Since I’m still getting my feet wet writing this missive and I don’t have David’s unique talent for recommending music that somehow (at least ethereally) pertains to the stories within this Daily Dispatch, I will skip that part. My apologies.
One more thing I have to mention – before we get started, that we’re having our first-ever Casey Research Energy & Special Situations Summit in Denver, Colorado, Sept. 18-20.
It will feature an all-star cast of experts on all things energy – as well as special situations in rare earths, potash, and more. This summit will put you solidly in the know on the critical energy sector and, more importantly, the many serious opportunities now available.
Experts from around the world in all matters pertaining to energy will be there:
Doug Casey, Ross Beaty, Rick Rule, Lukas Lundin, Frank Holmes, Dr. Marc Bustin, Paul Matysek, Keith Hill, Marin Katusa, Ron Hochstein, Bud Conrad, Miles Thompson, Clint Cox, and more!
Attendees will have the opportunity to ask questions, rub shoulders, and get up close and personal with some of the best energy and resource minds alive today.
See you in Denver!
Now, let’s get started.
This past Friday, the Commerce Department’s Bureau of Economic Analysis released its second-quarter 2009 advance estimate of GDP, and the crowd went wild.
CNNMoney.com’s headline read, “The pain is starting to ease – GDP report.”
The Dow Jones Industrial Average surged up 132 points in the next two trading days, and the S&P 500 was up about 1.6% on the news.
What exactly was the news that made so many feel all warm and fuzzy?
Here’s an excerpt from the BEA’s report:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 1.0% in the second quarter of 2009, (that is, from the first quarter to the second), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4%.
… The decrease in real GDP in the second quarter primarily reflected negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports that were partly offset by positive contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased…
… Real federal government consumption expenditures and gross investment increased 10.9% in the second quarter, in contrast to a decrease of 4.3% in the first. National defense increased 13.3%, in contrast to a decrease of 5.1%. Nondefense increased 6.0%, in contrast to a decrease of 2.5%. Real state and local government consumption expenditures and gross investment increased 2.4%, in contrast to a decrease of 1.5%...
Doesn’t seem very positive even on the surface, does it? According to the BEA, the economy is still contracting, just slower than before and perhaps less than expected. But that’s not the interesting part of the story.
What is interesting is what partially offset “negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports,” i.e., federal government spending and local government spending.
You see, GDP records the dollar amount of goods and services produced in the economy during a given period. But it equates government spending with private spending. And it ignores the wealth and potential growth destroyed by taxation.
To quote Llewellyn H. Rockwell, Jr.’s article, The Fraud of GNP (you see where I got the name for this piece):
Imagine that the economy consisted of two small, productive towns. The government decides to destroy one of them—a hotbed of tax resistance—by aerial bombardment, and to tax the other to pay for the clean-up. After the year, the destroyed town is restored. Calculating the net effect of this process, the Commerce Department would say that the GNP of the two-town economy grew by 50% [it would say the same for GDP too].
GNP [and GDP] records the money spent on goods and services, not the wealth destroyed by bombs, taxation, regulation, or other government activities. So GNP [and GDP] would act as if a third town had been added to the economy, when in fact one had been deducted…
… Always be wary of government statistics. They are usually designed to mislead, and GNP [and GDP] is part of that game.
Now before you call us hypocrites for using government statistics (which we do all the time), please remember that often that’s all there is to use. While we recognize the imperfect nature of some of the statistics themselves, they are still an important vehicle to get to the truth.
And few, if any, are better at finding that truth in the data than our own Chief Economist Bud Conrad. In this month’s The Casey Report, Bud looks for signs of the “Demise of the Dollar.” Click here for a risk-free trial.
(Queue Jaws theme music in your head. By the way, it’s Shark Week on Discovery Channel… no affiliation on my part obviously, I just love it.)
No, this article is not about the indirect hidden tax – inflation -- we are so fond of discussing. It’s about a particularly insidious, direct, hidden tax that has already swept across Europe and (we think) is now bound for the U.S.
We’re talking, of course, about the “value-added tax” or VAT.
Former Deputy Treasury Secretary Roger Altman and former Fed Chair Alan Greenspan both (along with many others in Congress) recently expressed the opinion that the VAT tax is coming to the U.S. fairly soon.
Here’s what Greenspan said: “I don’t like the value-added tax, but I agree with Roger [Altman]. I think that there is a fairly significant probability that the least worst solution to the problem will end up to be a value-added tax, because it’s the only thing that raises revenues in significant quantities without significantly impacting on the economy.”
Before we get into the “hidden” nature of the VAT and the real-world impacts of it, let’s provide some background.
A value-added tax (VAT) is a fee that is assessed against businesses by a government at various points in the production of goods or services – usually any time a product is sold, resold, or value is added to it.
For tax purposes, value is added whenever the value of a product increases as a result of the application of a company’s factors of production, such as labor and equipment.
Every company that handles a product during its transformation from raw materials to finished goods must pay a VAT. For example, tax is charged when a manufacturer sells to a wholesaler and again when a wholesaler sells to a retailer.
The total VAT accrued during the production of a good is reflected in the price of the item sold to final consumers, because each reseller along the way passes through its VAT costs. In this way, VAT is quite similar to a national sales tax. In other ways, it is quite different.
Perhaps a comparative example will help clarify.
Consider the manufacture and sale of the economist’s staple hypothetical good – the widget.
