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Economy

Tax cuts won't save the economy from recession if no one is leaving their homes – CNN

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4 years ago

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But there’s little reason to think that traditional economic stimulus will solve what is first and foremost a health crisis.
And while it makes sense for Washington to craft a stimulus package, it would be unwise to consider it a cure-all for what ails the economy and financial markets. The extent of the economic pain will largely be dictated by the trajectory of the coronavirus.
“If the virus spreads to a worst-case scenario, where major chunks of the economy are shutting down, stimulus will have very limited impact. People will be too panicked to go out,” said Brian Gardner, director of Washington research at Keefe, Bruyette & Woods.
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That doesn’t mean Washington should sit on its hands. Economists said a carefully crafted, quickly enacted stimulus package could cushion the blow from the coronavirus.
A downturn is likely in the cards, period, says David Kelly, chief global strategist at JPMorgan Funds.
“There can be enough fiscal stimulus to shorten the recession, but not avert it,” Kelly said. “I just don’t think the money can get there in time.”

White Houses changes its tune on stimulus

Trump’s push for “dramatic” economic stimulus lifted the mood on Wall Street. The S&P 500 spiked 5% Tuesday, its best day since late 2018. Yet the broad market index remains deeply in the red for the year, reflecting serious fears that the coronavirus pandemic will spark a recession.
The idea for a major stimulus package is a recent one. Only last week, Larry Kudlow, Trump’s top economic adviser, pooh-poohed it.
“The story I’m trying to tell is a story of timely and targeted micro forms of assistance, not gargantuan across the board throw money at the problem, which has never worked in the past,” Kudlow told reporters then. “Cause we think we will get out of this within months.”
Yet the mayhem in markets has forced an about-face from the White House. Trump is now pushing Congress for a “dramatic” economic stimulus package.

80% chance of a recession?

Larry Summers thinks that reversal makes sense. The former US Treasury secretary told Bloomberg News there is an 80% chance of a US recession and called for a bold response from Washington.
“The risks are very much on the side of underdoing it,” Summers said.
The pressure is now on Trump to convince a deeply divided Congress to act quickly.
“If they pass something fast, it’s big and it restores confidence, we could get through this without actually having a recession,” said Mark Zandi, chief economist at Moody’s Analytics.
The goal of the stimulus package wouldn’t necessarily be to get people to fly or get on cruise ships. Instead, the aim would be to boost sentiment among households, especially ones living paycheck-to-paycheck.
“Once confidence goes, the economy goes with it,” Zandi said.

Payroll tax cut is a blunt instrument

Yet there are doubts about the wisdom of a payroll tax cut, Trump’s preferred stimulus weapon.
“A payroll tax cut won’t do you any good if you don’t have a job,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence. “You have to address the underlying problem: quite a few communities are afraid to consume.”
Another issue is that some people might not even notice a boost to their pay.
“It’s a stealth tax cut. That’s what we learned in the [2008 financial] crisis. It didn’t have the juice in terms of sentiment,” said Zandi.
5 things to know about the payroll tax 5 things to know about the payroll tax
And even those Americans who do notice it still might not be willing to venture into crowded restaurants or shopping malls.
“The effect cold be dampened by social distancing as the outbreak spreads,” Lewis Alexander, chief US economist at Nomura, wrote in a Tuesday note to clients.
Alexander added that there would likely be “negative payback” once the payroll tax cut expired. In other words, it could eventually hurt spending if consumers hold back on purchases when the tax returns.
During his lunch with Senate Republicans Tuesday, Trump floated the idea of a permanent payroll tax cut, several sources told CNN.

‘Politicians are in panic mode’

Rather than a payroll tax cut, Alexander said the most effective approach would target individuals affected the health crisis.
For instance, Zandi said Washington should cut checks directly to Americans whose incomes are disrupted by the virus. He said testing and other medical expenses linked to the coronavirus should be paid for by the federal government.
And given that elderly Americans are most at risk from coronavirus, Zandi said the federal government should increase the size of Social Security checks.
“That would have a huge impact on confidence. These are the people who will be hurt most by the virus. They are scared,” he said.
Unfortunately, a targeted response requires time and consideration, and “Washington just isn’t good at that, politicians are in panic mode,” said KBW’s Gardner. “That rush mentality may mean Washington can pass a package, but not the right one.”
Of course, there’s an even faster way Trump could boost the economy, one that doesn’t even require Congress: The president could ease pressure on overseas economies and multinational companies by immediately lifting tariffs on China and other countries around the world.
Such relief would amount to a $70 billion tax cut to businesses and households, Zandi said. “That’s the first thing I would do,” he added.
Still, some fear Washington is moving too late and too slowly to keep the longest economic expansion in US history alive.
“This is a worldwide supply and demand shock. It would take a miracle to avoid recession,” DiMartino Booth said.

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Economy

Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg

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59 mins ago

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April 19, 2024

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As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.

The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.

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Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail

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4 hours ago

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April 19, 2024

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Open this photo in gallery:

Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters

Alex Whalen and Jake Fuss are analysts at the Fraser Institute.

Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.

Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.

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The problems with hiking capital gains taxes are numerous.

First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.

For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.

Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.

Budget’s capital gains tax changes divide the small business community

And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.

Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.

Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.

At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.

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Economy

Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg

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6 hours ago

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April 19, 2024

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Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.

The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.

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