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Tag Archives: debt

Floyd Norris has published a new article on corporate taxes in the U.S. While corporations continue to complain that their tax burden is too high, statistics show that their tax burden is less than before and less than most developed countries.

The I.R.S. 2010 Data Book offers some information. In Table 6 on page 15, it details gross tax receipts for every fiscal year since 1960.

In the 1960s, corporate taxes amounted to about 22 percent of overall tax receipts, and averaged 3.9 percent of gross domestic product. In the most recent decade, the figures are about 12 percent of total taxes and 2.2 percent of G.D.P.

In other words, the corporate tax burden in roughly half what it was.

In times when US debt is a big concern, the next question must be about who faces the extra burden of US debt?

Or here is another set of available data. The Commerce Department calculates total corporate profits as part of its G.D.P report. Looking at 10-year averages to smooth out cyclical swings, pretax corporate profits are now higher than at any time in more than three decades. But corporate tax payments as a percentage of pretax income are lower than at any time since World War II.

So US debt must come at the expense of the taxpayer, and with higher income taxpayers benefiting from lower rates, the middle class faces a bigger burden. Is this any way to encourage growth in the US? Still the corporations argue that their tax rates are higher than in most of the world.

The news here is — or would be if it were true — that American companies face high effective rates. It is true that the 35 percent statutory rate is high by international standards, but there are so many exemptions and loopholes and incentives that relatively little money is actually collected.

If you read the fine print of the study carefully, you see this:

Total income taxes is defined to be the sum of all taxes imposed on income by local, provincial or state, national, and foreign governments during the year. It is the total tax provision and includes current taxes as well as the change in net deferred tax liabilities for the year.

So this counts taxes American companies do not actually pay, but only defer. There are numerous reasons for companies to have deferred taxes, often because tax laws enable expenses to be taken earlier than accounting rules provide. And companies with overseas profits can defer taxes indefinitely by never repatriating the profits.

Suffice it to say that US corporations are avoiding taxes as best they can. We would expect that of any corporation, but that the US government allows it–that is the question.


An interesting article today on the US government debt and how to reduce it. The debt now is 62% of GDP and growing, so there is a sense of urgency to either raise taxes or cut spending–or both.

The problem is that raising taxes is politically difficult, and cutting spending is potentially disasterous. For example, retirement funds will soon fail to cover costs, and health care costs are rising as well.

In both cases, fixing those problems without increasing revenue isn’t feasible. For one, kicking grandma to the curb is not really an option in civilized society. And making adjustments to spending will not happen overnight.

Done right, benefit changes would have to be phased in so future retirees can adjust their plans accordingly. And reducing health care costs requires systemic changes over time.

What are the real costs of high government debt? It is not really explained in the article, but we know that government debt raises interest rates which discourages investment. Higher returns can encourage foreign investment, but at some point the government will have to pay even more for increasing deficits, pushing the burden on to future generations.

Without cutting into retirement or health care, the military is the obvious choice for cuts. That is a problem in the US, but I believe that is the direction the US should consider.

Here is a headline anyone will approach with a grain of salt– Chinese credit firm says US worse risk than China.

A Chinese credit-rating firm, Dagong, founded in 1994, rates China and the government debt of 11 other countries as safer than debt from the US. Slow growth and high debt are given as the primary reasons. While the pinch of salt seems legitimate–there may be some pressure from the Chinese government on this–Dagong also makes a decent case for their ratings.

Dagong said it hopes to “break the monopoly” of Moody’s Investors Service, Standard & Poors and Fitch Ratings. Their reputation suffered after they gave high ratings to mortgage-linked investments that soured when the U.S. housing market collapsed in 2007.

Manoj Kulkarni, head of credit research for SJS Markets in Hong Kong, said that despite the possibility China’s government might try to influence Dagong’s decisions, there is room in the market for a Chinese agency because Western firms’ credibility is badly tarnished.

China, holding huge amounts of American debt, has strong incentives to encourage stricter controls over US debt and the value of the dollar. If investors world-wide start taking Dagong’s ratings seriously, it may influence US policy.

