Tax Receipts Vs. Savings Rate

Whenever the government raises taxes or when corporate profits rise, tax revenue will rise with it (blue chart).

But this has implications, if tax revenues rise, this will deplete the personal savings of the people. The red chart shows the personal savings rate (%). There is a negative correlation to be found here.

It shows us that higher tax revenues always lead to lower personal savings rates and vice versa. From this correlation we can deduct one thing. There is a limit to raising tax revenues. If the personal savings rate gets to 0%, there is no more margin to increase taxes.

At this moment the personal savings rate is 4.4% and is almost at a historic low. Contrast this to the savings rate of China, which is 50%. Also note that tax revenues have been declining as a percentage of GDP. This means that corporate earnings growth isn't keeping up with GDP growth at a constant rate of taxation.

To read more about this correlation go to this article.

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Interest Payments as a Percentage of Tax Revenues

This page is created to monitor the U.S. Interest Payments as a Percentage of Tax Revenues.

One metric that the U.S. government can never manipulate is this ratio. You can apply hedonic adjustments to inflation numbers, you can calculate GDP differently, but you can't falsify the amount of interest payments on government debt and you can't falsify tax revenues.

This ratio measures the affordability of government debt. A spike upwards means that the country is having difficulties servicing its debt load. This can have many causes, like higher yields on bonds, higher public debt or lower tax revenues.

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What does Cyprus mean to your money?

On 15 March 2013, Cyprus said it will impose a levy of 6.75% on deposits of less than 100,000 euros and 9.9% above that. The measure will raise 5.8 billion euros ($7.5 billion), which implies that we have about 68 billion euro ($85 billion) in deposits in the Cypriot banks. What this means is that each depositor in a Cypriot bank will get a haircut on their savings. This event is actually a very important one in history as it marks the first time that depositors actually lose their money, despite the presence of a deposit insurance. Of course, you can't have deposit insurance without a bailout of the banking system by the IMF. But to have this bailout, depositors need to have a cut (imposed by the IMF). It's sort of a paradox: "from now on deposit insurance is not insured anymore".

Many people think that their deposits are safe when they put their cash in the bank, but they either lose it to inflation or in this case lose it to the government. The result is that investors lose confidence in the banking system and will go to assets like precious metals which don't have counterparty risk.

To read more go here.

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How much of your Taxes are going to Interest Payment?

I was curious on how much of U.S. tax payer revenue was going to interest payment on government debt at this time compared to history and surprisingly the U.S. is doing very well.

Tax revenue data came from here and is at almost $3 trillion annually ($2.683 trillion to be exact).

Interest expense on debt data came from here and is at $400 billion.

If we just divide those two then we get chart 1.

And yes, surprisingly, the interest payment to bond holders is going down compared to the tax revenue the federal government is getting today. Historically, we had the highest interest payment to revenue ratio in 1991, which was 26%. Of course, the interest rate was much higher then.

Chart 1: Interest Expense to Federal Receipt Ratio

If we were to have the interest rate of 1991 today (7% for 10 year U.S. bonds). I bet we would be higher than 26% already. It would be as much as 50% of tax revenue according to Michael Pento. It all depends on the interest rate (which of course is never going to go up).

So all the hype about tax revenue that goes to interest payment (touted by Marc Faber) isn't as hot as it may actually sound.

To compare with Japan:
For Japan we have 22 trillion yen in interest payments. http://yhoo.it/MCWrdj

Versus

42 trillion yen in tax revenue. http://bloom.bg/11OIYoC

That's indeed 50% which is very high.

If the Japanese 10 year bond yield doubles, the interest expense will also double. Which makes Japanese people pay their taxes all to interest on debt.

But, Japan has a current account surplus..., which the U.S. doesn't have.
And the interest payments will stay in Japan and circulate in their economy.

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Fiscal Cliff: Savings Rate to go into Negative Territory

The fiscal cliff which is right in front of us will arrive on January 1st, 2013. The most important change will be the expiration of the Bush tax cuts. Each citizen of the U.S. will have a tax hike starting next year. The result will be a decline in savings rate. Tax rate can be said to affect the savings inversely both in the personal and corporate levels. It means that in the cases when the tax rate increases, the rate of savings may fall while with decrease in the tax rate, the savings may increase.

Overall, the personal income tax rate will go up 3% with the exception of the lowest and highest income earners who will have a whopping 5% tax increase. This tax increase will therefore reduce the disposable income of each and every person and business in the U.S.

So what does this mean in simple numbers? If I earn 3000 dollars and I am taxed 33%, I will have 2000 dollars of disposable income. If I save only 3% of my disposable income (see chart 1). I am saving 60 dollars. If now the taxes on my personal income go up 3%, I will need to hand over 90 dollars to the government. My disposable income will be 1910 dollars. This means I'm going underwater: 60-90 = -30.

Chart 1: Personal Savings Rate

Continue reading here.

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France's 7.2 billion euro tax is a non-event

France just raised taxes on the rich and is trying to get 7.2 billion euro in tax revenue in 2012 and 33 billion euro in 2013.

So what does this mean to the deficit of France? France's GDP is 2.56 trillion euro. France's debt is 90% of GDP. Its total debt is therefore 2.3 trillion euro.

What is 7.2 billion on 2.3 trillion euro? It's 0.3%. So it basically does nothing to the French debt.

You could argue that it is a first step to decrease the yearly deficit. But the deficit is currently 70 billion euro/annum. So we have a 10% decrease in the deficit, which is a non-event. It's like an obese person trying to lose weight by eating a smaller hamburger with less french fries. He is still gaining weight, but at a slower pace...

For 2013 it is estimated that France will have a 50% decrease in deficit, but France will still have a deficit.

And I believe France won't be able to wait till 2014 to decrease the deficit, because Europe would be in much worse shape than today.

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An Analysis on the Oil Price

Since May, the price of crude oil (OIL) has fallen from $US 106/barrel to $US 78/barrel (Chart 1). It is very likely that the price of crude oil will continue to decline because for the first time in a decade, supply is exceeding demand.

In this article I will give advice to investors on how to play the oil price and I will give critical information on when to buy the dip in crude oil based on a fundamental analysis of crude oil production costs.

Chart 1: Crude Oil Price

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The Effect of Government on the Economy of a Country

I believe government is an important institution to keep order in a society of a country. It should focus mainly on the country's defense and should obey the constitution of the country. By no means it should involve with the economy of a country as the government is always less efficient as free market capitalism. Governments should be as small as possible, in order to let the private economy flourish. Today, governments are standing in the way of free market capitalism through taxation, regulations and counterproductive measures. What governments don't know are the unintended consequences they cause. I'm sure that governments are the root cause of all the problems in Europe and soon in the United States.

In this article I want to give an overview of several countries and their government involvement. The best measure to rate government involvement would be the amount of spending as a percentage of the country's GDP. We will discuss the effects of a big government on the country's economy and give advice to investors on how to act on this knowledge. We will see that there is a direct correlation between government size and unemployment/debt/tax rate.

To read the article go to: The size of governments and the effect on their economies.

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