| About that "Beat the Street" GDP Number Posted: 31 Jul 2013 11:10 AM PDT GDP beat second quarter estimates of 1 percent easily. However, the BEA revised first quarter growth down from 1.7% to 1.1%. Is this a good thing, a bad thing, or nonsense? The correct answer is "nonsense". One look at BEA GDP Release is all it takes to determine the answer. The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.3 percent in the second quarter, compared with an increase of 1.2 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter compared with 1.4 percent in the first. How Convenient My friend "BC" says How convenient, otherwise real GDP would have printed at 0.8%, prices constant. Yet, the yoy rate of real final sales per capita is below 1% for the second quarter in a row, whereas the second quarter annualized rate is near contracting. Had the deflator been reported at the rate in Q1, the yoy and 2-qtr. annualized real final sales per capita rates would have been reported as contracting. Doug Short at Advisor Perspectives came up with similar conclusions via email. Doug writes - Official GDP with the BEA's GDP deflator (0.71% which is rounded in the popular press to 0.7%) gives us the official GDP of 1.67%, which rounds to 1.7%
- GDP with a hypothetical 1.6% deflator (as forecast by Briefing.com) would have been 0.78%, which rounds to 0.8%.
- GDP with the average deflator over the past 14 quarters (which is 1.75%) would have been 0.64%, which rounds to 0.6%.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Economic Recovery in Spain? Tax Collections, Retail Sales Prove Otherwise Posted: 31 Jul 2013 10:36 AM PDT In an attempt to distract voters from all the political scandals in his administration, Prime Minister Mariano Rajoy is talking about the pending economic recovery in Spain. Don't believe it. Huky Guru at Guru's Blog in Spain takes a good look at numbers that prove Rajoy is disingenuous. Via Mish-modified Google translation, please consider Debt Remains Uncontrolled, €40 Billion Deficit in First Half First Half Deficit 3.81% of GDP
The government deficit totaled €40 billion in the first six months of the year in terms of national accounts, 3.81% of GDP, according to data released Tuesday by the Ministry of Finance and Public Administration.
The figure represents a decline of 8.2% compared to the same period last year, although an increase of 19.9% compared to the figure recorded until May, which was around €33.3 billion.
The result of the shortfall until June due to an income reached €49.528 billion euros (+12%) and expenditure of €89.529 billion euros, up 2%.
Revenues Drop 7.1%
Cumulative to June, revenues fell by 7.1% and non-financial payments fall by 1%. What's worse, is that for nearly every euro that enters government coffers, it is burning one euro in cash.
VAT Shows Decline in Economic Activity
State revenue from indirect taxes, with €36.221 billion, an increase of 5.1%. But remember the VAT went from 18% to 21%, an increase of 17%, so that a rise of only 5.6% in revenue means that economic activity or the collection capacity of the tax has diminished.
Expenditures
On the expenditure side, the financial payments made by the State stood at €82.921 billion euros, up 1%. This result has been influenced by higher financial expenses and personnel, but were offset by declines in other chapters.
Personnel expenses stood at €13.892 billion euros, representing an increase of 1.3%, while collecting 1.9% decline in wages and salaries, to €6.798 billion euros. Social benefits grew by 5.6% on account of an increasing number of pensioners and 1% increase of pensions.
Transfer payments current until June totaled €50.551 billion, representing a decrease of 0.8%. Finally, payments for real investments, with €2.116 billion euro, fell 6.4%, while the capital transfer payments decreased by 2% to €1.961 billion euros due. Spain's Retail Sales Decline 36th Month Reuters reports Spain's retail sales slump stretches to three years, hampering recovery Spanish retail sales fell for the thirty-sixth month running in June, offering a snapshot of the shrinking consumer spending that is hampering a long-awaited economic recovery.
With Spain increasingly reliant on exports to generate growth, its current account - the broadest measure of a country's terms of trade - turned to a surplus in May.
The recession has lasted since the end of 2011, though economic output fell just 0.1 percent between April and June, leading the government to state the slump was over.
Calendar-adjusted retail sales fell 5.1 percent year-on-year in June, according to National Statistics Institute data on Wednesday, while the Bank of Spain said the current account posted a 2.4 billion euro surplus in the previous month.
Spain's unemployment rate is above 26 percent. That has impeded spending on the high street, as have the high budget gaps that have forced the government of Prime Minister Mariano Rajoy to cut expenditure and hike taxes.
