But here’s the stark reality: The money Uncle Sam gets from personal taxes, payroll deductions, corporate taxes and various other duties is a little more than half of the money it’s spending. The difference (deficit) has to be made up either by reducing spending, increasing taxes, or both.

It’s an unpleasant reality, but that doesn’t mean we’re helpless against these changes.

Many don’t know why or how much our Gross Domestic Product (GDP) relates to the taxes we all pay. So let’s take a look at how it’s determined and why it’s important. And best of all, how we can even profit from these charges – I mean changes – and make money in the process.

GDP: What is it and Why Should I Care?

Gross Domestic Product – or GDP as it’s most often referred to – is the basic measure of a country’s economic performance.

It’s calculated in a number of ways. One of the most common is the total money spent to purchase the final goods, end products and services produced in one year.

It’s a very big number: In 2008, the International Monetary Fund estimated that the GDP for the entire world was $68.9 trillion. Not too surprisingly, the United States’ share is by far the largest: $14.2 trillion, or about 20.6% of the total.

• It stands to reason that if GDP is rising, economic growth is increasing, unemployment is falling and tax revenue is increasing.
• In the United States, the consumer has historically been responsible for 70% of the nation’s GDP, and that’s what’s sustained our long run of economic growth.
• But now, the consumer’s ATM is tapped out… kaput. He’s now too busy saving and paying down debt (a good thing) to be able to spend money at historical levels.

As a result, GDP – and by extension economic growth – is falling, and unemployment is rising. As a result, federal and state tax revenues are dropping.

So who or what is going to make up the GDP difference? Of course, there’s always the hue and cry of cutting government spending. When was the last time – under any administration – that you actually saw government shrink?

It’s been awhile, but I can assure you that at least at the state and local levels, government is laying off workers and tightening its purse strings. But that won’t be enough: taxes will have to rise to make up the difference.

Our Rising Tax Predicament Was Foreseen in the 19th Century

It’s interesting to note that this scenario was foreseen hundreds of years ago. You see, way back in the 19th century, German economist Adolf Wagner predicted that as societies grew more affluent, taxes would inevitably have to rise. This became known in economic circles as Wagner’s Law.

The reason is simple: A nation’s citizenry ultimately wants more of the things that only its government can easily provide. All those good schools, public order and safety, a strong military, and various public welfare services and Social Security benefits all cost money.

While I’m not a fan of big government, most of these are things the average citizen would have difficulty providing on their own.

Arguments are made all the time that as more social services are provided, there is less incentive for people to work. The reality though, is quite different.

Even when taxes rose sharply – as they did in the early part of the 20th century – from only a couple of percentage points of GDP to the current level (18%), the country still prospered.

Now they will have to rise again, to make up the gap in social service spending. Although there is much ballyhooing about it, the country will still prosper, as most people are quite comfortable from a material standpoint.

So what’s the best way to “play” the inevitable tax increase?

Three Ways To Play The Coming Tax Increase

My answer might surprise you, but I believe there are three sectors that will fill the consumer spending “deficit” and fund an economic recovery: energy, infrastructure and health care.

Both energy and infrastructure will benefit for the next several years from the billions being thrown at the sectors via the stimulus package as well as coming tax increases. We’re just starting to see the first of what will be many large highway, bridge and other infrastructure projects, as well as energy infrastructure undertakings associated with the smart grid.

Regular readers know I follow the first two very closely. Marc Lichtenfeld – an Investment U contributor you’ll be hearing a lot more from in the coming weeks – is an expert on the third. Read about Marc’s ideas on partial profit taking.

• Right now, analysts and most investors are shunning the energy ETFs, many of which are off 25% or more from their highs of last November. Of course, that’s the very reason you should consider taking a position in one.
• Specifically, take iShares Dow Jones U.S. Energy (NYSE: IYE), a fund that seeks to replicate the performance of the Dow Jones Oil and Gas Index. It includes companies in all facets of oil and gas: producers, equipment and distribution.

No one likes higher taxes, but in the coming weeks and months, these three sectors stand to benefit from the coming increase in government spending. We’ll be bringing you more on all three over next few weeks and months.

And remember, there’s always a way to make a profit.

Good investing,

David Fessler

Source: Here’s Three Ways to Play the Coming Tax Increase

The “next big thing” our friends at The Daily Reckoning recently predicted, “will be downsizing, cutting back, making do. Barely on the radar screen now, thrift is coming into focus more clearly day by day. So far, people are a bit embarrassed about it…a bit ashamed that they have had to cut back. But soon, it will be popular…fashionable…and, finally, almost obligatory.”

This new austerity craze — if/as/when it arrives — will impose hardships on many American companies. But a select few might actually benefit.

