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Income, Debt, Taxes, and The Economy
Topic Started: Apr 1 2008, 03:02 PM (249 Views)
Dandandat
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Time to put something here
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Income, Debt, Taxes, and The Economy

I have been trying to figure out why so many people (including myself) have been so negative about the direction of the economy so I have been playing around with some data published by various governmental sources, primarily the Bureau of Economic Analysis tables and Federal Reserve Z.1 from December 2007. I created a few graphs because I believe a picture says a thousand words and I wouldn’t expect anyone to read so many of my words. So, here goes.


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The first chart I think really lays it out. This is Consumer Debt plus Mortgage Debt as a percent of Personal Income. I also charted Personal Disposable Income and it looks the same except the percentages are a little higher. This ratio has increased from 51% in 1974 to 112% in 2006 and an estimated 111% in 2007. So the good times for consumers over the past three decades appears to have been funded through incremental relative debt burden as opposed to income gains. This is simply another way of saying that we have been spending more than we are producing (unless we are borrowing to save, but keep reading), and perhaps we are close to hitting the proverbial wall.


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The second graph titled Debt to GDP breaks out some components of debt as a percent of Gross Domestic Product. Note the sharp rise here too. One reason this is so steep is because I have added the National debt to the mix. This does not include State and Local debt, but believe it or not as a percent of GDP those items are relatively unremarkable. Business debt to GDP has also increased, but not at an alarming rate. It averaged 60% over the 1974-2007 time period and is currently high at 69.5%, the highest point in the time series. This is not a net number so it does not take into account cash that businesses have, so if businesses are flush with cash the higher number could be meaningless.

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The graph titled Percent Change in GDP Components illustrates the makeup of GDP over this time period. The reason I like this graph is because it gives you an idea what is driving the economy; business investment, personal spending, or residential real estate. What I would like to point out here is the surprising suggestion that business investment is not what has driven the economy since the Bush tax cuts. In fact, with the exception of one spike in 1984, business investment doesn’t look very strong during the Reagan and Bush I presidencies either. I find it hard to see in this data support for the idea that tax cuts on high incomes lead to business investment raising all boats (you know, the trickle down theory). What, then, has been driving growth in this decade? We know from our Debt to GDP graph that mortgage debt increased dramatically over this period in both absolute and relative terms. Is it consumers borrowing against real property and spending that has fueled the economy? Add that to the fiscal stimulus of continuing budget deficits and maybe that’s the answer.

Posted Image

To put this into perspective, take a look at the final graph, Personal Consumption and Business Investment. These amounts are in nominal dollar amounts. As the graph illustrates, we have been increasing our consumption at a much faster rate than business investment, and it appears this is what has fueled our economic growth. Borrow and spend, at the personal and federal government level. And this is why, I believe, there is so much bad feeling out there. Unfortunately it may be justified.

So where do we go from here? Well, if we have a major economic downturn we could go through an extended period of hardship as debts are written off and asset values decline. This is one school of thought – that we are headed for a period of deflation (not just disinflation but actual falling prices and values). On the other side is inflation. If you owe a lot of money, inflation is good for you because as overall prices and wages rise, the debt you owe becomes a smaller and smaller amount in real terms. So we could inflate our way out of this by flooding the system with money – but this creates more debt. Ah, and therein lies the problem. How much debt will it take to inflate our way out of debt? Looking at the Debt to GDP graph I am not feeling very good about this approach.

I want to go back here to the economic policies of the past 27 years, since we began the reduction in marginal tax rates. I don’t have the numbers yet to support this so consider it an unsupported hypothesis for now. If I find some time I will look for the numbers, if they are even available, to try and support this. What if, instead of tax cuts that benefit the wealthy resulting in business investment the tax cuts actually resulted in cheap available consumer credit? Lets take an example. Person A makes a very good living, say $2 million a year. Person A gets a tax cut and finds they have an extra $100,000 at year-end. What happens to that 100,000? Perhaps some gets spent, and that could account for some of the increase in personal consumption. But what if a large portion of it goes to a hedge fund for investment? Perhaps much of it flows into safe investments such as CDs and money market funds. What is the impact of the additional savings? The result would be an increase in the supply of funds available and, if our Eco 101 is working, a decrease in the cost of capital. If business does not use this capital to invest, it will find its way into some use because sitting idle it makes no return at all. We can speculate where this money may have ended up, and I speculate that over the past few years it ended up in places that include exposure to subprime mortgages and other consumer debt funded through securitization and commercial paper. If this is correct, then tax cuts to the wealthy do not in fact trickle down to the rest of the population through employment and income. Rather, they trickle down through debt, leaving the wealthy to accumulate more wealth and many of the not-so-wealthy wondering how they will make their next credit card payment.

