The G20 and VAT
Jun 28, 2010
Posted by Jody Eisenman | Filed under Uncategorized
Before I get into the markets, I was quoted in an article entitled “Letting Go: The Death of Buy and Hold” by Lauren Tara LaCapra.
As I have discussed in the past, the issue of so many countries running huge deficits has apparently caught the attention of the G20. Of course, cutting the deficit means cutting social services and/or slowing economic growth, so it’s sort of trying to fight a fever and cold at the same time. At the current summit in Canada, the leaders resolved to address these deficits. However, they also left room for each country to move at their own pace. Here’s an example of what’s happening in Europe:
- In France, Budget Minister Baroin called cutting the deficit level from 8 to 6 per centan “untouchable goal”. That’s like saying we are returning to profitability because we plan on losing less money this year.
- In Spain, a plan to cut civil servants’ pay by 5 per cent was met with a three day strike by underground rail workers.
- In Greece, they so desperate for cash that they are putting some of their 6000 islands up for sale to the highest bidder. Most of the investors are either Russian or Chinese, which is indicative of how the wealth is shifting in this world.
- In England, they announced that they are raising the VAT (value added tax) to 20%. The VAT is similar to a sales tax, where a tax is placed on products at each stage of manufacture or distribution.
Many economists view this as a regressive tax. The way taxation works, is that a progressive tax will put more of a burden on the rich. So, for example, someone earning $50,000/year might pay 10% of their earnings in taxes, while someone earning $100,000 might pay 15%. This is similar to the tax situation in the United States. A VAT is more like a flat tax, where everyone pays the same amount. However, since a tax of 20% would affect the poor more than the rich, this could be viewed as a regressive tax. It is also generally believed that the higher these VATs get, the more the underground economy grows in order to escape this.
Meanwhile, interest rates remain extremely low. The government average yield for retail money market funds is .02%. That means that someone who places $100,000 in a money market fund would earn the whopping return of $20 for an entire year! Certificate of Deposits (CDs) are only slightly higher. The national average for six month CDS is .36%. In order to get a 1% return, you would need to go out about two and a half years. With banks offering such low yields, they have the ability to make huge spreads on the money they lend. Some banks are still charging 24% on credit card balances.
