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IMF cuts global growth forecast; warns on euro zone

Concerns about weaker growth have now also moved to emerging economies. The IMF said they are facing “extraordinary uncertainty” as global growth slows and investors shun riskier assets. (AFP)

Concerns about weaker growth have now also moved to emerging economies. The IMF said they are facing “extraordinary uncertainty” as global growth slows and investors shun riskier assets.

By LESLEY WROUGHTON

The International Monetary Fund on Monday cut its global growth forecast and warned that the outlook could dim further if policymakers in Europe do not act with enough force and speed to quell their region’s debt crisis.

In a mid-year health check of the work economy, the IMF also cautioned the productive capacity in a number of emerging market economies, such as China, India and Brazil, may be lower than previously believed and future growth could disappoint.

The IMF shaved its 2013 forecast for global economic growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent.

“Downside risks to this weaker global outlook continue to loom large,” the IMF said in an update of its World Economic Outlook. “The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis.”

The global lender said advanced economies would only grow 1.4 percent this year and 1.9 percent in 2013.

It chopped its forecast for growth in emerging economies this year and next, projecting they will expand 5.9 percent in 2013 and 5.6 percent in 2012. Both figures are 0.1 percentage point lower than in April.

The IMF cut its growth forecast for the crisis-hit euro zone to 0.7 percent in 2013, while maintaining its projection of a 0.3 percent contraction this year. It said it now believes Spain’s economy will shrink both this year and next.

The IMF sharply revised down its growth projections for the United Kingdom to 0.2 percent this year and to 1.4 percent in 2013. In April, the fund said the UK economy would expand 0.8 percent in 2012 and 2.0 percent next year.
Moving in the right direction, but…

The fund praised measures adopted by European leaders at a summit in June as “steps in the right direction” but called for more fiscal and banking integration. It urged the creation of a pan-European deposit insurance guarantee program and a mechanism to resolve failing banks.

“The utmost priority is to resolve the crisis in the euro zone,” the IMF said.
It urged the ECB to provide ample liquidity to support banks under “sufficiently lenient conditions” and nudged the central bank to further ease monetary policy.

It made clear, however, that Europe was not the only risk to the outlook.

The IMF, which trimmed its U.S. forecasts slightly, said concerns were rising over a political battle brewing in Washington over how to avoid painful automatic spending cuts and tax increases at the start of next year.

The United States faces what economists are calling a “fiscal cliff” with the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions – enough fiscal tightening to knock the still-weak U.S. economy back into recession.

The nation is also expected to run into the statutory $16.4 trillion cap on its debt before the end of the year, raising the prospect of a default absent congressional action to raise it.

While financial markets believe Congress and the White House will find a way to avoid a fiscal train wreck, the IMF warned of the “potential for a significant adverse market reaction” if that consensus view began to falter.

Concerns about weaker growth have now also moved to emerging economies. The IMF said they are facing “extraordinary uncertainty” as global growth slows and investors shun riskier assets.

Earlier this year, policymakers in emerging economies were worried about large-scale capital inflows and excessive appreciation of their currencies. Those fears have given way to concerns over rapid depreciation and increased volatility in exchange rates. Currencies like the Brazilian real and Indian rupee have depreciated by between 15 and 25 percent in less than a quarter, the IMF noted.

“In emerging economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows,” it said.

The IMF cut its 2012 growth forecast for China 8.0 percent, down from 8.2 percent, and said it now expected growth of 8.5 percent next year, down from 8.8 percent.

It also sharply revised down its growth projections for India to 6.1 percent this year from 6.9 percent, and chopped its 2013 forecast to 6.5 percent from 7.3 percent.

Meanwhile, Africa’s growth is still seen at a robust 5.4 percent this year and 5.3 percent in 2013, as the region mostly remains relatively insulated from external financial shocks.

The IMF said growth in the Middle East will be stronger this year as key oil producing countries boost production and Libya’s economy rebounds from conflict in 2011, but it held its forecast for next year at 3.7 percent.

IMF cuts global growth forecast; warns on euro zone

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Why Doesn’t the IRS Do Your Taxes For You?

It’s Tax Day, and many of you are probably rushing to complete your returns before the filing deadline. At Slate, Matt Yglesiaspoints out that this process doesn’t have to be so difficult. The IRS has much of the information they need to fill out your tax return, so why don’t they just send you a partly or fully completed return for your review? Indeed, such a system has been proposed federally and adopted in at least one state (in California, it’s called ReadyReturn) but Congress has refused to move forward.

Yglesias focuses on a public choice problem—tax filers are made a little bit better off by this policy, but tax preparers are made a lot worse off, so they lobby to block ReadyReturn and similar programs. He also notes that some conservatives oppose pre-filled returns on the grounds that they might reduce public opposition to income taxes.

But I have a separate concern about ReadyReturn—what if it undermines tax compliance?

The key feature of the income tax that encourages compliance is two-party reporting. You send the IRS a Form 1040, and the people who paid you during the year send Forms 1099, W-2 and the like. If you lie about your income, the figures reported by your employers and clients will expose you.
But what if, when filing your return, you already know that one of your clients has failed to report what he paid you? In a ReadyReturn system, the government has to lay its cards on the table—before the taxpayer files, he knows exactly what the government knows about his earnings, and what it doesn’t know.

Today, if a taxpayer doesn’t get a 1099 form that he’s expecting, he probably asks his client where it is—he doesn’t want the IRS to get a copy of a form that he doesn’t have.  But with the knowledge that the IRS never got a copy, either, he might just go ahead and underreport his income. An “oopsie” defense would likely work just fine for omitted 1099s that later came to light, so long as they did not amount to a substantial underreporting of income (that is, 10 percent or $5,000, whichever is less). After all, you didn’t prepare your taxes—the IRS did.

It’s a lot like when you check out of a hotel and review your bill. If you notice the hotel charged you for an extra night of parking, you’ll complain and get the charge taken off. But let’s say you notice that they’ve accidentally omitted to charge you for one night of parking. Do you call the clerk’s attention and ask for a parking charge to be added? Be honest.

Maybe this wouldn’t be that big a problem because there aren’t that many payer-side reporting errors. Or maybe the reduction in tax compliance costs from ReadyReturn would outweigh any increase in tax evasion. But I do worry that ReadyReturn would, at least to some degree, undermine the advantages of two-party reporting and increase the tax gap.

Why Doesn’t the IRS Do Your Taxes For You?

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