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September 27, 2006
Global Strong
Written by Jeff Thredgold, CSP, President, Thredgold Economic Associates
Performance of the global economy has been rock solid in 2006, with favorable expectations for continuing strong growth in 2007. Solid economic growth within the broad global community is good news for the U.S., good news for regions within the U.S., and good news for individual states.
The International Monetary Fund (IMF) released its new semiannual global economic forecast on September 13th. The IMF boosted its global growth forecast one-quarter percent versus the forecast of six months ago.
The IMF now expects the global economy to grow at a 5.0% real (after inflation) annual rate in 2006 and again in 2007. Such growth, when combined with solid economic performance of the past few years, would mark the strongest 4-5 year growth pace since the early 1970s.
“The global expansion was broad-based in the first half of 2006, with activity in most regions meeting or exceeding expectations, and recent indicators suggest the pace of expansion is being maintained in the third quarter,” noted the IMF press release. No surprise here…global growth is being led by China, India, and other developing countries.
The IMF forecast assumes some slowing of the U.S. economy, as well as modest slowing in Europe and in Japan. These three nations/regions have all experienced monetary tightening over the past 1-2 years as a means of addressing inflationary pressures.
IMF Concerns
Inflation remains the IMF’s major global concern, although recent sharp declines in oil and other energy prices have minimized some of the inflation anxiety, especially in global financial markets. The IMF also notes concern about a more rapid cooling of the American housing market than other forecasters anticipate.
The IMF maintains its concern about global economic slowing associated with a potential “disorderly unwinding” of global financial and trade imbalances. The IMF’s biggest concern in this area remains the enormous trade and current account imbalance that the U.S. has with the rest of the world. Financial markets are less concerned about such imbalances.
The IMF’s recommendations? A much higher level of savings in the U.S., structural reforms in Europe and Japan, steps to encourage domestic demand in emerging Asian nations, and greater exchange rate flexibility by China and others.
Different Views
Managing officials of the International Monetary Fund, along with those of the World Bank, view themselves as critical leaders of the global community. Financial market perceptions are different.
Critics of these institutions suggest that each has created or worsened numerous problems in recent years as their recommendations and loans to various nations have allowed poor practices to continue (such as in Argentina) or have made situations worse (such as in Asian developing nations, including Thailand and Indonesia, in the late 1990s) (The Wall Street Journal). Emotions are high among both supporters and critics.
In any event, solid global growth and associated rising global incomes enhance opportunities for U.S. companies of all shapes and sizes to boost exports. Such opportunities are good news in Boise, good news in Raleigh, and good news in Waterloo. We all benefit when the global economy, of which the U.S. is the major player, grows at a more rapid pace…
…it means the pie is getting larger
“Death” Tax
Emotional debate regarding “the death tax” is commonplace in the nation’s capital. Republicans decry the idea that the government should tax an estate at the death of the owner, while Democrats see such taxation as entirely fair and appropriate. The reality is that America taxes death at one of the highest rates in the world, with many nations favoring zero taxation.
While Democrats and Republicans push their polarized views, there is a middle ground that appeals to the more moderate elements in both parties. Such middle ground also receives considerable support among the American people. Effective government is supposed to be the art of compromise.
Like the emotional debate regarding the minimum wage, both parties stake out far right and far left positions. Earlier this year, the Republicans pushed legislation to give the Democrats their desired increase in the minimum wage in exchange for desired Republican repeal of the death tax…all wrapped in one bill. The Democrats did not support such a trade-off.
Prior to legislative changes in 2001, estates of as little as $1 million were taxed as high as 55%. Such a confiscatory tax rate had no place in the American free enterprise system.
The estate tax has traditionally applied to only about one percent of U.S. taxpayers. Legislation passed in 2001 provided for a sizable rise in the amount subject to exemption each year, while also providing for reductions in tax rates over time. Such changes will lessen the share of taxpayers subject to the estate tax in coming years.
One flaw in the current legislation is that after totally disappearing in 2010, the estate subject to taxation and the tax rate will return to pre-2001 levels. Legislators during 2001 presumably sought a passable compromise, with improvements to be worked out at some future time.
In a perfect world, taxation of estates of any size would not occur. Critics of such taxation argue that the death tax is immoral as the money has already been taxed once or twice, if not even three times. It is not a perfect world. What is viable and reasonable in the hands of Republicans is unfair and sacrilegious to Democrats.
The truth is that most estates will never be taxed. About 12,600 estates will be subject to estate taxes for the 2006 filing season, according to the Tax Policy Institute (The Wall Street Journal). A broad compromise similar to the following framework is likely to emerge from the Congress in coming years.
Perhaps the first $4-$6 million of an estate would avoid taxation. Larger estates might find the next $15-$20 million taxed at around 15%-19%, while still larger estates would be taxed at near a 30% rate.
Estate tax policy must appear fair to the American people. Given the high level of emotion on both sides of the political aisle, the art of compromise is the only avenue to new legislation in coming years…
…let’s get on with it
“Tea”ser
A mother and daughter were walking through a cemetery and passed a headstone inscribed, “Here lies a good economist and an honest man.”
The little girl read the headstone, looked up at her mother, and asked, “Mommy, why did they bury two people here?”
—from our book, On The One Hand…The Economist’s Joke Book
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