Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
BEA Revises Q2 2016 US GDP Growth Upward to 1.42% - 29th Sept 16
Could the OPEC deal set stage for the Next Stock Market Risk Rally? - 29th Sept 16
Why Trump Lost, Hillary Won the 1st U.S. Presidential Debate - 29th Sept 16
Is a Dollar Crash Imminent After the Senate Overrides Obama Veto on Saudi 9/11 Bill? - 29th Sept 16
2017: Gold and Silver's Year of "Public Recognition" - 29th Sept 16
Did Trump Win the 1st US Presidential Election Debate? - There's Something Happening Here... - 29th Sept 16
FED Goes from ZIRP to NIRP! - 29th Sept 16 - Chris_Vermeulen
Here’s Why You Should Be in Cash Right Now - 28th Sept 16
The Fed Put a 50% Tax on Your Retirement Plan - 28th Sept 16
Massive Chinese Debt And Why They Are On A Gold Buying Binge! - 28th Sept 16
Stocks Commodities and FX Markets Waiting Technically While Fundamental Data Neutral Poised - 28th Sept 16
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

As Corporate Earnings Slow, What Will Happen To Taxes?

Companies / Corporate Earnings Jan 26, 2016 - 04:07 PM GMT

By: Rodney_Johnson

Companies Last week the Census Bureau reported retail sales for December, and the numbers weren’t pretty. Sales dropped 0.1% overall last month, and were down the same 0.1% when auto sales were excluded. Removing volatile gasoline sales only moved the number to flat. Making matters worse, retail sales increased a paltry 2.1% for all of 2015 – the smallest gain since 2009, and well below the 3.9% growth in 2014.

The report justified our negative view on earnings. Fourth-quarter numbers should be ugly. All of this plays right into our forecast for a general market decline and tough economic conditions in the months ahead.


But it also means something else.

Higher taxes.

Over the past five years, the U.S. budget deficit, as well as those of most states, has improved. Through a combination of higher sales tax receipts, higher tax rates in general and higher capital gains taxes, government entities have pulled in a lot of cash. But the days of easy tax revenue growth are over.

Consumers aren’t spending more, and in some cases are spending less, as noted by retail sales. This cuts into sales tax growth. Falling markets put the kibosh on capital gains tax revenue, which has been a constant source of cash in California, in particular.

These two trends cramp the spending style of governments large and small, leaving them with few options. They can curb their spending (don’t hold your breath for that one), or they can raise tax rates.

As the U.S. economy struggles in the face of a global economic downturn, expect tax rates to move up… and then go even higher.

While falling revenue might cause the federal government and states some short-term pain, the real problem is that their costs keep climbing. It almost doesn’t matter what happens in Congress or in state legislatures across the country. Even if they held their spending flat, costs would still jump because they have non-discretionary expenses such as Social Security and pensions, which are zooming out of control.

The case of the federal government and Social Security is well known, and state pension issues surface from time to time, but the issue at the state level is about to get markedly worse, even as the pension managers make the right moves.

Through September of last year, large pension funds held more than 5% of their assets in cash, which is a huge allocation. Clearly, the investment managers of these funds were worried about the markets.

Based on the market action of the last couple of weeks, their caution was warranted. On the face of it, these managers look like investment heroes. Unfortunately, even if they held 100% cash and saved their funds from any losses at all, they would still be losing.

All pension funds have an estimated rate of return. These anticipated gains add to the value of the fund, thereby reducing the contributions required of the plan, participants and employers. Both fund gains and contributions are used to pay benefits. In years where no gains are made, the funds don’t grow, but they still have to pay benefits.

In an odd way, investment managers can be great at sidestepping market landmines, but if they can’t hit their targeted returns, typically around 7.25%, then they are still failing at their jobs!

This might sound like a problem for state pension fund managers and probably state retirees, but the pain won’t end there. Illinois has less than 40% of the money it needs to pay benefits to retirees, and half of all states have 70% or less of the necessary funds.

When these institutions go broke, they won’t simply close their doors and tell pensioners “too bad.” Many of these states guarantee the benefits in their constitutions, which means the burden will fall squarely on taxpayers.

So, as earnings season kicks into high gear, the global economy slows and the markets suffer, remember that governments will still increase their spending. They’ll just need more of your cash to do it.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife