The president of the European Central Bank (ECB), Jean-Claude Trichet, has called for an immediate increase in taxes and spending cuts across the world?s industralised nations. Trichet urged majo
The president of the European Central Bank (ECB), Jean-Claude Trichet, has called for an immediate increase in taxes and spending cuts across the world?s industralised nations. Trichet urged major economies to follow Europe?s lead in raising taxes and cutting public spending. In the current environment, tax planning is becoming even more important for those who wish to shelter their wealth from unnecessary taxation.
In an article entitled Stimulate no more – it is now time for all to tighten, published in the Financial Times on 22nd July 2010, Trichet wrote that policymakers who want to continue with stimulus measures are mistaken and cutting borrowing would have very limited effects on growth. Trichet wrote that world policymakers had been right to correct the fragile fiscal situation but the timing was in question. European economic growth should now be boosted by belt tightening.
“There is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now,” he wrote. ?We have to avoid an asymmetry between bold, if justified, loosening and unduly hesitant retrenchment.?
Trichet was also critical of last year's global push for budgetary stimulus. “With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: 'stimulate,' 'activate,' 'spend.'?
“We expect governments to confirm their determination to consolidate their public finances,” Trichet wrote. “Now is the time to restore fiscal sustainability.?
ECB Executive Board member, Gertrude Tumpel-Gugerell, has supported Trichet?s views. “It is true the fiscal stimulus measures have made a contribution equivalent to roughly 2% of GDP in the Euro area,” she said, “but, with the economic outlook improving, it is now time to phase out these special measures and to start fiscal consolidation.“
In his article Trichet stated that public debt growth has been driven by three phenomena: a dramatic diminishing of tax receipts due to the recession; an increase in spending, including a pro-active stimulus to combat the recession; and additional measures to prevent the collapse of the financial sector. ECB?s calculations show that the volume of taxpayer risks earmarked to support the financial sphere, including all options ? recapitalisation, guarantees, toxic assets etc ? was as high as 27% of gross domestic product on both sides of the Atlantic.
Slightly before Trichet?s article appeared, chairman of the US Federal Reserve, Ben Bernanke, told the House Financial Services Committee that the current policy on fiscal stimulus was the right one to follow. “In the short term, I would believe that we should maintain a reasonable degree of fiscal support, stimulus for the economy,” he said. Bernanke reassured politicians that the Fed is ready to take steps if the recovery does not continue to improve and urged them to work out a credible plan to reduce the high budget deficits in the long run. He said they should not act now to cut spending or raise taxes in the near future.
Bernanke signalled approval to renewing tax cuts introduced by the Bush administration in 2001 and 2003 and set to expire at the end of this year. However, Speaker of the House of Representatives, Nancy Pelosi, is in favour of increasing taxes for wealthy Amercians by letting the Bush tax cuts expire. ?My stance is that the Bush-era tax cuts contributed to the deficit, did not create any jobs, and that they should be repealed,? she said.
Bernanke?s predecessor, Alan Greenspan, also thinks the tax cuts should expire at the end of the year. While it has been reported that several Democrats support extending the tax cuts others, including Treasury Secretary Timothy Geithner, are supporting President Obama?s campaign pledge to finish them.
President Obama said that some of the Bush tax cuts were part of the reason why the previous economic boom had been more excessive. He attacked Republican proposals to extend all of the tax cuts, saying that they would ?permanently keep in place the tax cuts for the very wealthiest Americans ? the same tax cuts that have added hundreds of billions to our debt.?
The evolving policy of the current administration appears to be to allow the top two tiers of income tax, that is, those on incomes above US$250,000, to revert to their previous levels of 36% (currently 33%) and 39.6% (currently 35%), while maintaining the tax cuts for those on lower incomes. There would also be an increase in the top rate of capital gains tax from 15% to 20%.
The Joint Committee on Taxation has estimated that extending the tax breaks on those with yearly incomes under US$250,000 would cost the treasury about $255 billion per year. If the tax cuts were extended for those earning over US$250,000, there would be an additional US$115 billion according to estimates by the Congressional Budget Office.
In Europe, the UK, France, Spain, Portugal and Greece have already increased taxes for high earners and other countries are considering similar measures. In Spain a further new tax on the country?s wealthiest residents, potentially a re-introduction of wealth tax, is due to be introduced soon. If you are living in a country where taxes are rising it would be advisable to review your tax planning strategy now. An international tax and wealth manager such as Blevins Franks can help you to reduce your tax liabilities through the use of legitimate and approved arrangements.
By Bill Blevins, Managing Director, Blevins Franks
28th July 2010