Tax Revenues Vs. Stock Markets

When stock markets are high, the government receives a lot of tax revenues. There is a very high correlation here. That’s also why the government can’t let stocks go down in value, because that would mean their tax revenues would decline.

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=13G2

The result is that deficits would go up (red chart down) as tax revenues decline (blue chart down). So it would be a nightmare to have a strenghthening dollar (higher debt load), with declining stock markets (lower tax revenue), because that would spiral into a government default.

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=13G1

Indian Gold Panic Buying

India didn’t decrease its import taxes from 10% to 6%.

Result: panic buying among the jewellers to restock gold, because Indian gold premiums will skyrocket again.

Of course, in the long run, this is not good for Indian gold imports. So official Indian gold demand will not strengthen due to these 10% import taxes. Smuggling on the other hand is going to continue.

First reaction: gold surges.

"Retroactive" Tax on Deposits

Remember this post?

Spain will now retroactively tax bank deposits to January 1, 2014 stating the move will boost growth and job creation. And for your information, it’s 6 July 2014 today. Luckily it’s only 0.03% tax. But it’s a lot of money for those wealthy millionaires.

 

I have never heard of such things. How can you retroactively tax deposits? Let’s say i used up all my money in February 2014 and it was a lot of money. Then I would be bankrupt now due to the “retroactive tax”.

Also, let’s say I put all my cash in gold in February 2014, then I still have to be taxed on the deposits from before February 2014. 

Your money isn’t safe, it’s better to act now, before it’s too late. If you act too late, you’ll be retroactively taxed before you know it.

European Bank Deposit Outflows: The Case of Italy

European bank deposits have seen outflows since the start of 2012, right when the ECB started tightening its balance sheet. Two of the countries most affected were Spain and Greece where the outflows are steepening. Italy has been holding pretty steady.

But more recently, we see that Italy is topping out, right on the breaking news that inbound money transfers to Italy will have a 20% tax imposed on them. I wonder what this will do to the Italian economy as nobody will buy stuff from Italy anymore because the merchants won’t be able to make a profit. Everyone will also transfer their money out of Italian bank accounts to foreign bank accounts.

Let’s see how fast the deposits will flow out of Italy going forward.

Why the Federal Reserve Cannot Increase Interest Rates

A very interesting chart from Mish Shedlock. You can see that the Federal Reserve can never raise interest rates as it will spike the interest payments on its debt from the current $400 billion, which can be found here, to over $1 trillion.

Interest Impact Comparison

As you know, the tax revenues are only $3 trillion at this moment. If interest payments go to $1 trillion, the interest payment as a percentage of tax revenues will go over 30%. Which is even worse than Japan’s 25% today. On top of these interest payments, we have several spending programs which will result in a total spending of more than $4 trillion. $4 trillion minus $3 trillion is a 1 trillion deficit/year at least.

This means, the Federal Reserve cannot ever increase interest rates. Especially when tax revenues will come down due to the low savings rate and high real unemployment.

Not to mention what would happen to adjustable mortgage rates and the housing market, where everyone is now using adjustable rate mortgages to profit from low rates. Knowing this, we will always have negative real interest rates as inflation will be kept at 2% and nominal interest rates at 0%. A great environment for precious metals.

Tax Revenue To Come Down, U.S. Dollar To Weaken Further

One of the main reasons why I think that tax revenues will not increase anymore is because the people don’t have any savings left at this stage.

There is a correlation between what the government receives in taxes (blue chart), and the savings rate (red chart). When the savings rate makes a bottom, this coincides with a top in tax revenue.

The savings rate just dropped to 4.2% from 4.5% and this will eliminate all hope that tax revenue will continue its increase. What this also means is that the deficit will likely continue to increase.

We already see this happening in the budget deficit, which has increased again (yellow chart). An increased deficit will weaken the U.S. dollar and put pressure on U.S. bonds (higher yields). With this information, you can prepare accordingly.

Interest payments as a percentage of tax revenue: Fiscal Year 2013

As fiscal year 2013 passes by we note that the interest payments as a percentage of tax revenue has declined over the past year (Chart 1: red line). The number came in at 13% and wasn’t due to a decrease in interest payments.

Chart 1: Interest Payments

 As a matter of fact, the interest payments went up this year due to higher debt and higher interest rates (Charts 2 and 3).

Chart 2: U.S. Debt Vs. Interest Payments

Chart 3: 10 Year U.S. Bond Yield Vs. Interest Payments

The reason why we see a decline in the interest payment to tax revenue ratio is because of the huge increase in tax revenues the government received this year (Chart 4).

Chart 4: U.S. Government Tax Revenue

This was all due to a tax increase at the start of 2013 (Chart 5: blue line), which plunged the savings rate (Chart 5: red line) of households.

Chart 5: Tax Revenue Vs. Savings Rate

All in all a pretty positive year for the U.S. budget.

The question is, what can we expect from the coming year? The projected tax revenue is going to follow this trajectory according to the Federal Budget. This is more than enough to pay for the increase in interest payments due to higher public debt and higher interest rates. It will all depend on what Janet Yellen will do. If she decides to increase QE, we might see even lower interest payments due to lower interest rates.

Chart 6: Projected Revenue

IMF has plans to impose 10% tax on deposits

What happened to Cyprus, doesn’t stay in Cyprus. We already warned everyone about this in this article. What they do to Cyprus, they will do to every European country. That was my statement.

And here we finally have it. The IMF is setting up plans to impose a 10% tax on the savings of citizens of European countries.

After citing their colleagues, IMF economists are throwing themselves into the water. “The tax rate needed to bring debt ratios (relative to GDP) to the level of the end of 2007 would require a tax of about 10% of all households with positive net savings.” These calculations, we specify the IMF has been made to 15 countries in the euro zone. Let us recall that such arguments are intended merely suggestions to “theoretical” character. They are no less iconoclastic. But is it soft solutions leveraging outside of inflation, the most hypocritical of all?

 I wonder what will happen to the deposits of the European banks. If I had savings in the bank, I would take them out of the bank and store them at home or buy gold.

=> And yes, the bank deposits are falling.

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.

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.