Kiddie Tax No Longer Based on Parents’ Tax Rate

Article Highlights:

  • Parents Attempting to Shift Income to Children
  • Kiddie Tax
  • Tax Reform Changes
  • Tax on Child’s Unearned Income
  • Tax on Child’s Earned Income

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U.S. consumer spending rises, Brexit casts shadow on outlook

U.S. consumer spending rises, Brexit casts shadow on outlook

BY LUCIA MUTIKANI | Featured on Reuters

U.S. consumer spending rose for a second straight month in May on increased demand for automobiles and other goods, but there are fears Britain’s vote to leave the European Union could hurt confidence and prompt households to cut back on consumption.

Wednesday’s fairly strong report released by the Commerce Department pointed to an acceleration in economic growth in the second quarter.

Still, economists worry that financial turbulence, following last Thursday’s so-called “Brexit” referendum, could hurt consumer confidence and cause households to bulk up their savings rather than increase spending because of an uncertain economic outlook.

“With the confidence-sapping eruption in global financial markets continuing to play out, we expect spending momentum to slow in the coming months ahead, adding a layer of uncertainty to the U.S. economic outlook going forward,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

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Fed's Williams Sees 'Huge Impact' on U.S. From China, Brazil

Fed’s Williams Sees ‘Huge Impact’ on U.S. From China, Brazil

Article Featured on Bloomberg News

Federal Reserve Bank of San Francisco President John Williams said the global economy, particularly China and Brazil, was having a significant impact on measures that U.S. policy makers watch to determine interest rates.

The world’s largest economy is doing “quite well,” Williams said Monday in an interview on CNBC, citing stable inflation and strong employment growth. The U.S. economy grew at a faster pace than expected in the fourth quarter, with a 1.4 percent increase. That compared with a prior Commerce Department estimate of 1 percent, figures issued Friday show.

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China’s Bumpy New Normal

China’s Bumpy New Normal

Article by  | Featured on Project Syndicate

SHANGHAI – China’s shift from export-driven growth to a model based on domestic services and household consumption has been much bumpier than some anticipated, with stock-market gyrations and exchange-rate volatility inciting fears about the country’s economic stability. Yet by historical standards, China’s economy is still performing well – at near 7% annual GDP growth, some might say very well – but success on the scale that China has seen over the past three decades breeds high expectations.

There is a basic lesson: “Markets with Chinese characteristics” are as volatile and hard to control as markets with American characteristics. Markets invariably take on a life of their own; they cannot be easily ordered around. To the extent that markets can be controlled, it is through setting the rules of the game in a transparent way.

All markets need rules and regulations. Good rules can help stabilize markets. Badly designed rules, no matter how well intentioned, can have the opposite effect.

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A Step Forward for Sovereign Debt

A Step Forward for Sovereign Debt

Article by Joseph E. Stiglitz & Martin Guzman | Featured on Project Syndicate 

Every advanced country has a bankruptcy law, but there is no equivalent framework for sovereign borrowers. That legal vacuum matters, because, as we now see in Greece and Puerto Rico, it can suck the life out of economies.

In September, the United Nations took a big step toward filling the void, approving a set of principles for sovereign-debt restructuring. The nine precepts – namely, a sovereign’s right to initiate a debt restructuring, sovereign immunity, equitable treatment of creditors, (super) majority restructuring, transparency, impartiality, legitimacy, sustainability, and good faith in negotiations – form the rudiments of an effective international rule of law.

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The Trouble With Financial Bubbles

The Trouble With Financial Bubbles

Article by  | Featured on Project Syndicate

Very soon after the magnitude of the 2008 financial crisis became clear, a lively debate began about whether central banks and regulators could – and should – have done more to head it off. The traditional view, notably shared by former US Federal Reserve Chairman Alan Greenspan, is that any attempt to prick financial bubbles in advance is doomed to failure. The most central banks can do is to clean up the mess.

Bubble-pricking may indeed choke off growth unnecessarily – and at high social cost. But there is a counter-argument. Economists at the Bank for International Settlements (BIS) have maintained that the costs of the crisis were so large, and the cleanup so long, that we should surely now look for ways to act pre-emptively when we again see a dangerous build-up of liquidity and credit.

Hence the fierce (albeit arcane and polite) dispute between the two sides at the International Monetary Fund’s recent meeting in Lima, Peru. For the literary-minded, it was reminiscent of Jonathan Swift’s Gulliver’s Travels. Gulliver finds himself caught in a war between two tribes, one of which believes that a boiled egg should always be opened at the narrow end, while the other is fervent in its view that a spoon fits better into the bigger, rounded end.

