Britain is looking to sell the Royal Mail to escape Out of Control Pension Costs

Posted by PITHOCRATES - July 13th, 2013

Week in Review

The United States Postal Service isn’t the only postal service flirting with the idea of privatization.  So is the Royal Mail.  And, predictably, some are not happy about making government jobs like private sector jobs (see Royal Mail privatisation ‘will lead to soaring prices and job losses while taxpayer keeps debts’ by Graham Hiscott posted 7/11/2013 on the Mirror).

STAMP prices will soar and jobs will be slashed when the Royal Mail is privatised.

The warning came from critics as the Government announced its controversial plan to kick off a £3billion sale.

It is feared the sell-off could see a big chunk of the company snapped up by foreign investors, with investment banks raking in millions in fees.

So while the Treasury pockets a pre-election windfall, the taxpayer will still be paying for Royal Mail’s £12billion pension deficit.

Chuka Umunna, Labour’s Shadow Business Secretary, said it amounted to “nationalising its debts and privatising its profits”.

This pretty much says it all.  Pension costs are so out of control that the only way the Royal Mail can survive is with huge government subsidies.  And if they cut those subsidies they will have to pay for those pensions with the revenue from stamps.  Which means stamp prices will have to rise to replace those lost subsidies.  So these government workers can continue to enjoy those generous pensions.

Britain has an aging population.  Like most of the developed world.  People are living longer.  Giving them more time to suffer more diseases.  Raising the cost of pensions and health care for retirees.  Ponzi schemes like state pensions worked when there was an expanding population growth rate with more people entering the workforce than were leaving it.  But those days are long gone.  As are the days of defined benefit pension plans.  Where today they only result in unfunded pension obligations.  And companies like the United States Postal Service and the Royal Mail unable to pay their bills.

The reason why unions resist the privatization is that these business models cannot survive in the private sector.  For their labor costs (pay and benefits) far exceed anything available in the private sector.  And the only way they can keep those generous pay and benefit packages is by having the taxpayer subsiding their cost.  But if they go private and it costs $7.50 to mail a utility payment people aren’t going to mail their utility payments anymore.  And people will see the true cost of union labor.  Which means either unions must match the pay and benefit packages they have in the private sector.  Or they will lose all their union jobs.  Because no one is going to pay $7.50 to mail a letter.

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More of the Same from the Fed means more Housing Bubbles and Great Recessions

Posted by PITHOCRATES - April 14th, 2013

Week in Review

Those who wanted to get away from the United States’ limited government past and grow government had to do away with the gold standard.  Those who favored a large and expansive federal government needed fiat money.  They needed the power to print money at will.  To fund deficits when they continually spend more than they have.  Despite continuously raising taxes.  When Nixon decoupled the dollar from gold in 1971 the fiat money people got their way.  Now the Keynesians could tax, borrow, print and spend to their heart’s content.  With the federal government in the driver’s seat of the U.S. economy.  With their Keynesian economists advising them.  Who said government spending was just as good as private spending.  So go ahead and tax, borrow and print.  Because all you need to create economic activity is to print money.

Of course they couldn’t have been more wrong.  As the Seventies proved.  Printing money just created inflation.  Higher prices.  And asset bubbles.  With no corresponding economic activity.  Instead there was stagflation.  And a high misery index (the inflation rate added to the unemployment rate).  Because there is more to economic activity than monetary policy.  Tax rates and regulations matter a whole heck of a lot, too.  As well as a stable currency.  Not one being depreciated away with double-digit inflation.  Rich people may get richer buying and selling real estate and stocks during periods of high inflation but working class people just see both their paycheck and savings lose purchasing power.

It was these Keynesian policies that caused the S&L Crisis.  The dot-com bubble.  And the subprime mortgage crisis.  Giving is the Great Recession.  The worst recession since the Great Depression.  But have we learned anything from these failed policies of the past?  Apparently not (see Blind Faith In The Fed Is Not Enough by Comstock Partners posted 4/12/2013 on Business Insider).

