- EU leaders have ruled out a “total restructuring” of Greek debt and will decide on additional aid for the country by the end of June. There are talks that Germany has also softened its stance on requiring a restructuring of sorts before providing any additional aid.
- US Consumer Confidence declines to 60.8 in May vs 66.6 expected and 65.4 previously
- Chicago PMI declined to 56.6 vs 62.0 expected and 67.6 previously
- Dallas Fed Manufacturing Index declined to -7.4 in May vs +8.5 expected and 10.5 previously.
- S&P Case/Shiller 20 city Composite declined -3.6% YoY in March vs -3.4% expected and -3.3% previously
- BoC kept rates unchanged as expected, but said “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target.”
- Canadian GDP rose 2.8% YoY in March vs 2.6% expected and 2.9% previously
- EU CPI rose 2.7% YoY in Mary vs 2.8% expected and previously
- EU Unemployment was unchanged at 9.9% in April as expected. German Unemployment declined -8k in May vs -30k expected and -37k previously.
- South Korea IP growth slowed to 6.9% YoY in April vs 9.2% expected and 8.7% previously
- Swiss GDP growth slowed to +0.3% QoQ in Q1 vs 0.7% expected, mainly as a result of a decline in inventories. Net exports contributed a surprisingly strong 3.2% to GDP.
- This article in the Times got me to do some digging. Here is the breakdown of US tax receipts as a percent of GDP, as presented by the OMB.
A few takeaways:
1) Individual income taxes are at the lowest level as a percent of GDP since 1951.
2) Even if the income tax receipts increase to the long run average of ~8%, it would only correct 2% of the 10% budget deficit.
3) Corporate taxes are also near the historical lows. HOWEVER – we note that foreign earnings now represent almost a third of total S&P 500 earnings, which is taxed at a much lower rate. That actually doesn’t show up on this chart because foreign earnings are likely reported in a way that is not incorporated into GDP calculations.
Federal government tax receipts are clearly too small relative to GDP. The solution is clearly NOT to lower taxes – either corporate or individual. However, there needs to be some short term pain because the current budget deficit of 10% is 8% above the average budget deficit of 2.1% from 1960-2008. A reversion of individual and corporate tax receipts to their long term averages would only cover 3%, suggesting that the budget deficit needs to contract a further 5% of GDP to be sustainable.