In 2001 and 2003, the old prez Bush made some big tax cuts in personal income tax. They expire towards the end of 2010 and will change back to the old rates. Big deal I thought, it's just catch-up time ... until I dug deeper. The taxpayer's pocket is going to get bashed on this one.
- The 10% bracket will increase to 15%
- The 25% bracket will increase to 28% (between $33,950 and $82,250 per year)
- The 28% bracket will increase to 31%
- The 33% bracket will increase to 36%
-The 35% bracket will increase to 39.6%
They seem smallish amounts until I figured you're looking at hikes of +9% to 50% (that's probably the local hairdresser in the bottom bracket!). But get this...Larry Summers, Obama's National Economic Adviser has gone on record in 2009 as saying these will not be renewed/extended. So that's the first calc. With all that govn't debt, they need the revenues.
In the last few years, Asia's emergence has revolved around the US consumer...not the mainland factoryworker or the rich monied wife who flies down from Shanghai to shop at Pacific Place while hubby pays HK$70,000+ per sqft for the Masterpiece in Tsimshatsui to get rid of his loose change. The last two (a small and visible minority) are just the multiplier effect at work aided by the factory worker (a visible but uninfluential economic majority). But over the water, "Joe the plumber" who was personified in the presidential election campaign as the common man on the street is a very visible and powerful cog of the economic majority who determines Asia's export fate, representing 70% of US GDP.
My second calc is to quantify the probable loss in Asia exports due to the loss in spending power as a result of these tax rises. My assumptions:
- US population 307m
- US unemployment in 2010 @ 10% (now at 9.7%, although John Williams of Shadowstats puts it in the mid-teens)
- No. taxpayers = 307m x 70% (30% are non-working under 18s and retirees) x 90% (less unemployed) = 193m
- Say the average taxpayer's annual salary is U$40k (ie HK$26k/mth) across the whole workforce and allow 15% for deductions (taxes & social security etc - very conservative %) and the tax rate goes up by +3% as above
Each taxpayer has to pay additional taxes of US$40k x 85% x 3% = US$1,020 per year. With 193m taxpayers = US$197bn increase in tax revenues / loss in consumer spending power.
Remember this is consumer goods (PCs, cameras and phones, stationery, clothes, home decorations etc) of incremental discretionary spending they will have to elimiminate. Most of this stuff is imported. They'll still have to maintain paying their rents/mortgages, eating and value shopping on day-to-day necessities while cutting back the imported nice to haves/luxuries. If not already, they're cutting back on services too (gym passes, Fifi's doggy manicure sessions).
This is where I use back of envelope maths for the third calc.....if 75% of the imported consumer stuff is from Asia (can only generalise here what truly good popular stuff South America, Europe and Africa ship across besides meat products, confectionery and precious stones), then Asia will lose US$148bn exports. Of this, say 50% is from China @ US$74bn (high volume and low margin consumer electronics and cheap household stuff you see in CitiSuper/FrancFranc/discount stores) with Korea, Taiwan and Japan making up the other 50% with their predominant lower volume but higher margin electronics gear and autos.
US$74bn China loss works out at a reduction in their trade surplus of US$6.2bn / month. If you look at the big picture below, US$6.2bn is a devastating hit in any month! My calc can still be 20% wrong and not affect the picture. The trend is already down drastically; it may bottom out and level off for a while in 2010...before it gets whacked again later. PRC Government steps in again with more stimulus?
This is a freight train which is out of sight but you can hear the rumbling in the distance. Oncethe lights start flashing, bells ringing and the gates come down at the crossing, it is too late to get across the profitable investing road. You're stuck in your positions! Whatever Obama's tax pledges, Joe the plumber is about to be well and truly drained (excuse the pun). You have plenty of time to position your portfolios to counter the 3% tax butterfly flapping its wings in Washington today before it causes an earthquake at the Chen's factory in Dongguan and Hutchison House (HK's status as a premier transhipment port is at stake here because of economic cycle and structural (Shenzhen port cheaper) shifts.
Keep a careful eye out on this US tax issue which the local HK media don't have on their radar today.
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