The move of the S&P 500 into new all-time highs is based on neither the economy, nor earnings, nor value, but almost completely on the blind faith that the Fed can single-handedly flood the market with enough funds to keep the illusion going.  In this sense the similarity of the current stock market to the dot-com bubble of the late 1990s or the housing bubble ending in 2007 is glaring…

Real consumer spending has been growing at a mediocre 2% rate over the past year despite growth of only 0.9% in real disposable income over the same period.  This was accomplished mainly by decreasing the savings rate to only 2.6% in February, compared to rates of 7%-to-11% in more prosperous times.  With employment growth diminishing and the negative effects of the January tax increases and the sequester yet to kick in, consumer spending is likely to slow markedly in the period ahead.  While March year-over-year comparisons may benefit from an earlier Easter, the reverse will probably be true in April.  Keep in mind, too, our over-riding theme that consumers, still burdened with most of the debt built up in the housing boom, are in no shape to jump-start their spending…

In sum, the lack of support from the economy, earnings or valuation leaves the Fed as the only game in town.  Although the old adage says “Don’t fight the Fed”, it did pay to fight the Fed in 2001 and 2002 and again from late 2007 to early 2009.  In our view, the Fed can only try to offset the tightness coming from the fiscal side, but cannot get the economy growing on a sustainable basis.

The only real growth we had was from a tax cut.  Surprise, surprise.  Of course that cut in the tax rate of the Social Security payroll tax decreased the Social Security surplus.  Moving the Social Security funding crisis up in time.  That along with Medicare and whatever Obamacare will do will cause a financial crisis this country has yet to see.  Which will cause great suffering.  Particularly because people are saving less because they have less.  Which is the only way they can compensate for the horrible economy President Obama and his Keynesian advisors are giving us.  So they won’t have private savings to replace their Social Security benefits that the government will spend long before they retire.

And what does the government do?  Why, spend more, of course.  Because of the sweet nothings their Keynesian advisors are whispering into their ears.  Saying the things big government types want to hear.  Spend more.  It’s good for the economy.  If you wonder what got Greece into the mess they’re in this is it.  Spending.  And anti-business policies to pull more wealth out of the private sector so the government can spend it.

All the countries reeling in the Eurozone sovereign debt crisis are there for the same reason.  None of them got into the mess they’re in because they had low taxes and low regulatory costs.  Because countries with business-friendly environments create private sector jobs.  And private sector jobs don’t cost the government anything.  So they don’t have to tax, borrow, print and spend like they do when they listen to their Keynesian advisors.  Because that is what causes chronic deficits to fund.  And growing national debts.  Things that don’t happen when you leave the economy in the private sector.

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President Bush spends $222,000 on Bathroom Renovation, President Obama adds $5.3 Trillion to the Federal Debt

Posted by PITHOCRATES - January 20th, 2013

Week in Review

President Obama added approximately $5,294,450,000,000 to the federal debt in four years.  While President George W. Bush added $2,660,250,000,000 in eight years.  So President Obama is clearly outspending President Bush.  Even though the Interior Department under George W. Bush spent $222,000 to renovate a 100-square-foot bathroom (see Interior Department’s 2007 bathroom renovation cost $222,000 by Stephanie Condon posted 1/16/2013 on CBS News).

In 2007, the Interior Department wasn’t skimping on its own interior. The department spent $222,000 that year to renovate the bathroom in the interior secretary’s private office.

Under the direction of President George W. Bush’s Interior secretary, Dirk Kempthorne, the department made a number of lavish renovations to the 100-square-foot bathroom: New wall panels cost more than $1,500, while custom cabinetry was installed for $26,000. The bathroom was outfitted with a $689 faucet, a $65 vintage tissue holder and even a $3,500 refrigerator…

The Interior Department said the renovations — which were approved and contracted by the General Services Administration — were needed because of water leaks in the bathroom. The GSA told CBSNews.com, “These renovations began in 2007, which predates the current leadership at both the GSA and the Department of Interior. Under the current leadership, we have greater oversight to ensure the responsible use of taxpayer dollars. The renovations were part of a larger restoration project at the historic facility.”

Did the GSA spokesperson say this with a straight face?  That they have greater oversight under the current leadership?  Right.  Pull the other one.

