Wednesday, January 30, 2013
The Great Santelli And The EuroTrap
And he was right, except that we are really worse off than Europe. The reason he is screaming hysterically about this is important, because it means we have no real exit from the trap. Here's how this works:
Have patience, and look at this overloaded graph. The bottom two lines, indexed on the left, represent personal taxes (yellow) and personal current transfer receipts (green). Personal current transfer receipts are welfare programs, including food stamps, TANF, SS, Medicare, WIC, Medicaid, etc.
The first problem is that since 2000, our personal taxes have been falling ever shorter of our social benefits to persons. This means that to balance the budget without hugely raising personal taxes, you would have to hugely raise corporate taxes. Given that the US now has close to the highest corporate tax rates in the developed world, this is unlikely. We could, of course, cut corporate taxes and cut our tax gimmes to big corporations, and we'd probably collect more that way. But if we cut corporate tax rates to do that, we wouldn't be able to pay for our social benefits from the proceeds. And if we cut the corporate tax gimmes to the biggies but don't cut our corporate tax rates, we will just slow growth even more. After all, we are competing with countries that mostly have corporate tax rates under 28%. Many, including such socialist havens as the northern Scandinavian countries, have corporate tax rates centering on 25%.
Here is where we're worse off than Europe. Most European countries have high rates of personal benefits, but they also have very high rates of personal taxation, and it is far more regressive than the US tax structure. Lower income people pay high rates of tax in Europe compared to the US through Value Added Tax, which greatly raises the price of goods they buy, and also suppresses consumption.
The second problem is that since 2000, the share of personal income derived from government social benefits has gone through the roof, with most of that occurring since 2009. The big thick purple line is personal current transfer receipts divided by personal income, and you can see what has happened. Nor is it correcting meaningfully. Even a much better economy won't significantly lower that line because of the boomer retirements, and Obamacare is set to hugely raise subsidies to individuals for health insurance and subsidies for Medicare, so next year that purple line jacks right up there again.
The red thicker line (ending third from the top) is private personal income - personal income ex-transfer benefits. Note that this has not recovered to 2008 levels. But you see that personal income (top blue line) and personal consumption (second from the top, black line) have shot right past that line, and that's because the government is paying for it. With deficit spending.
The third problem is that, consequent to the second problem, an ever-increasing share of personal consumption is derived directly from government social benefits. This is worth considering carefully. First, if we tried to raise taxes on most individuals, obviously their consumption would drop as a result. But if we don't raise personal taxes, then we will either have to cut personal transfer benefits, which would drop consumption, or we will have to keep borrowing ever larger amounts of money to fund consumption. That must end, and it will. It will end within the decade. If we don't curb ourselves, Mr. Market will do it for us.
The fourth problem is that the US economy is still around 70% consumption.
I gave you a longer time series in that graph so you could see how historically abnormal all this is. Here's a shorter version:
This lets you look at it in a bit more detail. For example, you can see how government social benefits jacked way up toward the end of the recession, and haven't fallen much since. That occurred because of all of the lost jobs. And even though we are gaining jobs again, we're not adding enough in quality employment to overcome the retirement surge. I must reiterate that Obamacare will shove that purple line way up in 2014 and 2015, no matter how well the economy does, and the retirements will just continue to add to the load.
To understand the trap fully, let's look at some ratios:
The purple line is the same as before - it's the percent of government social benefits included in personal income. The jagged green line is new. It is personal consumption expenditures divided by personal income. Remember that personal income includes taxes! This is not personal income less taxes - it is personal income before taxes!
Since we're running well over 80% of personal income in spending, several things should be intuitively obvious from this graph:
1) Personal consumption will be acutely sensitive to social benefit cuts,
2) Personal consumption will be acutely sensitive to tax increases,
3) Personal consumption will be acutely sensitive to changes in marginal borrowing ability.
I will expand more on this in my next post. But it is an ugly, ugly picture that implies that the US must see a drastic fall in living standards before it can possibly begin to achieve a sustainable growth picture.
Whatever you call it, the bottom line is that no society can pay for these programs without generating the money from personal taxation. The load is too great for corporate taxation to carry.
