The US Relies Too Much On Incomes For Tax Revenue

BCA Research | US Tax RevenuesReprinted from: Business Insider, The Money Game
By, Lisa Mahapatra


There are plenty of different ways to look at a country’s tax rate. 

The US Relies Too Much On Incomes For Tax Revenue

Taxes on income, profits and capital gains account for 47% of tax revenue in the U.S. compared with a median 30% in other OECD countries.

F or instance, if you look at tax as a percentage of GDP, the U.S. has a relatively low rate. However, BCA Research goes one step further and considers the make up of those tax revenues. It turns out that the U.S. relies pretty heavily on incomes as a source of tax revenue.

BCA believes this should be addressed when considering tax reform.

The U.S. tax system is desperately in need of reform. Tax revenues as a share of GDP need to rise, but this should be done by sweeping away all the loopholes and this could even allow marginal rates to come down. Ultimately, a national sales tax will probably be needed. This would broaden the tax base and reduce the heavy reliance of the U.S. on income taxes. Taxes on income, profits and capital gains account for 47% of tax revenue in the U.S. compared with a median 30% in other OECD countries.

This is not to say that taxes on incomes should come down.  Rather, the U.S. should better diversify its sources of revenue.

[Read the full article at Business Insider, The Money Game]

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On A Collision Course With The Debt Supercycle

Reprinted from: The Globe And Mail
By, Larry MacDonald

Which is the best investment approach – dividend stocks, index funds, value plays or growth stories? Alas, this debate is looking like an exercise in rearranging the deck chairs. That’s because financial markets are on a collision course with the Debt Supercycle.

On A Collision Course With The Debt Supercycle

T he Debt Supercycle, a term coined by Montreal-based BCA Research, describes a persistent increase in national debt relative to gross domestic product (GDP). What this means in layperson terms is that many countries are increasingly living beyond their means, raising serious questions about the sustainability of current levels of prosperity….

…We are now in a reflationary period, when the economy is being pumped up by central bankers and other policy-makers. Substantial equity exposure may work during this time, but adhering to target allocations will be more important than ever. Indeed, instead of rebalancing to a fixed asset mix, a progressively more conservative mix might be considered as the reflation matures and moves closer to a possible tipping point.

What will also help is diversification. Equities should include a good weighting in emerging economies given the Debt Supercycle is not as advanced in those countries, advises BCA Research.

As for fixed-income securities, say others, a good percentage in short-term quality bonds is advised.

[…Read the full article at The Globe And Mail Online]


The View Beyond The ‘Cliff’: Blue Skies

Reprinted from: The Globe And Mail
By, David Berman

One of the big concerns about the so-called “fiscal cliff” is that even if Washington agrees on a budget before the end of the year, averting automatic tax increases and spending cuts, taxes are still likely to go up and spending is likely to go down. But there could be some good news here.

B CA Research has taken a sunny view, arguing that economic growth should rebound in2013 even if the economy takes a step back early in the year. After all, a budget deal that extends middle-class tax cuts and avoids the most dramatic spending cuts will nonetheless slow U.S. growth to about 1 per cent in the first quarter of next year. And a resolution to the other parts of the “fiscal cliff” will likely set up the rest of the year for stronger growth.

 “In particular, the growth picture in 2013 is likely to benefit from the re-acceleration in business investment, which appears to have been adversely affected by recent fiscal uncertainty,” BCA Research said.

Improvements in the housing market, already underway throughout most of 2012, along with better household finances should also help.

This sort of optimistic thinking on the U.S. budget seems to be in short supply these days. Worries about the “fiscal cliff” have been hanging over the stock market for some time, but the concern went mainstream after the U.S. Presidential election, when it became clear that more political gridlock in Washington diminished the chances of a budget agreement before the end of the year.

[…Read the full article at The Globe And Mail Online]


Ireland’s Recovery Is The Exception As Europe Falters

Reprinted from: Barron’s
By, Randall W. Forsyth

While global markets rallied Monday on growing chances for a solution for America’s fiscal dilemma, the sad reality about Europe’s even more intractable crisis intruded after Wall Street closed when Moody’s Investors Service stripped France of its triple-A rating.

M oreover, observes BCA’s Global Investment Strategy, Ireland has begun to recover without resorting to the usual expedient, a devaluation of its currency. As a member of the euro zone, Ireland could not alter its exchange rate to boost exports. Instead, Eire had to effect an internal devaluation — a lowering of prices and wages in order to make its economy more competitive in the global sphere.

As BCA points out, in the early years of the single currency last decade, Southern European nations and Ireland saw their labor costs rise sharply while the European Central Bank followed an easy policy while Germany, the largest EU economy, struggled. The result was a boom in money flows to the periphery, especially Ireland, sparking a wild real-estate boom, and an inevitable bust.

Subsequently, labor costs were brought down in Ireland in a massive deflation that resulted in a 20% plunge in nominal gross domestic product between 2008 and 2011. Unit labor costs fell a massive 10% — while they rose 5.5% in Italy and 3% in Greece. Bottom line: Ireland slashed wages and prices to become competitive. Now, as a result, Ireland is recovering while the rest of Europe is mired in depression and massive unemployment.

This contrast hasn’t gone unnoticed in financial markets. Dan Fuss, the vice chairman and portfolio manager of Loomis Sayles, one of the canniest fixed-income managers around and a speaker at Barron’s Art of Successful Investing conference last month, was an early bull on Ireland’s turnaround and loaded up on Irish bonds. Similarly, Franklin Templeton’s Michael Hasenstab, who recently was a subject of a Barron’s magazine interview (“Vindication for a Contrary Vision,” Oct. 22), was reported by the Financial Times to have an €8.4 billion ($10.75 billion) in Irish debt, which has yielded huge gains as the benchmark Irish bond due 2020 has seen its yield plunge this year to 4.80% from 8.40%.

The difference between Ireland and the other so-called PIIGS is a much more flexible labor force and significantly lower tax rates than the rest of Europe, according to BCA. “The Irish experience suggests that while fiscal austerity is important , euro zone troubled economies may be well served to focus their policies on labor market flexibility and the corporate tax system,” the advisory writes.

[…Read the full article at Barron’s Online]


Will Britain’s Post-Recession Economy Be Resurgent, Stagnant Or Greener?

Reprinted from: The Guardian
By, Larry Elliott

Before 2007, the UK was humming on the back of a borrowing binge. But though growth is returning, will the old system?

Britain's Post Recession Economy A s Dhaval Joshi of BCA Research noted last week, the UK has been the fastest-growing major economy in Europe over the past decade, even after its double-dip recession. The reason for that, though, was simple: Britain went on a borrowing binge.

At the start of the 1990s, the UK’s combined private and public sector debt amounted to 165% of GDP. By 2000, this had climbed to 200% of GDP. Over the next decade it rocketed to 295% of GDP.

It was this acceleration in the rate of growth of indebtedness, Joshi says, that provided the strong tailwind for the economy in the years before the financial crisis.

The problem, he adds, is that last decade’s tailwind has become this decade’s headwind. To receive the same boost from credit again, the UK’s debt-to-GDP ratio would need to accelerate again over the next decade, to 450% of GDP. That looks utterly implausible since the private sector is debt-sated and the government is aiming to cut its borrowing.

Seen in this light, the recent performance of the economy looks a lot more comprehensible. Deprived of the impulse it got from credit, the UK’s growth rate has fallen. There is nothing abnormal about quarter after quarter of virtual stagnation; the abnormal period was the pseudo-Ponzi scheme that went before.

Yet the Joshi analysis should be cause for sober reflection rather than deep depression.

[…Read the full article at The Guardian Online]