US and Global Financial Issues Affecting Everyone

Posted on September 28, 2011 by Bill Faiferlick

The world is changing in financial terms beyond anything that has ever before been experienced with the exception of the economic rebuilding after WWII. Except, instead of rebuilding, the days of rapid financial wealth creation are all but over. We have entered an era of wealth destruction the likes of which we may never have experienced because real financial fortune reversal will be unachievable for many given the graying of America and most of Europe.

The magnitude of financial obligations the U.S. is responsible for totaling around the $ 54 to $60 trillion will be impossible to avoid. Most of this obligated debt will be disbursed for social services for the approximately 80 million Americans who have only just begun to receive these benefits and this will continue for another four decades. The debt servicing on our national debt will take considerable financial resources if we are to consider paying down the principal owed. One-half of tax payers who file returns pay noting into the U.S. treasury because their incomes are too low after deductions, exemptions or tax credits. 55 percent of working Americans pay the expenses for 100 percent of its residents. The U.S. has grown into a service based economy of low wages and lower salaries. Good jobs and technology have been exported raising the economic standards of other nations at the expense of America.

The world demographic is changing. Until the beginning of the twentieth century, a national median age higher than 30 was practically unheard of. As recently as 1950, no nation in the world had a median age higher than 36. Today, 8 of the 16 nations of Western Europe have a median age of 40 or higher. By 2050, 6 will have a median age of 50 or higher. So will Japan, the East Asian Tigers, and 17 of the 24 nations in Eastern Europe and the Russian sphere. (The Graying of the Great Powers).

As the term global aging correctly implies, nearly every country in the world is projected to experience some shift toward slower population growth and an older age demographic. Just as we are absolutely certain the median age is dramatically increasing in developed nations, we are also aware that older populations consume disproportional shares of national economic budgets. Because U.S. individual savings are the lowest of any industrialized country, thirty percent of the U.S. population are expected to be forced to increasingly rely on social programs from the government out of necessity.

Over the last two centuries, the U.S. share of the developed world’s population has risen almost continuously, from a mere 6 percent in 1820 to 34 percent today. With its higher rates of fertility and immigration, the U.S. share will continue to grow in the future—to 43 percent by 2050. By then, 58 percent of the developed world’s population will live in English-speaking countries, up from 42 percent in 1950. The relative U.S. economic position will improve even more dramatically. As recently as the early 1980s, the GDPs of Western Europe and the United States (again, in purchasing power parity dollars) were about the same, each at 37 percent of total developed world GDP. By 2050, the U.S. share will rise to 54 percent and the Western European share will shrink to 23 percent. The Japanese share will meanwhile decline from 14 percent to 8 percent. (The Graying of the Great Powers). Even with this growth in the U.S. which will be at the expense of other developed nations, the net result will still be a net decrease meaning overall our population in shear numbers will decline at a time when a majority of citizens are graying and no longer working or capable of being employed.

The current global financial transition has been described as a “New Ball Game” by David Walker, former US Comptroller General. We are transitioning from an industrial age to a technology age. From a fiscal perspective, we are transitioning from a period of past deficits to a period of continued projected deficits. There is a globalization of markets, information, and businesses. We are experiencing changing demographics – aging societies, longer life spans, decreasing worker to retiree ratios, slower workforce growth, greater diversity and growing skill gaps. Security threats are changing – it’s no longer the cold war, and threats range from weapons of mass destruction to infectious diseases and cyber attacks. Rapidly evolving technologies increase productivity, lower costs and decrease privacy. We are faced with environmental concerns and global warming and rising health care costs.