The near trillion-dollar stimulus package was going to explode all that shovel-ready work.  But it actually went to shore up public sector pension and health care plans.  Investments in clean renewable energy didn’t produce any new jobs of the future but instead repaid campaign bundlers.  The auto bailout didn’t help the auto companies become more competitive.  Which was their ultimate problem.  And why they couldn’t fund their pension and health care liabilities.

The bailout did not make GM or Chrysler more competitive.  It just injected cash into the UAW pension and health care plans.  And the only reason why they’re profitable now is because they aren’t paying any federal income taxes.  Their stock price has even fallen.  For as the government sells their GM stock they’re selling it at a loss.  So the taxpayer is collecting no taxes from GM.  And they are not going to get all their money back from the bailout.  And this is greater oversight to ensure the responsible use of taxpayer dollars?

Gee, I’d hate to see irresponsible oversight.

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The Keynesian Fiat Economies are so Bad that the World is Turning back to Gold

Posted by PITHOCRATES - January 19th, 2013

Week in Review

Keynesians hate the gold standard.  They blamed it for the Great Depression.  Which they believed could have been avoided if the government printed more money instead of contracting the money supply.  For a Keynesian’s answer to everything is to expand the money supply.  So the government can spend more money.  This came to a head in the U.S. during the Seventies.  Foreign countries were converting their dollars into gold.  Because the U.S. was devaluating the dollar by printing so much new money.  So these countries took the gold instead.  Because you can’t depreciate gold.

The Seventies were a disaster.  It turned out that the government just couldn’t print money to pay its bills as the destruction they caused on the dollar devastated the economy.  So they backed off.  The Federal Reserve raised interest rates into the double digits to stamp out that destructive inflation.  The world didn’t return to a gold standard, though.  As most countries were still hard-core Keynesians who liked the ability to make money out of nothing so they can keep spending. But now the Eurozone is in a sovereign debt crisis.  The UK is slashing their NHS budget.  Japan is now spending twice their GDP and stuck in an economic slump going on for over two decades.  And as the U.S. is spending about 100% of its GDP they added a whopper of a new entitlement.  Obamacare.  The destruction of the dollar isn’t a question of if but when.  And now we’re seeing a quasi return to the gold standard as nations everywhere are losing faith in the ability of these Keynesian governments to spend responsibly (see A new Gold Standard is being born by Ambrose Evans-Pritchard posted 1/17/2013 on The Telegraph).

The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.

Some readers will already have seen the GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.

They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen…

Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time – for better or worse. The only real disagreement is over the speed.

This is the inevitable result of Keynesian economics.  Reckless spending that destroys currencies.  And right now these countries stand in judgment of the U.S., the Eurozone, Great Britain and Japan.  Their social spending obligations have put them on a path towards currency destruction.  And they don’t want be around when that happens while holding dollars, euros, sterling, or yen.  Because they just won’t be worth the paper they’re printed on.

In Ayn Rand’s Atlas Shrugged American Industrialists went on strike.  Walked away from their companies and disappeared.  Leaving their overregulated and overtaxed businesses to the government to do with them as they pleased.  Refusing to be economic slaves anymore.  They eventually migrated to a place called Galt’s Gulch somewhere in Colorado.  Where they made their own community.  And economy.  Where creators traded with other creators.  Using that one money that stood the test of time.  Gold.  For if you wanted to buy something in Galt’s Gulch you had to have gold.  For no one accepted cash there.  Some have been predicting we’ve been on the brink of something like this actually happening for the last 80 years or so.  And now it’s happening.  Only it’s not American industrialists turning on the U.S. government but the rest of the world.

Is it any wonder that sales of Atlas Shrugged have surged during the Obama administration?  These people are seeing what these countries see.  The decline of the U.S.  And the destruction of the dollar.  Thank you President Obama.

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Japan clings to the same Keynesian Policies that have Failed for over 20 Years

Posted by PITHOCRATES - December 30th, 2012

Week in Review

The fiscal cliff negotiations are all about deficit reduction.  The Right wants to do it with spending cuts.   The Left wants to do it with new taxes.  So they can spend more.  This is why they can’t reach an agreement.  The Right wants to reduce the deficit.  While the Left wants to increase spending.  For benefits.  For education.  For investments in Green Energy.  For infrastructure.  For economic stimulus.  Which will only increase the deficit.  So the Democrats are not exactly sincere when they talk about deficit reduction.  Which is why they can’t make a deal with the Republicans.  Who are serious when they talk about deficit reduction.

