Last week we published a note, which drew attention to the long-term challenges facing U.S. policy makers seeking to rein in the federal budget deficit and bring it to a sustainable level. In particular, even if the U.S. economy reaches full employment by 2020 is likely, she will manage a budget deficit of more than 5% of GDP, if current exchange rate policy will remain. Then, in subsequent decades, the situation will become much worse because of population aging and the related obligations of financial security. In addition, we paid attention to the fact that 85% of the current budget, defense spending, subsidies and interest on debt, implying that it is very difficult to achieve significant reduction in the deficit a reduction of expenditure. Similarly, it is difficult to make significant progress with the surface solutions to increase the tax rates for individuals with high income. The budget for 2011, Obama proposed to extend tax breaks for those who donates 28% or less at the same time, allowing you to return to the rates prior to 2001 (higher) for those who are now deducted within 33% -35%.
The crisis in the figures. We analyzed some of the calculations made by the Urban Institute (valuable and impartial think tank in Washington). They pose the question: what should be to increase taxes in order to achieve the 3% budget deficit to GDP by 2020? The starting point of their analysis is the base budget forecast, which shows the ratio of the deficit / GDP of 6.5% of GDP at the end of the decade. Of course, this is somewhat higher than our own estimate of 5.2%, mainly because the starting point Urban Institute did not include the impact of higher taxes for high income countries, which have recently suggested that the president and are expected to be approved by Congress . However, despite the fact that the Urban Institute study based on a somewhat more pessimistic perspective of the budget, the results are still useful for demonstrating the value of higher taxes that will be necessary to achieve financial sustainability.
The conclusion is that the top marginal rate should increase up to 75%, if you save the tax rates for households with an income of $ 250,000 or less, as promised by President Obama (Note: To be precise, 33% rate is now beginning to be used on revenue of $ 210,000). This arithmetic reflects the fact that only about a third of the taxable income is concentrated in the two upper limits. So, you need to significantly raise rates in order to obtain the necessary income. In addition, it is important to note that this static model. Will undoubtedly be different, and behavioral reactions to such high taxes, which substantially limit the actual grown profits.
It should be noted that 3% of the ratio of the deficit / GDP ratio was chosen because it represents the upper limit of the threshold at which the policy is seen as sustainable in the long term. Urban Institute study also included a separate calculation for the purposes of 2%. Not surprisingly, the necessary figures were much higher. In particular, according to the scenario in which rates are adjusted only for the top two levels, the required tax rate on the upper level would have reached a colossal 91%.
One solution to our fiscal woes could be a value added tax. During my last visit to Toronto, I learned that you can lay down GST (federal sales tax on goods and services, which is a value-added tax) and PST (a regional sales tax) and round, to calculate the acceptable size of the tip at a restaurant . Here's the useful information that may once useful.
The crisis in the figures. We analyzed some of the calculations made by the Urban Institute (valuable and impartial think tank in Washington). They pose the question: what should be to increase taxes in order to achieve the 3% budget deficit to GDP by 2020? The starting point of their analysis is the base budget forecast, which shows the ratio of the deficit / GDP of 6.5% of GDP at the end of the decade. Of course, this is somewhat higher than our own estimate of 5.2%, mainly because the starting point Urban Institute did not include the impact of higher taxes for high income countries, which have recently suggested that the president and are expected to be approved by Congress . However, despite the fact that the Urban Institute study based on a somewhat more pessimistic perspective of the budget, the results are still useful for demonstrating the value of higher taxes that will be necessary to achieve financial sustainability.
The conclusion is that the top marginal rate should increase up to 75%, if you save the tax rates for households with an income of $ 250,000 or less, as promised by President Obama (Note: To be precise, 33% rate is now beginning to be used on revenue of $ 210,000). This arithmetic reflects the fact that only about a third of the taxable income is concentrated in the two upper limits. So, you need to significantly raise rates in order to obtain the necessary income. In addition, it is important to note that this static model. Will undoubtedly be different, and behavioral reactions to such high taxes, which substantially limit the actual grown profits.
It should be noted that 3% of the ratio of the deficit / GDP ratio was chosen because it represents the upper limit of the threshold at which the policy is seen as sustainable in the long term. Urban Institute study also included a separate calculation for the purposes of 2%. Not surprisingly, the necessary figures were much higher. In particular, according to the scenario in which rates are adjusted only for the top two levels, the required tax rate on the upper level would have reached a colossal 91%.
One solution to our fiscal woes could be a value added tax. During my last visit to Toronto, I learned that you can lay down GST (federal sales tax on goods and services, which is a value-added tax) and PST (a regional sales tax) and round, to calculate the acceptable size of the tip at a restaurant . Here's the useful information that may once useful.
Morgan Stanley
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