"Whenever the economy starts breathing, you'll have additional pressure to start cutting the deficit, so we get in to additional austerity and spending will fall. It's going to be a choppy ride," Moec said.
"Of the IBEX companies, practically the only thing carrying them are contracts and business volume out of Spain," said Pedro Alvarez, trader at Banco Sabadell.
"If you look at (Spain's largest department store) Corte Ingles, which is having problems, you get a good idea of how things are going in the country." Spain finally met its revised-four-times-lower deficit targets. Don't mistake that for an economic recovery. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| "Tax Nightmare" of Eminent Domain Mortgage Seizures Posted: 31 Jul 2013 12:27 AM PDT Gayle McLaughlin, mayor of Richmond, California is hell-bent on her plan to seize mortgages via eminent domain, then provide "mortgage forgiveness" for the homeowners. I smacked the idea from a legal standpoint in Illegal Public Seizure of Mortgages Via Eminent Domain in the Spotlight. Tax Nightmare Legalities aside, there are also huge tax consequences to consider. A local attorney and real estate broker posting under the name "davecherr" commented on the problem of debt forgiveness. There is a massive and thus-far unremarked upon problem with this ED scheme: it would result in a MASSIVE INCOME TAX BILL FOR THE HOMEOWNER. Under the tax code, discharge of indebtedness is counted as income. There is a safe harbor for people who lose their primary residence to foreclosure, but it would not apply to these Richmond residents, since they would keep their house with magically reduced debt.
That debt reduction would NOT be tax-free. If a homeowner's mortgage goes from $400K to $190K under the proposed scheme, they would owe taxes on $210K of discharged debt (it would likely be much more, because all missed payments, late fees, and missed property tax and insurance payment, and interest on all of that, would be folded into principal -- such costs can easily drive principal from $400K to $500K over the course of 1-2 years of non-payment).
The federal taxes on that would be around $50K, and the state taxes $15K, for a total tax bill of $65K, or around $7K per year on a 15 year payment plan. As a local, I can tell you that most residents of Richmond do not have an extra $7K/year of income to pay such a bill.
Who will tell the people of Richmond, and their craven politicians, that their scheme will lead to tax nightmares exploding all across their fair city? Mortgage Forgiveness Act of 2007 Expires Sure enough, "davecherr" is correct. Details can be found in the IRS publication Home Foreclosure and Debt Cancellation. Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn't apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.
1. What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
2. Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
- Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
- Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
- Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences
Conclusions It's safe to say this is not 2012. And even if the law was extended, there may still be huge tax consequences. There is no bankruptcy, proving insolvency can be problematic, these are not farm debts, and the paragraph on non-recourse loans does not apply because there is no default. The very purpose of the eminent domain seizure is to prevent default. Bankrate has more on the insolvency issue in What does it mean to claim insolvency? Q: Dear Tax Talk ...Can you explain what insolvency is? Is our 401(k) balance included in our assets? Thank you. -- Beverly
A: Dear Beverly, While your creditors may not have access to your retirement accounts, the IRS does. The general rule is that if you have a debt that is forgiven, you recognize income. Exceptions exist for primary home debt forgiven as well as debts forgiven in bankruptcy proceedings and when a taxpayer is insolvent.
The cancellation of your primary home debt is not considered income provided that the debt was used to purchase the home and was not increased by a cash-out refinance.
For many years, the tax law has given bankrupt and insolvent taxpayers a break when it comes to forgiven debt. It's pretty well established that if you enter into bankruptcy, certain assets, depending on your state of residency, are exempt from creditor claims. Generally, these assets are homestead property, insurance products and retirement accounts. What had not been clear is how these assets were treated in the case of insolvency; neither the law, IRS regulations, announcements or rulings explained it.
Prior to the real estate crisis, the IRS took a taxpayer's claim of insolvency to tax court. The taxpayers sought to exclude assets exempt from creditor's claims when measuring insolvency. The theory being that if the assets are exempt in bankruptcy proceedings, the taxpayer shouldn't be forced into bankruptcy just for the favorable tax consequences. The IRS and the U.S. Tax Court couldn't have disagreed more.
Hence, in determining the extent of your insolvency, you will have to count your 401(k) as an asset. I recommend you have your tax adviser work out the consequences more concisely so that you can measure the benefit of declaring bankruptcy. For those who are not careful, this ill-conceived socialist wealth redistribution scheme of Mortgage Resolution Partners LLC will leave unsuspecting recipients with huge tax bills should it erroneously survive court challenges that are surely coming. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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