Another reason why the Democrats want to spend so much money is that they are Keynesians.  Who believe the government can bring an economy out of a recession with stimulus spending.  Despite that failing every time we’ve tried it.  In the United States in the Seventies.  Again during the Obama administration.  In the Eurozone.  In Asia.  Especially in Japan.  Where they’ve been trying to stimulate themselves out of a recession since their Lost Decade.  The Nineties (see Japan’s New Stimulus: The Race With China To The Bottom by Gordon G. Chang posted 12/30/2012 on Forbes).

The universal consensus is that the fall in manufacturing bolsters the case for Shinzo Abe’s plans to stimulate the economy.  The new prime minister is pursuing a broad-based program of shocking Japan out of its fourth contraction since the turn of the century.

First, Abe is going to prime the pump in a big way…

Second, Abe is going to push the yen down to help struggling exporters…

Third, the just-installed prime minister is leaning on the Bank of Japan to open up the taps…

Markets may love Abe’s stimulus solutions, but they are at best short-term fixes.  Tokyo, after all, has tried them all before with generally unsatisfactory results.  What Japan needs is not another paved-over riverbed—past spending programs have resulted in useless infrastructure—but structural reform to increase the country’s competitiveness.

Tokyo’s political elite, unfortunately, has got hooked on the false notion that governments can create enduring prosperity.  Two decades of recession and recession-like stagnation in Japan are proof that repeated government intervention in the economy does not in fact work.

If you keep trying to stimulate yourself out of a recession with Keynesian policies for over twenty years perhaps it’s time to give up on those failed policies.  Of course to do that may require some spending and tax cuts.  And you know how well that goes over with big government types.  It’s why the Americans can’t make a deal to avoid the fiscal cliff.  And why the Japanese are going to try more of the same failed policies of the past.

Another impetus for these bad policies decisions is what’s happening in China.  Whose economy is much younger than Japan’s economy.  So they don’t have years of failed Keynesian policies digging their economy into a deep hole.  And because of that they’re going to go big.  Their stimulus is going to include the building of cities.  And that’s what the Japanese see.  That, and the (one time) economic explosion of their export economy.  Something they once had in Japan.  And would love to have again.  So they are going to follow China’s lead.  Even though their economic expansion is pretty much at its end.

Although there has been a “recovery” beginning in October, it looks like the upturn is already running out of steam.  China’s technocrats know they’re in trouble: they are apparently planning to increase the central government’s planned deficit for 2013 by 41% to 1.2 trillion yuan ($192 billion).  At present, it is now slated to be only 850 billion yuan.  Much of the shortfall is going toward an urbanization push next year.  Last year, Beijing announced its intention to build 20 new cities a year in each of the following 20 years.

The two biggest economies in Asia are ailing at the same time, and both Beijing and Tokyo have decided that government intervention is the shortest path to long-term growth.  Neither government’s program, however, looks viable.  Unfortunately, both China and Japan are going down the wrong road at the same time.

This could help the U.S. economy.  If they enacted spending cuts for their deficit reduction they could cut tax rates to spur the economy along.  And make the U.S. competitiveness soar while Japan and China dig themselves into deeper holes.  But the Americans, being the foolish Keynesians they are, are going to follow the Japanese and the Chinese into economic stagnation.  And with President Obama’s reelection they will stay Keynesian.  Drive over the fiscal cliff.  And compete with the Japanese to see who can have more lost decades

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Keynesian Monetary Policy keeps Interest Rates low and Bankrupts Pension Funds

Posted by PITHOCRATES - November 10th, 2012

Week in Review

For a long time Keynesians in government said borrowing money was not a big deal for governments.  At first it was people owing money to themselves.  No big deal, right?  As the people would never call those loans in.  Then it was foreign investors buying a nation’s sovereign debt.  No big deal, right?  As long as the additional cost of borrowing didn’t increase dramatically for the next issue of debt what was the harm?  Well, as long as you didn’t live off of your savings or a pension it was hard to see the harm.  But if you did live on a fixed interest income or a pension you saw a HUGE amount of harm (see British company pension deficits soar past 230 billion pounds – report by Sarah Mortimer posted 11/7/2012 on Reuters).

