well as expanded the alternative minimum tax.

At the same time, the Reagan administration funded a massive military buildup, which exceeded 6 percent of GDP in several years.

During the two-term Reagan presidency and one term of President George H.W Bush that followed, GDP growth averaged 3.40 percent, with only one-year having an out-sized gain (7.2 percent in 1984). Job growth averaged 1.8 million a year. By comparison, the numbers for the preceding Carter administration were 3.25 percent and 2.0 million.

Tax receipts averaged 20.82 percent of GDP under Carter, vs. 18.19 percent with Reagan. The budget deficit as a percentage of GDP averaged 2.42 percent under Carter and 4.22 percent under Reagan.

“These tax cuts are not as pure as we want to think,” says Weller. “In the Reagan years...you lowered rates and closed loopholes...so the effective tax rate doesn't change that much.”

Reagan also wound up taking back pieces of the 1981 income-tax cuts to address the budget deficit and later raised corporate taxes and closed loopholes, as well as those on gasoline.

Clinton

Comparisons with the Clinton administration are also interesting, because the Democratic president and his like-minded Congress pushed through a tax-increase package in 1993.

The top income bracket was raised to 36 percent with a 10 percent surcharge for the top earners, creating am effective tax rate of 39.6 percent. The corporate tax rate was upped to 35 percent.

There were also tax increases on Social Security benefits and gasoline, as well as a repeal of the cap on ordinary income subject to the Medicare payroll tax. Taxes were cut, however, for some 15 million low-income earners.

The plan also included spending restraints and mandated the budget be balanced over a number of years.

In 1997, the Republican-controlled Congress pushed through a tax-relief and deficit-reduction bill that included a cut in the capital gains tax from 28 percent to 20 percent and a near doubling of the estate tax exemption. The package, however, did raise cigarette taxes and expanded or created tax credits.

GDP growth averaged 3.37 percent during Clinton's first time term and 4.45 percent in his second. Job growth averaged 2.3 million over the full presidency and tax receipts 19.16 percent. The deficit-to-GDP ratio averaged 2.6 in the first term and turned into a 1.1-percent surplus in the second.

Bush

The eight-year Bush presidency that followed posted average GDP growth of 1.76 percent and never once broke 4 percent in any given year. Just 133,000 jobs were created over the period

Tax receipts averaged 17.89 percent of GDP, but fell from 19.8 percent in 2001 to 17.9 percent in 2002, after the first of two tax-cut packages. The budget balance went from a 1.3-percent surplus in 2001 to a deficit in 2001 and averaged 1.97 percent over the presidency.

The combined Bush tax cuts of 2001 and 2003 were broader in scope but smaller in size when it came to income-bracket reductions. They were considered long-term, however, stretching out to 2010, which is a key in changing behavior. The top rate was reduced to 33 percent and the surcharge rate from 39.6 to 35 percent. The marriage penalty was largely eliminated and taxes on capital gains and dividends slashed.

The Bush presidency was also marked by increased spending on defense and homeland security in the aftermath of 9/11, as well as the $400 billion Medicare Prescription Drug Modernization Act, known as Medicare Part B, the biggest entitlement initiative in decades.

"We couldn't afford those tax cuts back when they were implemented by Bush. We can't afford them now," said David Stockman, Reagan's former budget director, referring to the nation's debt problem.

Even former Fed Chairman Alan Greenspan, who ardently backed the Bush tax cuts a decade ago, said extending them was unrealistic and unaffordable in the current budget environment.

Nevertheless, both Democrats and Republicans are pushing for expensive tax cuts at a time of extraordinary government spending and record-high budget deficits on the assumption that it will help an economy suffering from weak demand, which is holding back job creation.

The Democratic plan to cut taxes on all taxpayers except those in the two-top brackets would cost the government $2.9 trillion in lost tax revenue over a decade; the Republican plan--which applies cuts to all taxpayers—would mean another $700 billion in lost tax revenue.

“Whichever camp your are in—cutting taxes or raising rates—spending reductions are a necessary thing. While my side says tax reductions will produce robust growth we cant turn a blind eye to the expenditure side." says Pete Sepp. executive VP of the National Taxpayers Union. "It's been proven time and time again under Democrats and Republicans."


And another..........

Currencies Clash in New Age of Beggar-My-Neighbour

Published: Wednesday, 29 Sep 2010, By: Martin Wolf, Financial Times
"We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.”

This complaint by Guido Mantega, Brazil’s finance minister, is entirely understandable. In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. They fear the results.

This is not the first time for such currency conflicts. In September 1985, now 25 years ago, the governments of France, West Germany, Japan, the US and the UK met at the Plaza Hotel in New York and agreed to push for depreciation of the US dollar.

