Tax'ing times

For a truly emotive subject you have to look no further than Taxes. Who pays them?, how much? and how fair is to redistribute wealth from one group to another? From an economic perspective governments can take revenue from its people and use that revenue to raise the countries GDP in both the short and long term (such as improving logistics and funding research), although it is no always the case that the people who have the money (taken away from them in taxes) are the same people that benefit from the increases in economic growth.

What is the immediate important? On the 31 of December American Payroll tax raises from 4.2 to 6.2 percent (roughly $1000 extra dollars a year per person), and with the payroll report out on Friday (jobs growth), presidential relections and the small matter of $15 trillion debt, then a 2 percent rise is very significant.

If the rise goes through then it's bound to be unpopular, lets be honest here no one likes tax raises and no politician likes people feeling bad at re-election time (Obama). If the payroll report shows that jobs growth is slowing (due out later this week) then the rising taxes is also bad, people having money to spend is what fuels the economy and suddenly making all your average tax payers poorer will put the dampers on any growth.

To keep the lower tax rates requires the tax revenues to be raised from non-average earners, already sunk by the Republicans as they consider the highest earners the only way to grow jobs, or to add a little more onto the deficit (approximately $120 billion), which would only increase the stress on the already nervous markets. If it wasn't for the absolutely shocking state of the global economy, then borrowing more would likely be punished by the markets. Yep you read that right, a bad global economy is good for the greenback as it benefits from its position as a safe-haven and therefore releases of new currency tend to get snapped up.

What's appears the best course of action? From a domestic point of view it would probably be to borrow more from the markets and ensure that the U.S. economy can keep growing. As long as Euro doesn't fall over and die, then (in the long term) the lead in productivity should offset the short term pain for yet more borrowing. From an international point of view letting the payroll tax increase would improve confidence in the dollar, draw in more external investment and is likely to further reduce the deficit by improved borrowing rates.

Is Obama likely to let taxes raise in such a way? Unlikely, after all he's after another term of office.