Scenario 1: Manufacture and sale of one widget without any sales tax
Scenario 2: Manufacture and sale of one widget with a North American (Canadian Provincial and U.S. State) sales tax of 10%
Scenario 3: Manufacture and sale of one widget with a VAT of 10%
So, you see, the total tax paid to the government in both scenarios 2 and 3 is $1.50, and the entire tax burden is ultimately placed on the end consumer, who must pay $16.50 for a widget that would only cost $15.00 absent the sales tax or VAT.
Remember, the total tax, regardless of the stage of production at which it was collected, ends up being added to the final sales price.
No matter how many steps there are in the production process, a fixed percentage of the final price of the product would represent the value-added tax, just as a retail sales tax is a fixed percentage of the final product price. Unlike a sales tax, however, the cost of the VAT to consumers would be hidden because it is baked into the advertised retail prices of goods and services.
Many consumers, of course, would recognize that the VAT existed, but it is not likely that they would realize the magnitude of the levy. For instance, gasoline consumers generally understand that gas taxes exist. But because gas taxes are incorporated in the advertised retail price of gasoline, few are aware that taxes comprise a substantial share of the retail price. (The average gasoline tax in the U.S. is about $0.46 per gallon. That’s $9.20 in taxes to fill a 20-gallon tank.)
Many countries already impose VATs (over 130, in fact), and the results of this real-world experiment have been dismal.
VATs are associated with both higher overall tax burdens and more government spending. In 1966, before the VAT swept across Europe, the average tax burden for advanced European economies (the EU-15) was 28.4% of GDP, fairly similar to the U.S., where taxes consumed 25% of economic output, according to data from the OECD Factbook 2009:Economic, Environmental, and Social Statistics,an annual publication of the Organization for Economic Cooperation and Development (OECD).
European nations began to impose VATs in 1967, and now the EU requires all members to have a VAT of at least 15%.
What are the results? Scary, to say the least.
By 2007 (the most recent data available), calculations using OECD data determined that the average tax burden for EU-15 nations has climbed to 39.9% of GDP. That’s a 40% increase since 1966. The tax burden also has increased in the U.S., but at a much slower 13.2% rate, rising to 28.3% of GDP for the year 2007.
Furthermore, according to European Commission figures, government spending during 1965 in EU-15 nations averaged 30.1% of GDP, roughly comparable to the 28.3% of economic output consumed by U.S. government spending. By contrast, in 2007, government spending consumed 47.1% of economic output in the EU-15, significantly higher than the 35.3% burden of government spending in the U.S.
Another argument for the VAT concedes it will increase the overall tax burden but lead to lower taxes on personal and corporate income. The evidence from Europe indicates otherwise. Taxes on income and profits consumed an average 9.1% of GDP in the EU-15 during 1966, which gave Europe a competitive advantage over the U.S., where they ate up 12.4% of GDP.
By 2007, calculations using OECD data show that the tax burden on income and profits climbed to 14.1% of GDP in the EU-15, slightly higher than the 13.9% figure for the U.S.
Other than triggering more government spending and higher aggregate tax burdens, what other effects does a VAT have?
I’d like to thank our very talented and overworked editor and proofreader Shannara Johnson for alerting me to this last story.
Apparently, Treasury Secretary Geithner is not too pleased with how some regulators have criticized Obama’s financial regulatory overhaul plan, and he let them know it with words that can’t be used in this missive.
Since this Reuters release of the story is brief, I’ll copy it in its entirety below. But if you want to email the story to a friend or print it out for yourself, the link is here.
U.S. Treasury Secretary Timothy Geithner issued a stern warning punctuated with expletives to U.S. regulators to end turf battles and show support for President Barack Obama's plan to overhaul financial regulation, a person familiar with the situation said on Monday.
At a tense, hour-long meeting on Friday, Geithner told Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp Chairman Sheila Bair to end recent public criticism of the plan and stop airing concerns over their potential loss of authority.
The Wall Street Journal, which first reported the meeting, said that Geithner vented frustration over the plan's slow progress and told regulators that "enough is enough".
Citing people familiar with the meeting, the newspaper also said that the Treasury Secretary used obscenities and took an aggressive stance in his dressing down of the regulators.
A Treasury Department spokesman, Andrew Williams, said Geithner was resolute in his message.
"We planned this meeting as a venue to deliver a tough message to regulators that we should work together to get reform done - and focus less on protecting turf." Williams said.
Spokespersons for the Fed, the SEC and the FDIC did not immediately return calls seeking comment.
Obama in June unveiled a financial regulatory overhaul, sometimes called the biggest since the 1930s. Among other things, the plan would give the Fed added powers, award the government more power to break up troubled companies, and create a new agency to oversee consumer finance.
Many major banks and industry trade groups however have criticized the plan, as have some regulators wary that any redistribution of power would reduce their own.
Even though the regulators are viewed as independent of the White House, the Journal said Geithner told attendees that the administration and Congress set policy.
It also said the Treasury Secretary, without singling out officials, raised concerns about regulators who have questioned the wisdom of giving the Fed more power.
Schapiro and Bair have argued that more authority should be shared among a council of regulators.
Chris again. Personally, the story makes me sick, a bunch of people fighting over power to control the actions of others… but the thought of Tiny Tim flaring his nostrils and yelling curse words at his cohort does have entertainment value, I suppose.
And that, dear readers, is that for today. As I sign off, I see the S&P 500 is hovering around 998, gold is at $962/oz., crude oil is at $71.32/barrel, and the dollar is up slightly on the euro from yesterday at $1.4378.
See you tomorrow. In the meantime, thank you for reading and for being a subscriber to a Casey Research service!
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