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Tax and save

Written By: - Date published: 12:46 pm, August 10th, 2011 - 52 comments
Categories: Economy, tax - Tags:

There are some interesting comments in the Standard and Poor’s press release announcing the US downgrade. I’ve highlighted a few. They make the point that fixing debt involves increasing revenue – the top level of tax in the case of governments – as well as cutting spending. They also note the US difficulty in reaching a consensus on fiscal policy, and the looming demographic that will drive age-related spending.

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options.

In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).

Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012,
remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis
announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand.

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

It’s a pity that our politicians can’t reach a consensus on fiscal policy – on capital gains tax, on superannuation, and on tax cuts for the bottom rather than the top. “Key shrugs off credit warning” is the headline in the Herald . Not much chance there of capital gains tax or removal of tax cuts for the rich, and Key has already ruled out looking at changes to superannuation while he is Prime Minister. And after three years of his promising growth is just around the corner the optimistic forecasts in the Budget are now looking less and less likely.

New Zealand is on credit watch negative too. Labour’s long-term plan to tax capital gain rather than sell assets looks more and more credible.

52 comments on “Tax and save”

  1. Afewknowthetruth 1

    David Walker, Chief Comptroller of the Goverment Office of Accountability, warned many years ago that the US was on a path to self annihilation, and resigned in 2008 when his warnings were constantly ignored.


    The bankers’ Ponzi scheme is dependent on prepetual expansion of debt and perpetual expansion of the consumption of resources: both are mathematically impossible, and there is every reason to believe we have hit the wall on both counts.

    The whole thing is beyond a joke at this stage, with obvious manipulation the daily norm.

    With the US government buying its own debt to prop itself up and global energy supply poised on the brink of significant decline, the wrting is clearly on the wall for the US and for all nations that use fractional reserve banking and depend on imported energy to maintian their economies.

  2. Bored 2

    The Casino on Wall St was interesting last night. The punters stayed away from the tables as shares were shed for less until miraculously somebody announced the Fed vowed to keep the money rate low for the next 2 years. A miracle then happened, the Casino bounced back up by nearly 5%.

    All very interesting, the investors are clutching at straws if they believe that the world and those listed companies and their underlying economic position changed during that couple of hours, but there it is. Safety reached, stabilisation done. Watch for the next big slide, its on its way because the whole edifice will be shaken by continuing trouble with the Eurozone and with a lac of economic output and purchasing power in thhe USA. Maybe Friday, or next week, its not far off.

    • rosy 2.1

      I was listening to some excitable Wall Street person shouting on the news about how the market was depressed, the market was waiting, the market was interpreting the signals, the market would only do x if y happened.

      Doesn’t he realise the market isn’t a person? The market can’t think? It doesn’t have emotions and the market won’t do anything, the traders or investors will? Are ALL investors taking the same action? Or only most? (I heard that Warren Buffet makes most of his money by going against the herd mentality – but then again I also heard that he thinks the rich should pay more tax to help fix this crisis).

      It seems strange how these people legitimise unquestioned collective decision-making in the financial markets, and they use this collective decision-making to press for the policies they want, but actively promote the interests of the individual over the group in real life.

      • Vicky32 2.1.1

        Doesn’t he realise the market isn’t a person? The market can’t think? It doesn’t have emotions and the market won’t do anything, the traders or investors will?

        I first remember hearing people talking about the market as if it was a sentient being, back in the 90s… I laughed at the idea of the “market sending signals” and my son used to mime semaphore whenever we heard that on the radio…
        We imagined the Market looking a bit like the Cave troll in Harry Potter and the Chamber of Secrets…

        • Bored

          Rosy and Vicky, how could you possibly point out such blindingly obvious conclusions. It will upset the nice man who comes onto the TV News and gives a market report. At that moment ii always stare deeply into the tea leaf detritus at the bottom of my cup. If your views were upheld he would be out of a job and at the mercy of Paula Bennetts bennie bashers.