It is fair to say that the debate has moved on a little since 2008. Most important, macroprudential regulation has been added to policymakers’ toolkit: simply put, it makes sense to vary banks’ capital requirements according to the financial cycle. When credit expansion is rapid, it may be appropriate to increase banks’ capital requirements as a hedge against the heightened risk of a subsequent contraction. This increase would be above what microprudential supervision – assessing the risks to individual institutions – might dictate. In this way, the new Basel rules allow for requiring banks to maintain a so-called countercyclical buffer of extra capital.

But if the idea of the countercyclical buffer is now generally accepted, what of the “nuclear option” to prick a bubble: Is it justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target? And should central banks be given a specific financial-stability objective, separate from an inflation target?

Jaime Caruana, the General Manager of the BIS, and a former Governor of the Bank of Spain, answers yes to both questions. In Lima, he argued that the so-called “separation principle,” whereby monetary and financial stability are addressed differently and tasked to separate agencies, no longer makes sense.

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IMF

Modernizing the IMF

PRINCETON – The international system of economic governance is at a turning point. After 70 years, the Bretton Woods institutions – the International Monetary Fund and the World Bank –appear creaky, with their very legitimacy being questioned in many quarters. If they are to remain relevant, real changes must be made.

The IMF, in particular, is facing challenges on all sides. In the United States, Congress is stalling not only on international issues like trade, but also on the implementation of reforms that would expand the role of emerging economies in the IMF. For its part, Europe has drawn the organization into its debt crisis, with Greece having already missed a payment on its IMF loans (though the Fund is not calling it a default). And, in Asia, the IMF still carries a stigma, because of its flawed response to the region’s financial crisis in the late 1990s.

How can the IMF reprise its role as a guardian of international financial stability? One solution could be to adjust its international reserve asset, the Special Drawing Rights (SDR), by adding the Chinese renminbi to the basket of currencies that determines its value.

The SDR was created in 1969 to help protect the world against the dangers of a liquidity shortage. At first, its value was equal to that of the US dollar, which was defined in terms of a specific weight of gold. But when US President Richard Nixon ended the dollar’s international convertibility to gold in 1971, much of the world moved to a floating exchange-rate system in which the value of any given currency can fluctuate wildly.

In order to stabilize the SDR’s value, policymakers decided in 1974 to base it on the currencies of the 16 countries that represented at least 1% of global trade. But, given that many of those currencies were not widely traded, the large currency basket proved ineffective. The SDR became a poor option for storing value, with a lower yield than other reserve assets.

In 1981, the SDR basket was revised to include only the currencies of the biggest global economic actors: France, Germany, Japan, the United Kingdom, and the United States. The new composition was simple enough to be understood easily by investors and stable enough to withstand swings in exchange rates. The basket was streamlined further when the euro replaced the French franc and the Deutsche mark.

Yet, since the world has not faced a real liquidity shortage since 1971, the SDR’s use as a global reserve asset has remained limited. Before the recent global financial crisis, the SDR accounted for only 0.5% of international reserves. Even after substantial allocations in 2009 – intended to supplement IMF members’ foreign-exchange reserves and strengthen their capacity to weather the crisis – its share peaked at a mere 3.7%. In short, the SDR is used less as a reserve asset than as the IMF’s own unit of account.

Nonetheless, the SDR can be of real value, serving as a stable reference unit at a time of increasing exchange-rate volatility. Since January, when Switzerland responded to the euro’s depreciation against the dollar by abandoning its peg to the European currency, the country’s economy has experienced a downturn. This highlights the value of a stable unit to which smaller economies can peg their currencies, especially at a time of increasing exchange-rate volatility.

Of course, if the SDR is to assume this role, it must be used more widely. Most importantly, it should be traded privately and used as a basis for private credit. Under these circumstances, however, the SDR basket would need to be more comprehensive, including the currencies of large emerging economies, beginning with China.

Contrary to what some opponents say, the Chinese renminbi meets the requirements of joining the SDR basket. For starters, it is now a truly global currency. One-quarter of China’s massive international trade (the country is the world’s second-largest exporter, accounting for one-eighth of global exports) is invoiced in renminbi.

Furthermore, the renminbi now meets the requirement – which it did not in 2010, when China first tried to have its currency added to the SDR basket – of being “freely usable.” Since the introduction of a series of domestic reforms aimed at increasing the renminbi’s use in international payments, the currency has become the fifth most used for that purpose, accounting for over 2% of such transactions. That may not seem like a large share, but it is less than one percentage point below that of the Japanese yen.

