Gaug­ing the fi­nan­cial tip­ping point

Prob­a­bil­ity is for a new global down­turn

The Washington Times Daily - - Opinion - By Richard W. Rahn By Dan Al­ban

De­spite the en­cour­ag­ing U.S. jobs-re­port data last week, the fis­cal sit­u­a­tion in the United States and most of the rest of the world con­tin­ues to de­te­ri­o­rate. The Euro­pean Cen­tral Bank said the euro­zone’s econ­omy is likely to con­tract this year. Greece fi­nally for­mally de­faulted last week. The sit­u­a­tion con­tin­ues to get worse, and many ob­servers think Greece will need an­other bailout within a year. The next time, the world’s tax­pay­ers, rather than pri­vate banks, will be hold­ing the bag. The sit­u­a­tion in Por­tu­gal also is get­ting worse at an ac­cel­er­at­ing rate.

It’s not just Europe that is hav­ing prob­lems. Last week, the Chi­nese re­duced their ex­pected growth rate from 8.2 per­cent to 7.5 per­cent for 2012. There has been grow­ing po­lit­i­cal dead­lock in In­dia, stop­ping many re­forms, which will neg­a­tively im­pact eco­nomic growth. There are in­di­ca­tions that Brazil also may be fac­ing an eco­nomic slow­down.

The 10 largest economies ac­count for a lit­tle more than two-thirds of the world gross do­mes­tic prod­uct (GDP). The United States alone ac­counts for about 23 per­cent of global GDP. Of the 10 largest economies, only China and In­dia have eco­nomic growth rates higher than their deficits as a per­cent­age of GDP, which means all of the oth­ers have a ris­ing debt-gdp ra­tio, as can be seen in the ac­com­pa­ny­ing chart. Stud­ies have shown that once net debt-gdp ra­tios rise above 90 per­cent, it is very hard for coun­tries to avoid debt de­fault and/or high in­fla­tion and very painful aus­ter­ity. The United States, France and the United King­dom are un­com­fort­ably close to the 90 per­cent mark. Any fur­ther turn­down in eco­nomic growth that would sharply re­duce tax rev­enues or any un­ex­pected spend­ing be­cause of war or nat­u­ral dis­as­ter would push these coun­tries over the tip­ping point.

Italy may mud­dle through, thanks to par­tial eco­nomic re­form and a large un­der­ground (un­taxed) econ­omy. Ja­pan is well past the stan­dard tip­ping point for most coun­tries and has had two decades of very slow growth but has been saved from a Greek-style melt­down be­cause of its very high do­mes­tic sav­ings rate, which fi­nances most of its debt. Even so, any ad­verse cir­cum­stance could push Italy or Ja­pan into a down­ward fis­cal spi­ral.

Of the 10 largest economies, only Brazil and Canada are in suf­fi­ciently strong fis­cal po­si­tions to weather an­other global re­ces­sion with­out hit­ting the tip­ping point. Ger­many has had strong eco­nomic growth and has man­aged its econ­omy much bet­ter than most of the other Euro­peans, but it de­pends heav­ily on ex­ports of ma­chin­ery and high-tech goods, and as its cus­tomers weaken, it will fol­low them down.

Most of the rest of the world — the other one-third of world GDP — looks lit­tle bet­ter than the big 10. On ev­ery con­ti­nent, there are many smaller coun­tries

Fore­cast for 2012 with un­com­fort­ably high debt-gdp ra­tios, and it would not take much to push them into a cri­sis sit­u­a­tion.

The United States is in the best po­si­tion to make the re­forms nec­es­sary to take care of its own eco­nomic prob­lems and thereby be­come an en­gine of eco­nomic growth for the world, but the Obama ad­min­is­tra­tion con­tin­ues to head in the wrong di­rec­tion. It pre­sented a bud­get that was both eco­nom­i­cally and po­lit­i­cally un­re­al­is­tic and did noth­ing to stop the rise in the debt-gdp ra­tio. The ad­min­is­tra­tion has pro­posed mas­sive tax in­creases on job cre­ators and con­tin­ues head­long in its rush to im­ple­ment job- and econ­omy-killing reg­u­la­tions.

Last week, Pres­i­dent Obama said that “re­duc­ing the de­mand for oil would cause its price to drop” and also, “in­creas­ing the sup­ply of oil would not cause its price to drop.” Huh? Which is it? What the pres­i­dent has done with his end­lessly con­tra­dic­tory state­ments and ac­tions on the econ­omy is prove that he is the most eco­nom­i­cally il­lit­er­ate pres­i­dent at least since Jimmy Carter.

What is un­am­bigu­ously clear is that with­out a ma­jor course cor­rec­tion in the United States and the other ma­jor economies, a new global re­ces­sion will oc­cur some­time in the next few months or the next year or two at the lat­est. The eco­nomic growth and deficit num­bers in the ac­com­pa­ny­ing ta­ble are the best that are likely to hap­pen. An in­ci­dent in the Per­sian Gulf or else­where could send oil prices sky­rock­et­ing, which would ric­o­chet quickly through­out the global econ­omy, lead­ing to a new global turn­down. The U.S. re­cov­ery has been so tepid and in­com­plete that there is no mar­gin for er­ror. Any ma­jor pol­icy er­ror by the Fed­eral Re­serve, which is skat­ing on very thin ice, or fur­ther eco­nomic lu­na­cies by the ad­min­is­tra­tion — like block­ing the Key­stone pipe­line — could be the trig­ger to push the econ­omy be­yond the tip­ping point.