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The news seems more and more pessimistic about the prospects for recovery and growth in the west. Are Americans Worried About a Double Dip? was one story, and Strategies: A Market Forecast that Says Take Cover was another–just two of dozens of editorials written on the same theme.

It may be that this is partly a response to falling market values over the last several days. It might also be that investors are responding to negative reports by analysts and the shared pessimism becomes a self-fulfilling prophesy. A Bearish forecast brings down investment, jobs go missing, output drops, income drops, more bearish forecasts.

The traditional idea of the business cycle says that resource prices drop during a recession, and that brings new opportunities for investment and profit. Keynes explained that prices may be static for long periods of time, despite surpluses. While politicians have embraced Keynes’ suggestion of deficit spending, public fear of huge debt remains a big part of the argument, just as it did in the thirties.

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Robert Kuttner has a new article, Austerity Does Not Produce Prosperity. It is a strong statement that current thinking on the need to limit government debt is likely to extend the recession in Europe and the US. Kuttner makes it clear that he believes in Keynesian policy, and does not want to see the west succumb to concerns over debt.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, “The patient does not need rest. He needs exercise.”

Kuttner goes on to review the recovery of the Great Depression, when the US experienced a debt/GDP ratio of 120%. Of course, they went on to pay-off debt with rapidly expanding incomes through the 1950’s and 60’s.  Kuttner claims the situation today is different because the spending came in the 40’s because of the war, and common folk were helping finance the debt buying war bonds.

I am not so sure the US debt has not been helped along with spending in the military activity in Afghanistan and Iraq. Rather, the difference might be that these wars are not creating new industry and new training for workers.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls. Surtaxes on high incomes were over 90 percent. Interest rates were administered through a deal between the Treasury and the Fed, and the war debt was financed with cheap money.

It seems to me that Kuttner is pointing out enough differences that there may be room to disagree with his main point, that we should follow history’s example.

Two articles caught my eye this morning, one on plans for the Federal Reserve to tighten money growth as recovery allows, another on the growth of the US trade deficit.

I was surprised that the trade deficit had grown lately, thinking that lower exchange rates had already boosted US exports. In fact, that has happened, but the growth in oil imports has overwhelmed the export growth in heavy machinery and commercial airplanes. It is predicted that deficits may continue to grow as American incomes grow and import demand increases.

But how will the Fed’s plans affect that?

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

Initial response is that borrowing will decrease and import demand–for better or worse–will probably decrease as well. But what happens to the interest income? Just a thought, but if the interest elasticity is inelastic (< 1), the actual quantity of debt will increase with higher rates.

The point of the rate hike is said to be controlling inflation, but what if the rate hike brings more money into circulation?

There is likely a mistake in my thinking here. Please point out my mistakes.

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yuanThis story–Can China buck the dollar?–is interesting in itself, but is also a great review of international trade and all the links between exchange rates, trade, and international debt.

The setting is China’s huge holdings of US Treasury Bonds, one way the US has financed its huge deficits over the last many years. China has been anxious to buy the notes because it helps keep the value of the Yuan low against other currencies, and that encourages demand for Chinese exports.

One theme of the story now is that U.S. debt is growing so huge that the debt will devalue and China’s pay-off will be too small. What can China do? Sell the treasury notes and stop buying? That will devalue the dollar and the demand for Chinese exports will fall.

Replacing the dollar with the Yuan as the wold’s reserve currency seems unrealistic, and the article as much as says that. But the headline gets your attention.

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foreign20debtThe first quarter of this year, China’s foreign reserves went up by only $7.7 billion. Sound like enough? Last year for the same period it was $153.9 billion. Reasons for this are numerous.

  • Chinese investors are becoming wary of the safety of their foreign bond holdings.
  • Exports from China are decreasing compared to imports, so less demand for the Yuan.
  • Capital flight from China may be slowing.
  • Non-Chinese investors are buying more US debt, keeping returns low.
  • US consumers are saving more money, reducing the need for Chinese savings.

One Chinese economist was interviewed, and he was asked about the balance of financial power between China and the US. He replied–

“I think it’s mainly in favor of the United States.” (As John Maynard Keynes said) “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

Not sure I believe him, but I like the quote.