The cost in revenue to the Federal Government of the Bush tax cuts is estimated to be approximately $1.7 trillion through 2011. This begs the question: what if those tax cuts went to the middle and lower income taxpayers who would be more likely to have spent it rather than invest it. On average, that would be like getting the current stimulus plan being rammed through Congress every year for ten years. Would Greenspan have felt it necessary to keep interest rates as low as he did after the 2001 recession? Would the economy have rebounded faster? Would we have had the real estate bubble without the historically low interest rates? We will never know the answers to these questions, but I think they are well worth asking.


http://polecolaw.blogspot.com/2008/02/inco...nd-economy.html
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Dandandat
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EXPLAINING OUR UNITED STATES TAXING SYSTEM WITH BEER

Suppose that every day, ten men go out for beer and the bill for all ten
comes to $100.
If they paid their bill the way we pay our taxes, it would go something like
this:


The first four men (the poorest) would pay nothing.

The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.


So, that's what they decided to do.


The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.  'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beers by $20. Drinks for the ten now cost just $80.' The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected.


They would still drink for free. But what about the other six men - the
paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.


So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.



And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22 % savings).
The tenth now paid $49 instead of $59 (15% saving s).


Each of the six was better off than before and the first four continued to drink for free, but once outside the restaurant, the men began to compare their savings. 'I only got a dollar out of the $20,' declared the sixth man. He pointed to the tenth man, 'but he got $10!'  'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got TEN times more than I!'  'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!' 'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'


The nine men surrounded the tenth ready to beat him up. But the tenth man was ready for them. With a smile he raised his hand. "Gentlemen, no need to get angrier, where all friends here right? I have a proposition for you"

The other men stopped in their tracks waiting to here what the tenth had to say. It was true they where all friends even if things got a bit heated from time to time.

"Gentlemen, as always my good fortune is your good fortune" the tenth man continued with a sly smile. "I'll let you barrow some of the money I got back at a low introductory rate"

"I don’t know" the first five men said. "We already owe you money and we all have children to think about"

"Nonsense" the tenth man said "its easy money, you pay me back nothing for a few months and then when your in a better situation the rate will increase. But again you'll be all better off by then so it's still going to be easy. Look at how successful I am, I know about these kinds of things and I wouldn’t steer you wrong."

And so the first five man took the tenth man up on his offer. The eighth and ninth men where actually happy with their return in the first place and had only gotten caught up in the mob mentality early. Further after seeing how the tenth man was making even more money on his return the ninth offered up his refunds as loans to the other men. The Sixth and Seventh men where a bit more cautious then the first five but eventually they to took the tenth man up on his offer. Eventually even the eighth man barrowed some of the refund the tenth was offering when he fell on some harder times.

The next few months went uneventful; the men came to their bar and they all drank and had a good time together.

But one day as the first nine men came up to the bar to find the tenth man waiting with a big smile on his face. "Payday boys, its time to start paying back the loans I gave you." He said to them. The Ninth man looked at his watched and smiled too "Time already?".

The first for men looked between them bewildered. They knew this day would come, but in the last few months they where not able to make life better for them selves as the tenth man suggested they would and so they did not have the money to pay him back. The fifth sixth and seventh men where not that much better off either and could only pay off a fraction of what they owed. The eighth man had the money but knew there was going to be a problem. They all told the tenth and ninth man their story.

"Don’t worry" the tenth man said to the first four men. "We had a deal long before this nonsense. You keep paying me back what you've been paying me and I'll be happy, after all I'm a humanitarian" so the first four men went into the bar and to their normal seats.

"Well you have your $1 for beer don’t you?" The tenth man said to the fifth, "and you have your $2, and $5 and you have $9?" he said to the sixth, seventh and eighth man. All four men nodded sullenly, they did have that money but it was for their beer. "Just give me that then and will put it toward the interest and a small portion toward the principle. We can do this until you pay me back, I don’t mind where all friends here." The tenth man smiled.

The fifth, sixth, seventh, and eighth man had no choice but to agree and hand over the money. Now that they did not have any money for beer they all went home.

"Wait a minuet," The ninth man said as his friends walked away "If they all pay you back with the last of their money and you let the first five slid. Who's going to pay me back?"

The tenth man surged and walked into the bar, but as he did he said something over his shoulder. "oh by the way since the others are going home your percent of the bills going to have to go up."

The ninth man was besides himself, he only had his usual $14, and since he couldn’t collect on the money he loaned out he could not afford his portion of the bill to go up. He too had no choice but to go home.

So at the bar the first four man drank with the tenth. Yes the tenth man's bill went up because of it, but he was now $17 richer and what's more it would be a steady stream of income. All was right in the world. The first four men depended on him and the next four now worked for him and the ninth man, the tenth man mused to him self, well in time he'd have the ninth man too.   

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction and if you're nice they might even lend it to you. But watch out they aren't doing it to be friends. 
     