“Things have got much worse for defined benefit (DB) final salary pensions,” said Mel Duffield, head of research at the National Association of Pension Funds (NAPF).

“Our fear is that the firms might decide to close these pensions altogether, further undermining the UK’s ability to save for its old age,” Duffield said…

Repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts – a staple investment for pension funds – making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

Keynesians are all for taxing, borrowing, printing and spending.  For they think there is no harm that government spending can’t overcome.  But there is.  First of all when the government borrows money it pulls investment capital out of the private economy.  Raising the cost of borrowing for business.  But it’s even worse when the government starts printing money to lower the interest rates even further.  Because retirees live off of the interest of their savings.  As do pension plans.  When the government keeps interest rates artificially low to ‘stimulate economic activity’ it neither stimulates economic activity nor provides a livable income for retirees.  As the resulting price inflation eats up their savings at an accelerated pace.

This is the cost of excessive government spending.  Passing the bill for today’s spending onto future generations.  And destroying the retirement of today’s retirees.  And future retirees.  As their pension funds become so underfunded that business can no longer maintain them.  And abandon them.  Having the state pick up the cost of these retirees.  Guaranteeing these retirees will get even less in retirement as the government struggles to pay these pensions in an expanding budget amidst falling tax revenues thanks to an aging population.  And if you want to get an idea of just how this can get just take a look at Greece.

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Women are having Fewer Babies and they’re having them Later in Life Guaranteeing Continued Financial Crises

Posted by PITHOCRATES - November 4th, 2012

Week in Review

Aging populations are plaguing advanced economies.  In Japan.  The United States.  Britain.  France.  Spain.  Italy.  Greece.  And others.  All countries with large welfare states.  Large deficits.  And mountains of debt.  Fewer people are entering the workforce than are leaving it.  Resulting in a shrinking tax base.  Requiring higher taxes.  More borrowing.  And when all else fails, budget cuts.  Which is where the British are in trying to keep their NHS solvent.  Cutting 20% from the NHS budget.  While the US added Obamacare to a budget that is already causing record deficits.  Caused by fewer people entering the workforce than are leaving it.  So that’s how we got here.  Now how does the future look (see CDC: U.S. Birth Rate Hits All-Time Low; 40.7% of Babies Born to Unmarried Women by Terence P. Jeffrey posted 10/31/2012 on CNSNews)?

The birth rate in the United States hit an all-time low in 2011, according to a report released this month by the federal Centers for Disease Control and Prevention…

While the overall birth rate declined to a record low, the birth rates for women in the 35-39 and 40-44 age groups actually increased from 2010 to 2011.

Pretty bleak.  Not only are women having fewer babies they’re waiting another 10-20 years before having them.  Which means when the full costs of Obamacare hit we’ll have perhaps an all-time low of new workers entering the workforce to pay the taxes to fund Obamacare.  And the rest of that swelling welfare state.

In about twenty years our spending obligations will grow too great for taxes and borrowing to pay.  Which means the US will have no choice but to follow the UK.  And make massive spending cuts in our health care.  Resulting in increased wait times.  Rationing.  And perhaps a little Greek-style protesting.  Unless we repeal Obamacare.  And make some serious reforms in our two most costly programs.  Medicare.  And Social Security.  If we do we can save them.  If we don’t we probably can’t save them.  This is the choice we have to make.  Forced onto us by a declining birthrate.