The one sticking point that remains is that the renminbi is not freely convertible, with China’s government having yet to eliminate capital controls. But, in recent years, the IMF has revised its stance on capital controls, acknowledging their usefulness under certain circumstances. And major central banks have lately been moving toward so-called “macro-prudential” regulation, which amounts to a mild form of capital controls.

This year, the US dollar has appreciated against almost every currency, with one notable exception: the renminbi. This is evidence that China is steadily, if slowly, moving toward a market-dictated exchange rate – precisely the kind of evidence that could spur investors to advocate for a global asset.

The logic behind the SDR’s creation was sound: The world needed an international reserve asset that mirrored global trade. But the plan’s execution has been flawed. The original SDR basket was too broad, just as the current version is too narrow. And the focus on officially held assets ignored the SDR’s potential value in private markets. These flaws should now be corrected.

If the IMF is to remain relevant at a time of rapid economic transformation, it must adapt. By adding the Chinese renminbi – and perhaps other emerging-market currencies – to the SDR basket, it would demonstrate its willingness and ability to do just that.


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America and China in "Productivity Paradox"

America, China, and the Productivity Paradox

NEW HAVEN – In the late 1980s, there was intense debate about the so-called productivity paradox – when massive investments in information technology (IT) were not delivering measureable productivity improvements. That paradox is now back, posing a problem for both the United States and China – one that may well come up in their annual Strategic and Economic Dialogue.

Back in 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere except in the productivity statistics.” The productivity paradox seemed to be resolved in the 1990s, when America experienced a spectacular productivity renaissance. Average annual productivity growth in the country’s nonfarm business sector accelerated to 2.5% from 1991 to 2007, from the 1.5% trend in the preceding 15 years. The benefits of the Internet Age had finally materialized. Concern about the paradox all but vanished.

But the celebration appears to have been premature. Despite another technological revolution, productivity growth is slumping again. And this time the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all.

Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%. It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, America’s productivity renaissance seems to have run into serious trouble.

China is witnessing a similar pattern. Although the government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 – well in excess of the government’s targeted growth rate of ten million. Moreover, hiring seems to be holding at that brisk pace in early 2015.

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Debating the Confidence Fairy

Debating the Confidence Fairy

LONDON – In 2011, the Nobel laureate economist Paul Krugman characterized conservative discourse on budget deficits in terms of “bond vigilantes” and the “confidence fairy.” Unless governments cut their deficits, the bond vigilantes will put the screws to them by forcing up interest rates. But if they do cut, the confidence fairy will reward them by stimulating private spending more than the cuts depress it.

Krugman thought the “bond vigilante” claim might be valid for a few countries, such as Greece, but argued that the “confidence fairy” was no less imaginary than the one that collects children’s teeth. Cutting a deficit in a slump could never cause a recovery. Political rhetoric can stop a good policy from being adopted, but it cannot stop it from succeeding. Above all, it cannot make a bad policy work.

I recently debated this point with Krugman at a New York Review of Books event. My argument was that adverse expectations could affect a policy’s results, not just the chances that it will be adopted. For example, if people thought that government borrowing was simply deferred taxation, they might save more to meet their expected future tax bill.

On reflection, I think I was wrong. The confidence factor affects government decision-making, but it does not affect the results of decisions. Except in extreme cases, confidence cannot cause a bad policy to have good results, and a lack of it cannot cause a good policy to have bad results, any more than jumping out of a window in the mistaken belief that humans can fly can offset the effect of gravity.

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The Problem with Secular Stagnation

The Problem With Secular Stagnation

DELHI – In a recent exchange between former US Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Larry Summers on the plausibility of secular stagnation, one point of agreement was the need for a global perspective. But from that perspective, the hypothesis of secular stagnation in the period leading up to the 2008 global financial crisis is at odds with a central fact: global growth averaged more than 4% – the highest rate on record.

The same problem haunts Bernanke’s hypothesis that slow growth reflected a “global savings glut.” From a Keynesian perspective, an increase in savings cannot explain the surge in activity that the world witnessed in the early 2000s.

Supporters of the secular-stagnation hypothesis, it seems, have identified the wrong problem. From a truly secular and global perspective, the difficulty lies in explaining the pre-crisis boom. More precisely, it lies in explaining the conjunction of three major global developments: a surge in growth (not stagnation), a decline in inflation, and a reduction in real (inflation-adjusted) interest rates. Any persuasive explanation of these three developments must de-emphasize a pure aggregate-demand framework and focus on the rise of emerging markets, especially China.

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