  • Countries and companies are facing an economic environment that is borderless but also has no rules.
  •  In Zimbabwe, inflation hit 231 million per cent; are we headed there? In June, the statistic stood at 11.2 million per cent a year, but the state-owned Herald newspaper said that in July it was more than 20 times higher. Monthly inflation was 2,600.2 per cent, it added. A loaf of bread, which cost Z$500 at the beginning of August, now costs between Z$7,000 and Z$10,000, even when it can be found. The root cause of the country’s hyperinflation is the government’s policy of printing ever more money to meet its own needs, which has the effect of destroying the Zimbabwe dollar’s value in terms of hard currency, sending the cost of anything imported soaring. (Sebastien Berger)
  • Canada’s 32-year run of trade surpluses came to an unexpected end in December 2008 after weak demand and a decline in commodity prices, once the savior of the economy, caused the trade account to plummet to its worst monthly deficit on record.
  • Average household Canadian debt rose to more than $90,000 in 2008. The total debt-to-disposable income ratio rose to 140% last year. Last year, the average household income was $65,200, up by 11.6% from 1990. In that same period, spending jumped by 24.4%, total debt went up more than six times faster than incomes, and annual savings shrank. (The Current State of Canadian Family Finances)
  • Mexico counts on an elite population that controls a significant portion of the income. With the top 20% group controlling almost 60% of the nation’s income, they maintain the status quo.
  • The richest 25% of the world’s population receives 75% of the world’s income, even when adjusting for Purchasing Power Parity. (Milanovic)
  • Average household debt has reached 141% of disposable income in the United States and 177% in Britain.
  • About 43% of American families spend more than they earn each year.
  • In the US, the total federal debt burden currently totals $56,400,000,000,000: Your Share $184,000.
  • 45.6 million households, or one third of all income tax filers, according to the Tax Foundationpay no federal tax because their incomes fall below $40,000.
  • An estimated 135.7 million tax returns were filed in 2006. 43.4 million tax returns representing 91 million individuals will face a zero or negative liability because of exemptions, deductions and tax credits that completely wipe out their federal income tax liability.
  • In 2006, 92.7 million tax returns came from people who paid taxes into the Treasury
  • 41 percent of the U.S. population will be completely outside the federal income tax system in 2006 which represents 15 million households and individuals who file no tax return at all or roughly 121 million Americans.
  • The latest release of Internal Revenue Service data on individual income taxes from calendar year 2006 shows that the top 1 percent or 1.34 million people who filed and paid taxes paid 39.9 percent of all federal individual income taxes. This is up from 36.9 percent from 2004. To break into the top 1 percent, a tax return had to have an adjusted gross income of $388,806 or more in 2006. The top 1 percent of taxpayers earned approximately 22.1 percent of the nation’s income, yet paid 39.9 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.
  • Taxpayers with an adjusted gross income of $153,542 or more in 2006 constituted the nation’s top 5 percent of earners.
  • The top-earning 25 percent (which includes the top 1 and 5 percent) of taxpayers with adjusted gross income over $64,702 earned 68.2 percent of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86.3 percent).
  • Tax Freedom Day® will fall on April 23 in 2008, according to the Tax Foundation’s annual calculation using the latest government data on income and taxes.
  • “Government continues to dominate the American taxpayer’s budget, Americans will still spend more on taxes in 2008 than they will spend on food, clothing and housing combined.” – Tax Foundation.
  • Tax Freedom Day has generally occurred later and later in Britain, while in the United States it remained broadly static. During this period, real GDP growth in the US began to outstrip that of the UK, which entered a period of severe economic decline. Compared to other countries in 2005, Euroland citizens had to work almost one month longer than British subjects before they had paid off their taxes.

The wealthy or top 1% consists of only 1.357 million people in the U.S. who already pay 39.9% of all federal tax revenue collected. The top 5% consist of 6.785 million taxpayers. Remember you only have to have adjusted gross income of $153,542 or more in 2006 to fit into the top 5%. In terms of household finances and income, this is not a lot of money.

With the US population hovering around 300 million, 6.785 million are responsible for 86.3 percent of the revenue collected (this represents the top-earning 25 percent of taxpayers with adjusted gross income over $64,702). The federal taxes collected from them are responsible for supporting the rest of our population or 293 million Americans.

Since August 2008, the Federal Reserve has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the billions wiped out in the financial crisis. Based on the size of the recent bail-outs, we all need to be concerned about inflation and minimizing our tax liabilities where possible.

Based on the expectation that taxes will increase and they will rise the most for high income earners, it is incumbent upon business owners, professionals and high income earners to take advantage of all strategies available to protect, accumulate and preserve wealth. In any declining market there are still opportunities but these will not be made available from the same professionals you’ve relied on in the past. We need to rely on those who have a broader perspective which includes not only a domestic but an international expertise if we expect to grow and protect our assets, and secure higher levels of confidentiality.

The use of risk management, entity structures, and other available strategies is necessary in these uncertain times. A new era is not measured in a few years but in decades; international investing where appropriate needs to be considered to ensure diversity and personal security if as individuals are to succeed financially.

Links of Interest

The Hegemony of Money

IOU USA 30 minute free download

Peter G. Peterson Foundation

Tax Rates Around the World