Author: John King, Quacera
Covestor model: QPM Radar
Disclosure: None
The constant cry of so called progressive economists is that we are under-taxed, and that our deficits come from low tax revenues and not overspending.
Greece taxes its population at a 40% top income bracket of €70,000 per year. Add to that a 19% value-added tax (VAT) which is a sales tax on all goods and services sold in the country. Corporate tax rates are at 24%. Capital gains rates run from 5% to 20%. Dividends taxes are 10%. But the largest tax is on payrolls. Employers pay 28% on wages and workers pay an additional 16% for a total payroll-tax burden of 44%. Adding this up, we arrive at 38% of GDP going to taxes. Yet the government has run a deficit that is equal to 9.5% of GDP and its total liabilities equal 875%, or almost 9 years’ worth of total national sales.
Truly their debt crisis is warranted, as well as the downgrades of their debt to junk status. The continued knee-jerk bail-outs as recently announced by the EU will not change anything, but only prolong the economic agony. Switzerland on the other hand has relatively low tax rates and has run a structural surplus for the past 5 years while the franc has more than doubled vs. the Buck.
Here’s the real problem: In the US our total tax burden is 36% of GDP, our deficit is 10.8% of GDP and our total liabilities are over 900% not counting the new healthcare costs.
We think we’re smarter than the Greeks and believe we know to a 100% certainty when to shut the spending spigot. The latest Greek bail out agreement will fail for the same reason the first two have failed. Greece retains, as all EU nations do, their sovereignty over fiscal and tax affairs. There is no central financial authority to prevent any member from spending itself into oblivion. The markets are shouting at the top of their collective voices that the cost of this nonsense is extremely high Greek sovereign debt interest rates. This has not deterred the Central bank because the alternative would speed up the eventual bank/debt/regime demise. This is a strategy that will at best place the Euros and us in a gel like state, similar to Japan. Our trading partners are trying to find ways to shed the dollars they hold without causing a self destructive run against it. If Tim Geithner gets congressional approval to borrow more, we struggle to figure out who the lenders will be if the rates are not lifted to compensate for the risk.
This means that Ben Bernanke will likely have to accede to a QE3 program which will increase The Federal Reserve’s 98% debt laden balance sheet. Significant as this is we are also aware that all of Geithner’s recent borrowing has been short term. When it needs rolling over, this glob of gearing might just meet resistance from borrowers and if interest rates are driven higher, that 2% equity margin will disappear quickly.
We have a theory that if the unfolding Greek tragedy worsens, as this new round of printing portends, it will eventually crush the Euro. Most likely the next to fall would be the British Pound due to the enormity of the Euro denominated debt Brit banks own. Should things unfold this way, the dollar would strengthen for a while but ultimately we will find ourselves in the same boat as our European cousins. Government pandering to popular whims and stupid wars has, since the Roman Empire, been the cause of unsustainable currency manipulation that ended with the demise of the political procurers and their constituents.
Sources:
“Taxation in Greece” Wikipedia, 6/6/11 https://en.wikipedia.org/wiki/Taxation_in_Greece
“Greece 2010-2011 Economic Crisis” Wikipedia, 6/6/11 https://en.wikipedia.org/wiki/Greece#2010-2011_Economic_Crisis
“Taxation in the United States” Wikipedia, 6/6/11 https://en.wikipedia.org/wiki/Taxation_in_the_United_States