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Britain’s Liberal Democrats propose Lowering the Voting Age to bring in more Irresponsibility into Parliament

Posted by PITHOCRATES - October 27th, 2012

Week in Review

A teenage girl goes home to live with mom after her boyfriend left her.  And her unborn child.  Another teenage girl in high school saves her allowance for cigarettes.  A high school friend dies in a DUI accident that he caused.  A high school kid overdoses on drugs he took from his parent’s medicine cabinet.  Kids make a lot of bad decisions.  A lot drink while underage.  A lot drive while drunk.  A lot use drugs.  A lot engage in casual sex that results in a pregnancy or an STD.  This is why drugs are illegal.  And why we have a minimum age to drink.  And to smoke.  To minimize the effect of their bad decisions.  Because high school kids are really, really irresponsible.  Always putting ‘having a good time’ ahead of acting responsibly.  So based on that here’s a good idea.  Let’s have these same irresponsible kids vote (see Give 16 year olds the vote, say peers by Christopher Hope posted 10/22/2012 on The Telegraph).

New legislation published on Monday would extend the right to vote to 16 and 17 year olds in all elections and referenda in the United Kingdom…

Lord Tyler, who was the Liberal Democrats’ former shadow Leader of the Commons, said: “It isn’t good enough for Scots young people to be heard, just once, on this vital question, and then ignored thereafter, and worse still that English, Welsh and Northern Irish young people will continue not having a say at all…”

He added: “What about the expected referendum on Europe? I visit sixth forms regularly, and find students there more engaged and knowledgeable about current affairs, the state of the world and the state of our country, than many of the older people I bump into here in the House of Lords. It is time to give them a say.”

Those old people in the House of Lords?  They probably are refusing to vote for more irresponsible spending.  Like more subsides for university students that they simply can’t afford.  And other government benefits.  Of course if you can replace the responsible people in Parliament (or Congress in the US) with irresponsible people you can probably keep spending money you don’t have.  And having irresponsible kids vote can make that happen.  Because they are always putting ‘having a good time’ ahead of acting responsibly.  And would love to have free college.  Including room and board.  And some spending money for after classes.  All paid for by government.  As well a lower drinking age (“if we’re responsible enough to vote at 16 we’re responsible enough to drink”).  A lower smoking age.  Even decriminalize marijuana.  And champion other pressing concerns high school kids have.

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Due to Revenue Shortfall Australia will have Businesses Estimate their Taxes Monthly Instead of Quarterly

Posted by PITHOCRATES - October 27th, 2012

Week in Review

Commodity prices have fallen.  Cooling the great mining boom in Australia.  So how does the government address this falling tax revenue?  Do they cut their spending?  No.  They make businesses gamble with their cash-flows (see Monthly tax bill to help plug budget hole – Sydney Morning Herald by Peter Martin posted 5/22/2012 on Canberra Hub).

The budget will receive a $8.3 billion boost in the three years from 2014 as the government moves to collecting company taxes every month, rather than quarterly…

In its first year the measure is expected to give the budget a $5.5 billion boost because it will collect revenue that would have been paid in future months.

Accountants say it will not result in business paying significantly more tax overall, but will increase the compliance burden and require companies to pay their tax earlier.

With businesses likely to oppose any moves to extract more revenue, Treasurer Wayne Swan said the change would provide a more timely and accurate reading of the corporate tax take, but was not a tax rise.

‘‘We think this is only fair and it’s only logical,’’ Mr Swan said in Canberra. ‘‘We don’t see why companies cannot be in the same boat as companies that pay their GST monthly.’’

Revenue raised by the mining tax has also been downgraded by more than $3 billion, to $6.5 billion from $9.7 billion.

This tax collection policy will increase tax revenues by $8.3 billion (Australian dollars) in three years but this is not a tax rise.  They’re doing this to relieve the pressures from the lost mining tax revenues but this is not a tax rise.  You can do some accounting tricks to pull revenue into earlier accounting periods and push out cost to later accounting periods.  This will help the earlier accounting periods.  But it will hurt the later ones.  When a company, or a government, plays these games they either have a revenue problem.  Or a spending problem.  Apparently Australia has both.

Corporate income taxes are estimates.  GST taxes are not.  The corporations calculate their final income taxes due after the close of the year.  When they know their final earnings on the year.  Whereas anytime someone buys something the seller knows the exact GST due.  So the GST they pay at the end of the month is the exact amount of GST due.  Even if they have no sales for the last three months of the year.  Not the same with corporate income taxes.  Should something happen, say, like a fall in mining revenue due to a fall in commodity prices, a corporation could lose money in the latter months of their earnings year.  Even suffer a loss on the year.  If they do the government will have to refund those previous estimated tax payments.  Possibly causing the corporation to borrow money in those later months because they’re short on cash.  Because they overpaid their taxes.