Yes, we all pay into these programs, but not enough to support them. Unfortunately, the upshot will be that the most strongly-supported programs (revenue wise) will be cut to pay for the least supported programs of greatest necessity. So we are going to wind up cutting SS to pay for food stamps.
It's not a pretty picture.
Cut spending substantially - I do, 30%. We need to stimulate the economy, how about 15% direct to consumers and business? And we need to lock in the costs of social security and alternatives to medicare. I have a plan.
"Would you prefer the term "social benefit"? Entitlement?"
How about Ponzi? Does that work for you? It works for me.
Only about 5-7% of the population really makes over the SS cap in wages ($113,700 this year). You would have to raise the cap quite a bit to try and get much revenue. Also, if you impose the employer half you run the risk of losing more in income tax than you gain in FICA.
Of course, the money has already been abstracted from people's paychecks since 1983, so they have a legitimate beef. This upcoming group of retirees actually did pay in enough to fund their SS benefits, in contrast to all the prior generations! And it is the ones who paid in enough to fund SS who are not going to get their benefits, so I think the reason for floating federal gun bans is rather obvious.
The mood on the street is going to go from pessimistic to sour to angry to rage. And then when we do the inevitable and start cutting SSI things are really going to get impure and dangerous.
Everybody now wants someone else to pay for just about everything.
If someone getting $1,000 in SS gets cut to $900, they are going to qualify for Medicaid and food stamps. And do you think that they will not be likely to apply for them? People have their pride, but SS is regarded as an "earned" right, because people know they paid into the program all these years. So if they feel stiffed by the system, they will be willing to use the system to get their own back.
All the economists are just stupid asses for telling Congress to spend now and cut later. Not only does it defy common sense, but it cannot work. For one thing, if you cut in the future it will make more prosperous households save more now, and then too, you are not really going to save much when you get to the point of actually doing it.
If you want to balance the budget, you need to implement small changes now, see how they work, and then slowly try to shift the system toward sustainability.
From the December, 2012 U.S. Monthly Treasury report, it is anticipated that U.S. corporations will pay about 294 billion in taxes this fiscal year (FY2013, which began in October 2012). American citizens will pay approximately 1.3 trillion in taxes.
Now look at corporate profits AFTER taxes...
I hear this from Larry Kudlow every time I he speaks about the need to reduce corporate taxes. I actually get physically ill.
Those characters in Washington just increased taxes on 77 percent of Americans while at the same time they provided lucrative tax breaks for corporations.
Personal consumption will be acutely sensitive...
We'll make it all up in inflation. (yes, basically the same thing as a lower standard of living.) The Federal Reserve's purpose was and will always be to bail out the largest financial companies. You can raise corporate tax rates all you want, the Fed will just turn around and create more new money to be handed to financial institutions regardless of risk.
We hear the constant whining about the growing income disparity, but we hear absolutely nothing about the SHRINKING of the income gap between the lower and middle classes. The middle class is doing more work, paying more taxes, and bringing home less disposable income. The lower classes are getting increased government support. The highest of the upper classes are ALSO getting increased government support which is where the real widening of the income gap is coming from. The poor get bailouts, Wall Street gets bigger bailouts, everyone else in the middle pays for it. The poor may ultimately be getting poorer, but at a much lower rate than the middle is getting poorer.
The problem with high corporate rates is that most successful businesses do, in fact, pay them. What happens is that the taxes are paid by smaller, growing businesses (y'know, the kind that hire people instead of consolidating and laying off). Meanwhile, the older, bigger, shrinking companies have lobbyists that get tax breaks through Congress so they don't pay the excise tax.
Lower corporate rates and the elimination of loopholes is vital to fixing the employment engine.
But those big businesses do not generally drive job creation. Smaller businesses that do not have the same political access pay those corporate tax rates. And they DO PAY THEM.
To get around that, the bulk of US small businesses have switched to "pass-through" taxation, and now many of them will see a much higher effective rate due to the January tax bill.
Socialist European countries have not cut their rates because they have abandoned their principles - they have done so because they needed job creation, and because that approach works.
The US approach merely generates lobbyist and political bagmen jobs.
You're absolutely wrong on this issue. Then there is an additional trend in some of the states that are strapped in raising taxes. The US has not revised its approach to corporate taxation while the bulk of the world did, and we are paying the price for that.
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