  3. randal 3

    the meat is that the tea party have become irrational. they believe things that are not true and dont beleive things that are true but at bottom they dont care as long as they unseat Obama.
    thats a pretty crummy way to run a country or imagine that voters will let them get away with that sort of nonsense.

  4. queenstfarmer 4

    It’s a pity that our politicians can’t reach a consensus on fiscal policy – on capital gains tax

    Well until about a month ago, there was consensus on CGT. If you are now claiming that CGT is the right thing to do, then Labour spent 9 years (plus many decades more) doing the wrong thiing.

    I’m not criticising Labour for reversing its decades long policy of no CGT – I congratulate them and support (in principle) a broad-based, simple CGT. Labour’s isn’t that, but it’s great they have broken the hoodoo of CGT.

  5. aerobubble 5

    Will the government extend the credit guarantee scheme now that the crisis has returned and the world governments have failed to deal with the debt crisis properly.

    Or is Key on holiday in Hawaii again?

    • queenstfarmer 5.1

      No. Unlike the previous crisis, the current crisis is about public debt. NZ companies have very little exposure to European or US soveriegn debt.

      world governments have failed to deal with the debt crisis properly

      What is the proper way of dealing with it?

      • Afewknowthetruth 5.1.1

        ‘What is the proper way of dealing with it?’

        Throw out fractional reserve banking and have the government issue interest-free money, as Lincoln did.

        The only problem with attempting such a strategy is that whoever is at the top would almost certainly be assassinated (as Lincoln and Kennedt were) and the nation concerned would be subject to economic sanctions, if not softening up via drone attacks in preparation for invasion.

        In other words the banksters will not permit anything other than their Paonzi scheme.

        • queenstfarmer

          Sounds very Ron Paul-ish. Though I don’t think the Europeans are in a hurry to ditch the Euro (yet).

          • felix

            Do you not think govts should be able to issue currency? Why not?

            • queenstfarmer

              I think they should. The UK should never join the Euro (or cede any more sovereignty to Brussels full stop). But I understand what the Europeans are trying to do, and now they are in it they really need to make it work.

              • Colonial Viper

                The German people would be very brave (read: idiotic) to let Merkel get away with carrying through the underwriting of the entire periphery of the EU. If France fails, Germany will be on the hook for an amount of money probably exceeding 50% of their GDP, and which which will make the integration with East Germany look like a punt on a $10 Lotto ticket.

                • mik e

                  It was reckless German banks that were cashed up that lent to these economies which it was beyond their means to pay them back.Sounds a lot like our loan sharks here doesn’t it.CV These giant European banks are holding those who can pay to ransom, if they go down Europe will go down.They can’t afford to ditch the euro qstf because the likes of Greece could print their way out of debt. leaving the giant loan sharks high and dry.Its easier for them to get corporate welfare now,the are con artists and should be locked up but probably will get a giant bonus or golden hand shake and become the next IMF finance minister.

  6. Afewknowthetruth 6

    By the way, Capital Gains Tax, however meritorious it mght be, is unlikely to deliver much to the kitty if house prices and share values are falling, as is more than likely over the next few years, what with the global economy slowly imploding.

    And taxing speculation on precious metals will be nearly impossible, I suspect.

  7. Robert B 7

    While it is true that balancing any books involves both incomings and outgoings, the statement “They make the point that fixing debt involves increasing revenue – the top level of tax in the case of governments” is false.

    Tax is something that should be spread over as wide a group as possible to flatten the proportion that each person pays. We all use the same roads and the same hospitals.

    So yes, perhaps the revenue side should be looked at. But no, there is absolutely no reason this should only impact the “top level of tax”. Everyone needs to pay their fair share. Perhaps a good place to start is cutting back the number of net tax receivers before worrying about those that already pay a massive proportion into the kitty?

    • TightyRighty 7.1

      careful, ideas like that go against the prevailing orthodoxy here that everyone should pay their fair share, i.e. the “rich” pay almost all and everyone else close to diddly squat. I mean it is only fair that you work hard to provide for your self and your family and to remove you and your dependants from further dependency on the state, and then the government decides you should pay even more to support dependants because you have been successful or because you’ve worked so hard.

