By Russ Winter
Much of the government borrow, spend and transfer largess is scheduled to run off automatically without a major legislative effort to extend them. In otherwords what is now required is going to be a bipartisan effort to deliberately budget another FY 2013 trillion deficit in an election year. The would actually have to be legislated, passed and signed by the President. The default steep cuts and tax increases are automatic, if there is no legislation.
I posted a few days ago in comments an e mail I received from the progressive group MoveOn.org on the issue of extending the Bush tax cuts. It is fight to the death for them. I am also receiving e mails from Tea Party sources that make spending a fight to the death issue. A strange political compromise around continuing the status quo spending and tax regime almost looks impossible to implement.
The next Nomura chart shows the effect of loopholes in the corporate tax code. When you hear that the statutory rate is among the highest in the world, that would only be for those who don’t have tax lobbyists or the best tax accountants and lawyers. IBM has had a substantial stock run, and Tuesday reports flattish YoY revenue, and still faces the fiscal cliff. Incredibly the tax rate compared to last year was down five points from 25% to about 20%. Too much of the value of these companies are the tax angles, financial engineering, and government largess.
Nomura puts the effect of the fiscal cliff at almost 5% of GDP in 1H, FY 2013, which starts October 1, 2012. I would argue that government spending addiction is so ingrained that the GDP drop will be much larger depending on the degree of the cutbacks either in terms of taxation and largess. Still this gives a thinking person a good idea of the impact of trillion dollar deficits year after year. It’s back to the Herb Stein sustainability theory once more. Put simply, if the US Government can’t run these huge deficits, the addicted economy will swoon. And if it continues to run them, ditto.
About The Author - Russ Winter is a veteran investor, financial writer, world traveler, and he blogs at Winter Watch. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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