This will increase the cost of doing business.  It will strain cash-flows.  And just make running a business harder.  As cash is the lifeblood of a business.  It’s the only thing you can use to pay your employees.  Your vendors.  Your insurance companies.  Your payroll taxes.  This new policy could force businesses to overpay their income taxes leaving them starving for cash later in the year.  And if they can’t find money to borrow they could put their businesses in jeopardy.  Possibly in bankruptcy.  And if they do there will be even less tax revenue for the government to collect.  Monthly.  Or quarterly.

This is bad policy.  Brought on by excessive government spending.  A common problem in advanced economies.  Especially during good economic times.  When they make spending commitments as if those good times will last forever.  Something a business can’t do.  Because when the economy changes a business has to change to survive in the reality of the economic times.  Unlike government.  Who does everything within their power to pass their poor policy decisions onto the private sector.

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A Battle is Building in Australia over their Carbon Tax

Posted by PITHOCRATES - October 27th, 2012

Week in Review

Nations with high tax rates tend to have less foreign investment than nations with low tax rates.  Because lower tax rates allow companies to earn more profits.  More profitable companies have higher stock prices.  And higher earnings per share of stock.  Which means higher returns on foreign investments.  The whole argument about raising taxes on the big corporations is that they’re rich enough and can afford to pay more of their earnings in taxes.  So we know that higher taxes mean lower earnings.  Unless, apparently, it’s a carbon tax (see Abbott won’t axe carbon tax, Combet says posted 10/24/2012 on Sky News).

Climate Change Minister Greg Combet has attacked Tony Abbott’s plan to repeal Labor’s carbon tax as a sovereign risk…

Mr Combet believes abolishing the carbon price – which Mr Abbott says would be the coalition’s first order of government – would diminish Australia’s standing with the international investment community…

“Repealing the carbon price would be damaging to investment confidence and undermine the business decisions which have already been taken.

“This would see financial markets increasing the risk premiums for investments in Australia.”

Mr Combet said people would still pay more for power but without any environmental benefit.

So carbon taxes make consumers pay more for power.  According to the people that gave Australia the carbon tax.  This is the price of fighting global warming.  Higher consumer costs.  And a lower quality of life.  As people have less money to spend on themselves because the government is taking more of their money.

And yet repealing the carbon tax won’t lower the cost of power.  Interesting.  If you increased the cost of power with a carbon tax you’d think you’d reduce the cost of power by eliminating the carbon tax.  So why won’t the price of power come down?  The power companies would have a vested interest to show the people how bad a carbon tax is.  So they will never vote another carbon tax in.  And if the people are going to pay the same for power whether they have a carbon tax or not they’ll probably say,  “Well, if it doesn’t cost any more we might as well as save the planet.”  And vote to restore that carbon tax.  So the power companies would be wise to lower their rates once they repeal the carbon tax.  And most likely will.  As it is in their best long-term interests.

When a country starts using words like ‘nationalizing’ and ‘socialism’ investors will require a higher risk premium.  There’s nothing that will wipe out an investment like a 100% tax on their investments after the state takes it over.  When a country adopts a highly inflationary monetary policy investors will require a higher risk premium.  But one thing investors don’t ask for a higher risk premium is for low taxes.  As low taxes typically stimulate economic activity.  Which creates higher corporate profits.  And higher returns on investment.

Of course, a carbon tax provides a windfall of revenue for governments.  Especially those governments that like to spend the money.  So if this will have an effect on their sovereign debt this means the carbon tax has more to do with funding government spending that saving the planet.  And the risk premium is the higher interest rates they will have to pay on their government bonds if they repeal the carbon tax.  As they will have to borrow even more money to fund their out of control spending.

Remember this lesson well.  This is what a carbon tax is for.  Government spending.  Not to fight global warming.

www.PITHOCRATES.com

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