      • KJT 7.1.1

        The rich benefit the most from our society, they use a much larger proportion of the resources paid for by taxes, so it is fair that they should pay the most.

        Do you really think that Key worked as hard, or contributed as much to NZ for his 50 million, as I did for my 1/2 mill. And I suspect I have still paid a lot more in tax than Key.

        • KJT

          It is right though that the tax base should be broadened.
          For example if the half of the wealthiest people who, presently pay little or no tax were included, taxes for income earners and business could eventually be reduced.

          • TightyRighty

            I completely agree with you about broadening the base KJT. if everyone paid tax, those who currently pay tax would pay less. it’s not just the rich, how many do they number? 50? 100? what about the million wage earning net tax recievers?

        • davidc

          “The rich benefit the most from our society, they use a much larger proportion of the resources paid for by taxes, so it is fair that they should pay the most.”

          I know I am a thick RWNJ but would you mind explaining how I use more resources because I have more money than you? I know you cant mean health or education because I pay for those on top of my taxes, I know its not roads because I can only drive one car at a time, police? I dont have one standing at my gate tho I pay enough to have a private force of them.
          Please tell me how.

          • Colonial Viper

            You only asked one part of the question.

            You missed the one where the rich benefit the most from a structured society – and have the most to lose if society were to become…uh…’disordered’.

            I know I am a thick RWNJ but would you mind explaining how I use more resources

            You consume more personally, and seeking ROI on your excess capital inevitably causes additional resource usage as well.

            • davidc

              Quite simply put…. You are wrong and you cannot possibly prove otherwise.
              Having money does not mean I consume more. It just means I have some numbers on a bit of paper.

              . …and if I did consume more…I would pay way more GST so pay even more tax.

              and anyways…how is buying an Aston Martin a burden on the NZ govt? instead of say a Kia.
              seeking ROI on my wealth creates jobs thru investment which is what you LWNJ’s want to encourage thru you CGT , is this wrong now too?

              Money is just bad bad bad!

      • Draco T Bastard 7.1.2

        TR, you don’t have any ideas. You have false slogans.

        • TightyRighty

          Love the irony of saying something like that, using a slogan, and not providing anything of any substance whatsoever.

    • KJT 7.2

      It is much more economically efficient to tax the rich more.

      Take out the money they spend on holidays in Hawaii and useless speculation on derivatives. To spend it back on infrastructure, welfare and education within New Zealand. Where it comes back as income to New Zealand owned business and New Zealand wage earners. And a wider tax base!

      • TightyRighty 7.2.1

        Actually it is much more economically efficient to tax everyone the same. variations create distortions. But you aren’t what anyone would consider economically literate, so therefore we can dismiss your naivety as just that.

      • mik e 7.2.2

        Tax the rich So we can help solo mums like Little johnies mother get a hand up in life like he did.

        • TightyRighty

          tax all wage earners, then more little johnnies might go on to succeed as much as the first one, instead of living on intergenerational welfare.

  8. Vicky32 8

    Re Standard & Poors, one of my Italian friends told me today, that they (S&P) are under investigation in Italy for disemminating false information…
    I have asked him for more detail, but haven’t had it yet… (He lives in NZ, I’ll ask my finance industry friend who lives in Salento, for more info.)

    • rosy 8.1

      More info here

      Carlo Maria Capistro – chief prosecutor of Trani, a small Adriatic port – told Reuters that his office was checking to see whether the rating agencies “respect regulations as they carry out their work”.

      • Vicky32 8.1.1

        Thanks Rosy! I haven’t seen my finance industry friend yet today (he’s usually on Google Talk by now, happen he’s flat out busy!)

    • queenstfarmer 8.2

      Do you mean this?

      But perhaps the question should be, when HASN’T s&p been disemminating false information?? Just look at their brilliant rating of Lehmman, CDOs, Enron….

      • KJT 8.2.1

        The whole worldwide finance industry is based on false information from agencies such as S and P.

