Americans are rightly focused on the "fiscal cliff" looming at the start of next year, when, under current legislation, virtually all tax rates will rise, sucking more than 3 per cent of GDP out of households and businesses.
In addition, automatic cuts in government spending on defence and non-defence programmes will subtract nearly another 1per cent of GDP next year. And the fiscal cliff is only part of the problem that must be solved.
The bigger problem is that the United States has an enormous fiscal deficit - now about 7 per cent of GDP and predicted to grow rapidly.
Fiscal consolidation requires additional revenue as well as slower growth in entitlement spending.
My guess is that soon after the general election, the US congress will vote to postpone the fiscal cliff for about six months to allow time to work out an acceptable legislative solution. That solution will involve slowing the growth of social security pension benefits for future middle and upper-income pensioners.
The tougher problem will be how to raise revenue. The key will be to focus on the many special features of the tax code that are equivalent to government spending. If I buy a hybrid car, install a solar panel at my home or upgrade to a more efficient water heater, I get a tax credit. And if I buy a bigger home or just increase the size of my mortgage, I receive a larger deduction that reduces my taxable income, lowering my tax bill.
While the government is not giving me money, these special targeted tax breaks are no less "government spending" than they would be if the government sent me a cheque.
These features are rightly called "tax expenditures" because they describe the government spending that occurs through the tax code. Eliminating or reducing these tax expenditures should therefore be regarded as cutting government spending. Although the effect is to raise revenue, that is just an accounting convention. The fundamental economic effect is to reduce government spending.
The key to raising revenue is to reduce tax expenditures, use some of the resulting revenue to reduce tax rates, and devote the rest to reducing future deficits. So here is an idea that might work politically. Let taxpayers keep all of the current tax expenditures, but limit the total amount by which each taxpayer can reduce his or her tax liability.
I have explored the idea of "capping" the benefit that individuals can receive as a percentage of their total income (their "adjusted gross income", or AGI in US tax parlance). Applying a 2 per cent of AGI cap to the total benefit that an individual can receive from tax expenditures would have a powerful effect.
It would not limit the amount of deductions and exclusions to 2 per cent of AGI, but rather would limit the resulting tax reduction - that is, the tax benefit - that the individual receives by using all these special features. For someone with a 15 per cent marginal tax rate, a 2 per cent of AGI cap would limit total deductions and exclusions to about 13 per cent of AGI.
Such a cap would have a significant impact on the fiscal outlook. Even if the cap were applied only to "itemised deductions" and health-insurance exclusion, it would raise about US$250 billion (Dh918.25bn) in the first year and about $3 trillion over the first decade.
There are many options in designing such a policy. The cap rate could be higher, or it could start higher and be gradually tightened, or it could vary with an individual's income level. But the economic and political attractiveness of a cap consists in its ability to raise substantial revenue without eliminating specific tax expenditures.
Martin Feldstein is a professor of economics at Harvard and was chairman of president Ronald Reagan's council of economic advisers
* Project Syndicate
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Volvo ES90 Specs
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Price: Exact regional pricing TBA
The specs
AT4 Ultimate, as tested
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Power: 420hp
Torque: 623Nm
Transmission: 10-speed automatic
Price: From Dh330,800 (Elevation: Dh236,400; AT4: Dh286,800; Denali: Dh345,800)
On sale: Now
THE BIO
Favourite book: ‘Purpose Driven Life’ by Rick Warren
Favourite travel destination: Switzerland
Hobbies: Travelling and following motivational speeches and speakers
Favourite place in UAE: Dubai Museum
The Bio
Name: Lynn Davison
Profession: History teacher at Al Yasmina Academy, Abu Dhabi
Children: She has one son, Casey, 28
Hometown: Pontefract, West Yorkshire in the UK
Favourite book: The Alchemist by Paulo Coelho
Favourite Author: CJ Sansom
Favourite holiday destination: Bali
Favourite food: A Sunday roast
UAE currency: the story behind the money in your pockets
Killing of Qassem Suleimani
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
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The specs
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Fuel economy, combined: 6.5L/100km
On sale: December
Price: From Dh330,000 (estimate)
Schedule:
Friday, January 12: Six fourball matches
Saturday, January 13: Six foursome (alternate shot) matches
Sunday, January 14: 12 singles
The specs
Engine: 2.0-litre 4-cylinder turbo hybrid
Transmission: eight-speed automatic
Power: 390bhp
Torque: 400Nm
Price: Dh340,000 ($92,579