Earlier still, in August 1971, the US president Richard Nixon imposed the “Nixon shock”, levying a 10 percent import surcharge and ending dollar convertibility into gold. Both events reflected the US desire to depreciate the dollar. It has the same desire today.

But this time is different: the focus of attention is not a compliant ally, such as Japan, but the world’s next superpower: China. When such elephants fight, bystanders are likely to be trampled.

Here there are three facts, relevant to today’s currency wars.

First, as a result of the crisis, the developed world is suffering from chronically deficient demand. In none of the six biggest high-income economies – the US, Japan, Germany, France, the UK and Italy – was gross domestic product in the second quarter of this year back to where it was in the first quarter of 2008.

These economies are now operating at up to 10 percent below their past trends. One indication of the excess supply is the decline in core inflation to close to 1 percent in the US and the eurozone: deflation beckons. These countries hope for export-led growth. This is true both of those with trade deficits (such as the US) and of those with surpluses (such as Germany and Japan). In aggregate, however, this can only happen if emerging economies shift towards current account deficit.

Second, private sectors are working in just this direction. In its April forecasts (soon to be updated), the Washington-based Institute for International Finance suggested that this year the net flow of external private finance into the emerging countries would be $746 billion. This would be partially offset by a net private outflow from these countries of $566 billion.

Nevertheless, with a current account surplus of $320 billion as well, and modest official capital inflows, the external balance of the emerging world, without official intervention, would be a surplus of $535 billion. But, without the intervention, that could not happen: the current account must balance the net capital flow. The adjustment would go via a higher exchange rate. In the end, the emerging world would run a current account deficit financed by a net inflow of private capital from the high-income countries. Indeed, that is precisely what one would expect to happen.

Third, this natural adjustment continues to be thwarted by the build-up of foreign currency reserves. These sums represent an official capital outflow. Between January 1999 and July 2008, the world’s official reserves rose from $1,615bn to $7,534 billion – a staggering increase of $5,918 billion. This increase was, one might argue, a form of self-insurance after earlier crises.

Indeed, reserves were used up during this crisis: they shrank by $472 billion between July 2008 and February 2009. No doubt, this helped countries without reserve currencies cushion the impact. But this use of reserves was a mere 6 percent of the pre-crisis level. Moreover, between February 2009 and May 2010, reserves rose by another $1,324 billion, to reach close to $8,385 billion. Mercantilism lives!

China is overwhelmingly the dominant intervener, accounting for 40 percent of the accumulation since February 2009. By June 2010, its reserves had reached $2,450 billion, 30 percent of the world total and a staggering 50 percent of its own GDP. This accumulation must be viewed as a huge export subsidy. Never in human history can the government of one superpower have lent so much to that of another.

Some argue – Komal Sri-Kumar of the Trust Company of the West, in Tuesday’s Financial Times, for example – that such management of the exchange rate is not manipulative, contrary to views in the US Congress, since adjustment can occur via “changes in domestic costs and prices”. This argument would be more convincing if China had not worked hard and successfully to suppress the natural monetary and so inflationary consequences of its intervention.

In the meantime, the inevitable adjustment towards current account deficits in the emerging world is being shifted on to countries that are both attractive to capital inflows and unwilling or unable to intervene in the currency markets on the needed scale. Poor Brazil! Could we even be seeing the starting gun for the next emerging market financial crisis?

John Connally, Nixon’s secretary of the Treasury, famously told the Europeans that the dollar “is our currency, but your problem”. The Chinese respond in kind. In the absence of currency adjustments, we are seeing a form of monetary warfare: in effect, the US is seeking to inflate China, and China to deflate the US. Both sides are convinced they are right; neither is succeeding; and the rest of the world suffers.

It is not hard to see China’s point of view: it is desperate to avoid what it views as the dire fate of Japan after the Plaza accord. With export competitiveness damaged by its soaring currency and pressured by the US to reduce its current account surplus, Japan chose not the needed structural reforms, but a huge monetary expansion, instead.

The consequent bubble helped deliver the “lost decade” of the 1990s. Once a world-beater, Japan fell into the doldrums. For China, self-evidently, any such outcome would be a catastrophe.

At the same time, it is difficult to envisage a robust configuration of the world economy without large net capital flows from the high-income countries to the rest. Yet it is also hard to imagine that happening, on a sustainable basis, if the world’s biggest and most successful emerging economy is also its largest net exporter of capital.

What is needed is a route to these needed global adjustments. That will demand not just a will to co-operate that now seems sorely lacking, but greater imagination about both domestic and international reforms. I would like to be optimistic. But I am not: a world of beggar-my-neighbour policy is most unlikely to end well.


Copyright 2010 The Financial Times Limited

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