        It is one of the great mysteries of the world that anyone involved in the great finance debacle still has any credibility. Let alone remains out of jail, still getting bonuses.

        • Colonial Viper

          Not a mystery at all – the ratings agencies are tools of the wealthy elite in their projects to offload toxic assets or crush down sovereign nations, eventually causing the sell off of sovereign assets to their mates for cents in the dollar.

  9. mik e 9

    You believe your own BS tighty !your simplistic tea party rhetoric is a lie most people pay tax.this myth you are supporting is full of holes a lot of wealthy people pay little or no tax as well.The happiest, countries with low rates of child abuse, lowest rates of youth unemployment, best education lowest teen pregnancy have high gradual taxes.You should go and live in the USA tighty you could enjoy higher rates of unemployment, higher teen pregnancy ,higher crime , the bad stats just keep coming oh yeah then theirs your health care cost if you can get it. Keep your unresearched BS to your self or find some real and effective economic policy thats going to benefit the country as a whole,and not just a few arrogant narcissists like yourself!

    • TightyRighty 9.1

      Why? I thought the whole idea was to keep the young, educated, productive workers in New Zealand? it’s attitudes like your’s that make people leave. How dare I want to see everyone contribute? How dare you sponge off my hard work? Your whole rant is so uneducated and wrong, yet you want me to leave to go to the states? it’s only a short jump from your logic of hard workers being punished to immigrants are stealing jobs as they’ll work harder for less. you are an awful person

      • mik e 9.1.1

        I most likely pay more tax than you righty you and your mates want to dodge tax or pay as little as possible .Just keep up your narcissistic redneck diatribe .Don’t put words in my mouth you still haven’t come up with any constructive policy to grow our economy all you are doing is bashing poor people because they are poor. I’ve probably paid for your 72% subsidy on your education that you bludged off the govt so you can sit on your well educated butt and abuse poor people.If you had read more widely on economics you might be able to put some good ideas forward instead of your continual put downs. My investment in your education seem to be a waste of money as you seemed to have learned very little about economics and a lot about bullying.

  10. Afewknowthetruth 10


    ‘Sounds very Ron Paul-ish.’

    Ron Paul is one of the few US elected representatives who commands ANY respect amongst the informed these days.

    Issuing interest-free currency is also very Mary-I-ish, Elizabeth-I-ish, Fanklin-ish, Madison-ish, Jefferson-ish, Adams-ish, Lincoln-ish, Kennedy-ish, but not ‘ish’ of any of the warmongering criminals and sabotuers who have held positions of power in western ‘democracies’ in recent years.

    milk e

    The original Tea Party was a revolutionary movement to rid the American colonies of the banksters’ imposed fractional reserve banking system and rid the colonies of the monopolisitc tax regime imposed at the behest of the British East India Company – pack of evil bastards if ever there was one.

  11. Oligarkey 11


    “the “rich” pay almost all and everyone else close to diddly squat.”

    They don’t pay enough tax. That’s what’s causing the debt problem. At the bottom line they can fly first-class instead of having a private jet. Who will feel sorry for them? You? Cry me a river.

  12. Marjorie Dawe 12

    Part of the problem TR is that some wealthy people work so hard for themselves and their families that they forget to pay their workers a fair share of the earnings they make. They think that they do it by themselves and forget that without these workers they wouldnt be able to make thier products. This results in less money being spread through the economy because poor people usually have to spend all of their incomes to try to survive whereas wealthy people dont have to. Why should these poor people subsidise the wealthy employers who are not paying enough causing our government (us) to subsidise these low wages by WFF packages. Wake up and admit that many wealthybludgers employ on substandard rates and get wealthy off the backs of others. The problems could be fixed if there was more circulating and the rich paid their fair share.

