credits and deductions. A 2019 study by the Institute on Taxation & Economic Policy examined the 2018 effective tax rate for 379 profitable firms included in the Fortune 500. For the 379 companies, the study analyzed the effective U.S. income tax rates on their pretax U.S. profits in 2018. Their findings included: • On average, the 379 profitable corporations paid an effective federal income tax rate of 11.3 percent on 2018 U.S. income; 57 companies had an effective federal income tax rate that exceeded the statutory rate of 21%, while 322 companies had an effective rate below the statutory rate. • 91 out of the 379 corporations paid no taxes on 2018 U.S. income; 56 companies had an effective federal income tax rate between 0% and 5%. The Biden plan would increase the statutory corporate tax rate to 28%, impose a minimum tax rate of 15% on the book income of large corporations, and eliminate offshoring tax incentives. If Congress approves the infrastructure plan, there is a reason why the plan is proposed to be financed primarily through taxes. When the U.S. government spends more on programs and services than what it takes in through taxes, a budget deficit occurs. In 2020, due to the impact of the pandemic and the needed fiscal stimulus programs, the U.S. budget deficit hit a record $3.1 trillion, more than twice the level of the $1.4 trillion deficit that occurred in 2009 during the financial crisis. To finance a budget deficit the U.S. government borrows money from the public through the issuance of U.S. government debt securities called U.S. Treasury securities. Buyers include individuals, institutional investors, certain mutual funds, and foreign investors and governments. The record 2020 budget deficit also led to a record amount of U.S. government debt outstanding, at nearly $28 trillion by the fourth quarter of 2020. U.S. debt has also more than doubled since the financial crisis, with U.S. debt peaking at $11.5 trillion at the end of the financial crisis. To better gauge its magnitude, the amount of federal debt outstanding is often compared to the Gross Domestic Product (GDP). GDP not only measures output in the economy, it also reflects income. When goods and services are created, income is also created, split between individuals, corporations, and the government. Federal debt as a percentage of GDP is a measure of a country’s ability to pay its debt. Sort of. The more income, the more debt you can generally afford. The U.S. debt-to-GDP ratio ballooned to a record 135% in 2020, up from 105% in 2019. The 2020 mark was a record for the U.S.; the 135% compares to 80% at the end of the financial crisis. The difficult question to answer: When does the debt-to-GDP ratio become too high? That’s the hard part; no one really knows. Federal debt as a percentage of GDP provides a rough measure as to how the federal debt financially burdens the country. Increasing debt does lessen the financial flexibility for a country to a certain degree because it increases the potential for financially straining the country through higher interest and principal payments. However, there are a variety of factors in gauging how the federal debt financially burdens the country. The debt-to-GDP is one factor, but other factors include the Federal Reserve, inflation, and interest rates. In the United States, the Treasury will issue debt to fund budget deficits. The Federal Reserve, which manages the country’s money supply, can buy U.S. Treasury debt in the financial markets (and consequently lower the total debt outstanding). There is a potential drawback. If the Federal Reserve buys too much debt, then inflation may increase due to the increased money supply. By the end of 2020, federal debt held by the Federal Reserve reached a record $5 trillion. This was approximately double the amount held at the end of 2019, and approximately 7 times greater than the amount of federal debt held at the end of the financial crisis. No doubt, the Federal Reserve has been buying Treasury debt, and a lot of it. The debt-to-GDP ratio peaked at 135% during the second quarter of 2020 but declined to 129% by year-end. Given the increasing money supply resulting from the Federal Reserve’s purchase of Treasury debt, what has been the impact on expected inflation? The stock market can provide a clue as to what is expected for economic growth; the bond market can provide a clue as to what is expected for inflation.
Central Wisconsin Report - Fall 2020
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