dinsdag 4 december 2012

How much of your Taxes are going to Interest Payment?

I was curious on how much of U.S. tax payer revenue was going to interest payment on government debt at this time compared to history and surprisingly the U.S. is doing very well.

Tax revenue data came from here and is at almost $3 trillion annually ($2.683 trillion to be exact).
Interest expense on debt data came from here and is at $400 billion.

If we just divide those two then we get chart 1.

And yes, surprisingly, the interest payment to bond holders is going down compared to the tax revenue the federal government is getting today. Historically, we had the highest interest payment to revenue ratio in 1991, which was 26%. Of course, the interest rate was much higher then.

interest expense to tax revenue ratio
Chart 1: Interest Expense to Federal Receipt Ratio
If we were to have the interest rate of 1991 today (7% for 10 year U.S. bonds). I bet we would be higher than 26% already. It would be as much as 50% of tax revenue according to Michael Pento. It all depends on the interest rate (which of course is never going to go up).

So all the hype about tax revenue that goes to interest payment (touted by Marc Faber) isn't as hot as it may actually sound.

To compare with Japan:
For Japan we have 22 trillion yen in interest payments. http://yhoo.it/MCWrdj

Versus

42 trillion yen in tax revenue. http://bloom.bg/11OIYoC

That's indeed 50% which is very high.

If the Japanese 10 year bond yield doubles, the interest expense will also double. Which makes Japanese people pay their taxes all to interest on debt.

But, Japan has a current account surplus..., which the U.S. doesn't have.
And the interest payments will stay in Japan and circulate in their economy.

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