    • TightyRighty 12.1

      Your comment is so simplistic is laughable, do you imagine all rich people to be fat, cigar chewing factory owners doling out patronising words of wisdom to cloth capped workers? Many people get rich in New Zealand with few to zero workers, and they carry the workers along with them. Your so out of date with the economic reality and what actually defines rich according to tax brackets and welfare payments it makes me wonder if you listen at all? or maybe you don’t understand the passage, comprehension is the first to go with senility they tell me.

      if one million wage earners aren’t paying tax, is that as bad as 50 wealthy people actually creating jobs themselves not paying tax? of course it is, the numbers are unimportant, it’s the idea that everyone pays tax on a low, broad base. With no exemptions, distortions and bugger all tax transfers back. The original social welfare system was tool designed to help those most at risk when they were most at need. Now it’s a tool to keep a million voters dependent on the government. You’ve removed the need to pay high wages by promising to prop up people via welfare, it’s pretty standard that people respond to incentives positively and disincentives negatively. the intellectual paucity of the left means it will never acknowledge this and therefore fail to see the government and it’s systems are the problem.

  13. Afewknowthetruth 13

    Replying to davidc

    You are very wrong and very arrogant.

    A person who drives a car damages road surfaces, funded out of taxation, whereas a poor person who cannot afford to drive and stayd home or walks does negligible damage. Car drivers demand more roads and motorways because they complain about congestion. more roads and motorways come from taxation.

    The latest idiotic grand schemes -proposals for an extra bridges and/or tunnel across the Waitemata will be funded out of taxation and will be of no benefit to people stuck at home on welfare. And they will be of no benefit to anyone soon because Peak Oil is about to demolish all existing transport arrangements, particulalry those centred around personal motorised transport.

    I would not say that the wealthy necessarily get the most out of the tax system but they definitely get the most out of the indistrial economy which is detroying the planet we live on.

    ‘seeking ROI on my wealth creates jobs thru investment ‘

    That is utter nonsense. Return on investment is simply a form of usury and was regarded as highly immoral until the money-lenders took over western society in the late middle ages.

    The higher the return on investment demanded by ‘investors’ the greater the incentive to cut staffing levels or take short cuts that damage the environment more than it is already being damaged – the ultimate tragedy of the commons for which everyone will pay a horrendous price.

    I’ll remind you yet again that all economic activity is predicated on conversion of finite resources into waste and that we are very close to the end of the line.

    The Earth is not dying, it is being killed by people with names and addresses.

    • davidc 13.1

      so now answer these questions in words I can understand, because I am a RWNJ and thus thick.

      How by driving an Aston Martin rather than a Kia do I use more resources?

      How by having money in the bank do I use more whatever?

      • felix 13.1.1

        It’s funny you know, he starts his comments by joking about his stupidity but then when you point out the depth of his actual stupidity he gets really angry.

        • queenstfarmer

          It’s funny how you think calmly asking a question means someone is “really angry”.

          • felix

            Sorry q, I was referring to another convo we had. My bad, I should’ve been clearer.

    • Draco T Bastard 13.2

      …the ultimate tragedy of the commons for which everyone will pay a horrendous price.

      Yep, the tragedy of the commons is brought about solely through individualism and the greed that goes with it.

  14. Afewknowthetruth 14

    Replying to davidc.

    ‘How by driving an Aston Martin rather than a Kia do I use more resources?;

    I would have thought that was so blatantly obvious it did not need an answer but since you have told us all how thick you are I will explain.

    It takes around twice as much physical resource in the form of iron ore, oil etc. to produce a large car compared to a small car. The conversion of raw materials into cars requires huge amounts of energy -finite energy in the forms of coal, oil and gas, which are all close to or are past peak.

    Driving a large car uses more fuel (definitely a finite resource past peak of extraction) than a small car and generates a lot more of the kind of pollution that is kiling the planet.

    Ignorance, complacency, greed, elitism etc., all the usual suspects when it comes to the future of humanity, clearly dominate your thinking.

    ‘How by having money in the bank do I use more whatever?’

    The bankers’ Ponzi scheme is predicated on perpetual economic expansion, which can only be achieved by converting more of nature into waste. The fact that perpetual expansion iona finite planet s absurd and impossible is one of the many reasons why the entire system is now imploding.

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