  
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RTW
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Quote:
 
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22 % savings).
The tenth now paid $49 instead of $59 (15% saving s).

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction

That's a great story ... for people who do not understand that 33, 28, 25, and 22 are all greater than 15.
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Sgt. Jaggs
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How about a Voyager Movie
My head exploded. :thud: I'm going to get a beer.
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rowskid86
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Suck my Spock
Jag
Apr 1 2008, 08:21 PM
My head exploded. :thud: I'm going to get a beer.

I know the feeling man.
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STC
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rowskid86
Apr 2 2008, 02:39 AM
Jag
Apr 1 2008, 08:21 PM
My head exploded.  :thud: I'm going to get a beer.

I know the feeling man.

'Skid, Jag, Beer is always a wise move :thmup:

I am drinking a can of Red Stripe Jamica Lager Beer. Pleasant, and easy on the wallet :)
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Sgt. Jaggs
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How about a Voyager Movie
:huh: I didn't know chicks were partial to Jamaican beer. I have not tried Red Stripe since I was like 22 and don't remember liking it much but I remember it was not cold so likely that is why I didn't like it.
You have it in the can? I have only seen it in the bottle and its supposed to be an import here. I can't remember if you are in Canada or Europe. I don't know of any other beer that claims to be Jamaican.
OK after that run on paragraph I think I will go and keep it real in the other room. :fire:
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STC
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Jag
 
I didn't know chicks were partial to Jamaican beer.


Chicks! :huh:

Jag, I'm a beer-swilling, hairy-chested, football fan (soccer to you ;))... BLOKE.... MAN.... THING

My local shop sells it in cans. It can be found in bottles. Occassionally on tap in a pub though not very often up in the north. No matter if its stored cold in the shop or not as my fridge does that job.

I'm from England. I live in rainy Stockport nr Manchester ;)

Edit: The 'Red Stripe' I'm drinking is brewed in... Bedford, UK, .... under licence from Desnoes & Geddes Ltd, Kingston Jamaica (I just looked at the can).
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Sgt. Jaggs
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How about a Voyager Movie
:huh: What the hell does STC stand for then? You are kidding right?
Stereo Typical Chick. Right? :D Ok fine I just made that one up but why did I think you were a chick? :huh: :headscratch: Don't respond to that I am actually a meatball wich means I don't figure I am too smart. Its a ME thing, my bad.... I even though Proton was a chick too once but now I know her as a friend. :yes:
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rowskid86
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Suck my Spock
STC
Apr 1 2008, 08:44 PM
rowskid86
Apr 2 2008, 02:39 AM
Jag
Apr 1 2008, 08:21 PM
My head exploded.  :thud: I'm going to get a beer.

I know the feeling man.

'Skid, Jag, Beer is always a wise move :thmup:

I am drinking a can of Red Stripe Jamica Lager Beer. Pleasant, and easy on the wallet :)

here it isn't too easy on the wallet.

Never was too fond of it, but I had it only once, i should give it a second try. here it only comes in funky looking bottles

I got sam adams tonight which isn't that cheap but very good. but opening number 5, I got hurt.


I just noticed how you exactally said that, and the fact I was drink sam adams.

it's almost like the commercial. "Sam Adams, Always a wise Decision."
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Sgt. Jaggs
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How about a Voyager Movie
As you get older I find that you have bottle oppeners in every room of the house. One on the fridge with a magnet.
One in every pocket and every drawer. Swidden knew about this we talked about it.
Le Swid, may he have peace and stuff in Califireniona.
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STC
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Jag
Apr 2 2008, 04:38 AM
:huh: What the hell does STC stand for then? You are kidding right?
Stereo Typical Chick. Right? :D Ok fine I just made that one up but why did I think you were a chick? :huh: :headscratch: Don't respond to that I am actually a meatball wich means I don't figure I am too smart. Its a ME thing, my bad.... I even though Proton was a chick too once but now I know her as a friend. :yes:

Stereo Typical Chick. I like it :D. Even though its incorrect.

The meaning of 'STC' is a secret. I could tell you Jag, but then I would have to kill you ;).

Its possible you thought I was female because my avatar is female. You're not the first to be thrown by that and you won't be the last. :)
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RTW
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STC
Apr 2 2008, 06:06 AM
Its possible you thought I was female because my avatar is female. You're not the first to be thrown by that and you won't be the last. :)

To avoid future misunderstandings you should consider burping, farting or saying something piggish every once in a while. Another option is to photoshop your avatar so it looks like she is wearing a bikini, or consider changing it to Dax & Lenara sharing their kiss. ;)
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ds9074
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Did you know that to take home as an employee £1 million a year, paying UK tax, you would need to earn £1,684,795.60.

You would pay £664,544.24 in Income Tax and £20,251.36 in National Insurance.

I'd love to be paying that much tax.
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