A good eco­nomic fore­caster looks at the prob­a­bil­i­ties of all of those things that could go wrong and those that could go right. Yes, it is pos­si­ble to de­scribe a sce­nario in which the United States and the world could get out of their cur­rent eco­nomic fix with­out too much pain. Un­for­tu­nately, even though I am ba­si­cally an op­ti­mist, the prob­a­bil­i­ties are much more likely that some event will push much of the world over the tip­ping point within the next 24 months. It didn’t have to be this way.

Taxes, like death, may be in­escapable. But, at the very least, tax­pay­ers have al­ways en­joyed the free­dom to off­load the headache of do­ing their taxes to the tax-re­turn pre­parer of their choice.

Or rather, tax­pay­ers used to en­joy that free­dom.

Now, in an out­ra­geous and un­law­ful power grab, the In­ter­nal Rev­enue Ser­vice seeks to con­trol who you may hire to pre­pare your tax re­turns and even to nudge you to­ward a large tax prepa­ra­tion firm by elim­i­nat­ing many of their in­de­pen­dent com­peti­tors. It has en­acted a sweep­ing new li­cens­ing scheme that af­fects an es­ti­mated 350,000 tax pro­fes­sion­als na­tion­wide.

The li­cens­ing scheme re­quires tax pre­par­ers — who have al­ways had the free­dom to pre­pare tax re­turns for any­one who sought out their ser­vices — to se­cure per­mis­sion from the IRS if they want to earn a liv­ing pre­par­ing taxes. Get­ting per­mis­sion means sat­is­fy­ing ex­pen­sive, un­nec­es­sary and time­con­sum­ing new re­quire­ments that threaten to drive many in­de­pen­dent pre­par­ers out of busi­ness, leav­ing tens of mil­lions of tax­pay­ers search­ing for a new pre­parer.

Wait­ing in the wings for all these new cus­tomers are large tax prepa­ra­tion firms such as H&R Block, which sup­ported the reg­u­la­tions, and the Amer­i­can In­sti­tute of CPAS, which suc­cess­fully lob­bied for an ex­emp­tion from the li­cens­ing re­quire­ments for pre­par­ers su­per­vised by CPAS. These pow­er­ful spe­cial in­ter­ests stand to ben­e­fit tremen­dously from the re­duced com­pe­ti­tion and in­creased prices that will re­sult from these reg­u­la­tions. Mean­while, the costs of the reg­u­la­tions will fall dis­pro­por­tion­ately on in­de­pen­dent tax pre­par­ers and small tax-prep busi­nesses.

Con­sider Sabina Jones, who worked for a decade as an ac­coun­tant for banks and fi­nan­cial ser­vice com­pa­nies be­fore re­cently open­ing Lov­ing Tax Ser­vices in an im­pov­er­ished neigh­bor­hood on the South Side of Chicago. She has been of­fer­ing an af­ford­able, per­son­able al­ter­na­tive to the large tax-prep com­pa­nies for the mem­bers of her com­mu­nity, many of whom are low in­come. These new reg­u­la­tions will force her to raise her prices, mak­ing it more dif­fi­cult for her to com­pete with large tax-prep com­pa­nies. The reg­u­la­tions also pro­hibit her from hir­ing and su­per­vis­ing ad­di­tional tax pre­par­ers, sti­fling job cre­ation in a state with a 9.7 per­cent un­em­ploy­ment rate.

One hun­dred miles to the North­west, Elmer Kil­ian is a re­tired Korean War veteran liv­ing in the small vil­lage of Ea­gle, Wisc., where he hangs a wooden shin­gle out­side his house ad­ver­tis­ing his busi­ness, Ea­gle Tax Ser­vices. Mr. Kil­ian has pre­pared taxes sea­son­ally for more than 30 years on his din­ing room ta­ble, but he will be forced out of busi­ness by the cost of the new reg­u­la­tions, de­priv­ing the 80-year-old of an im­por­tant source of in­come.

These new li­cens­ing reg­u­la­tions rep­re­sent true crony cap­i­tal­ism, ex­pand­ing gov­ern­ment power to pro­tect po­lit­i­cally pow­er­ful in­ter­ests from hon­est com­pe­ti­tion. But the IRS’ new reg­u­la­tions aren’t just an af­front to eco­nomic lib­erty and con­sumer free­dom — they’re un­law­ful. Congress never gave the IRS the au­thor­ity to li­cense tax pre­par­ers, and the IRS can­not give it­self that power. That is why Ms. Jones and Mr. Kil­ian have joined with the In­sti­tute for Jus­tice, a na­tional public-in­ter­est law firm that pro­tects the rights of en­trepreneurs, to file a fed­eral law­suit against the IRS, chal­leng­ing its statu­tory au­thor­ity to im­pose these reg­u­la­tions on them and other en­tre­pre­neur­ial tax pre­par­ers like them across the na­tion.

Tax pre­par­ers such as Mr. Kil­ian and Ms. Jones have a right to earn a liv­ing in­de­pen­dent from the big tax-prep firms with­out get­ting per­mis­sion from the IRS. Tax­pay­ers have the right to de­cide for them­selves whom they want to pre­pare their taxes. A win for Ms. Jones and Mr. Kil­ian will ben­e­fit not just the 350,000 tax-re­turn pre­par­ers na­tion­wide who are sub­ject to these reg­u­la­tions, but the tens of mil­lions of tax­pay­ers they serve each year.

IL­LUS­TRA­TION BY HUNTER

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