The cause(s) of downsizing are pretty clear. Home values are falling so sharply that very few homeowners can still pull equity out of their houses. Stock prices are also drifting lower, more or less. Meanwhile, inflation is ramping up.

~~~~~~~~~~~~~Special~~~~~~~~~~~~~

At High-Yield International, we’re obsessed with finding the highest-yielding securities in the world — no matter where they hide. In the process, we’ve uncovered many foreign yields that U.S. investors thought were impossible.

What is the highest yield we have brought our readers so far in 2008?

(A.) 9.5%
(B.) 11.0%
(C.) 15.2%
(D.) 21.8%

Click here to learn the answer…it’s free!

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Prices are rising in Europe as in America. Bread is up 12 percent in Germany over the last 12 months. Butter has gone up 45 percent. Milk, 25 percent.

Higher prices often stem from printing more dollars. “Force-feeding the rest of the world $2 billion per day (more consumption),” Warren Buffett reminded us last week, “is inconsistent with a stable dollar (more inflation).”

We share Mr. Buffett’s concern. Bernanke keeps printing. Politicians keep promising. Bridges keep crumbling. Wars keep spending.

With regret, we read last week that the projected total cost of medical care for U.S. veterans of the Iraq and Afghanistan wars will top $500 billion, a figure on par with the total military spending to wage these wars to date. And speaking of military might, Defense Secretary Robert Gates estimated in testimony before the Senate Armed Services Committee that the Pentagon will spend upward of $685 billion next year alone. That’s $170 billion more than the $515 billion the president proposed in his first-ever $3 trillion budget.

If that weren’t enough, Gates doesn’t even expect that number to stick. “I have no confidence in that figure,” he admitted. You can expect the estimate to rise in the near future.

A hundred billion here…a hundred billion there. Who’s counting?

Apparently, no one.

But that’s not to say the S&P can’t weather the storm. The companies representing the Standard & Poor’s 500 index now derive 49 percent of revenue from foreign markets, up from 30 percent in 2001. Meaning, those with money to burn (Southeast Asian consumers) should keep earnings reports strong. Stronger repatriated currencies should only bolster this trend.

Unfortunately, many Americans believe a strong S&P equals a strong American economy. We tend to see another American economy. We see an economy riddled with debt, more debt and even more debt. We see the American consumer eerily close to tapping out. Thirty-four percent of Americans now believe they are among the “have-nots.”

It serves to reason. More than 405,000 homeowners lost their homes to foreclosure last year.

Most middle-income Americans, the ones driving our buy-now, pay-later economy, have spent well beyond their means. Americans currently perpetuate a negative savings rate. That can’t last forever.

~~~~~~~~~~~~~Special~~~~~~~~~~~~~

Here’s How the “Millionaire’s Market” Paid Me to Retire From My 9–5 Office Job at 32 Years Old…

No more ironing shirts and tying ties at 6:15 in the morning…no more sitting in rush hour…and no more waiting around at 5:00 p.m. on Friday to pick up my weekly check…

The Millionaire’s Market changed ALL of that. Now I’m my own boss. You can too, but only if you get in on it now… Read this, before you miss your chance…

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Cheap oil and cheap credit have fueled this era of consumption…this gilded age of instant gratification.

I realized this after receiving a thoughtful note from reader Eddie C., in response to last week’s piece, “China, Congo and the New Race for Africa.”

Sir,

As far as I can see, China is doing a real good job to these under-developed countries such as Congo. She put in her hard-earned capital to open up these countries, whether be they in Africa or Asia. It is a win-win situation. Where is the human rights violation?

The Chinese did not force these countries to buy opium at gun-point by a cohort of Western countries as what had happened to a weak China in the last century… they did not colonize countries like India or Malaya and treat their citizens as second class servants.

Your prediction that China would gain $400 billion out of a $4 billion investment is grossly exaggerated. Even if it is true, the profit will be shared by the people of Congo (as it is a joint-venture). Aren’t the US and the Europeans doing the same thing? Why pick on China?

…Please be fair and truthful.

Eddie C.

Dear Eddie,

I understand where you’re coming from. Let me make clear I wasn’t trying to bash China in regard to what they’re doing in Africa. In fact, I have a strong measure of respect for what they’re doing. What country wouldn’t want to act in its own long-term interests? What country wouldn’t want to leverage the power of wise investments today to supply their own vital resource needs tomorrow?

No, what China is doing in Africa is very smart.

You also point out that Africa will benefit from these investments. I don’t disagree. Odds are that Africa’s level of benefit could be very strong, especially in comparison to the disaster of Western aid — the hundreds of billions that have gone to waste in the past. When rich governments write checks to poor governments, all too often the cash winds up in the pockets of thieves and thugs.

Even charitable gifts can do more harm than good, as some African locals have lamented. When second-hand T-shirts and sweatshirts show up in poor countries by the truckload, they often wind up being sold on the black market. The net result is profit for bandits and a total block on any type of textile industry. (While local clothing makers can compete with cheap imports, they can’t compete with free.)

In contrast to all this, what China is doing is like night and day. Opening mines, building hospitals, paving roads… all these activities require training and infrastructure and jobs, and that’s a great thing. It’s a means by which Congo (and other countries) can benefit, not to mention the shared benefits of resource deals. I don’t want to take that away from China at all.

Valid Concerns

I still think Peter (the Congolese journalist) has reason to be concerned, though, because with China there are still valid human rights questions to ask. There is a lot of good that comes out of a bluntly pragmatic stance, but there is danger, too. In places like Sudan, China has shown its willingness to look the other way when atrocity occurs. Money flow from resource deals can wind up supporting that kind of atrocity.

There are also fair questions to ask about how resources are extracted and local land is used. When it comes to metal mining and oil and gas production, for example, we know there are better and worse ways to do it from an environmental standpoint.

The lowest-cost way to rip a resource from the ground is often the one that leaves that ground denuded by chemicals and all but stripped bare. So there are valid questions in regard to how Congo’s water and soil and sky might look in 20 years’ time.

As far as what the West did in the 19th and 20th centuries, and how to think about that — I can’t argue with you there. The history you point out is indeed a matter of record.

A Hard Question

This all leads to the question stated earlier: How to think about China? For many in the West, this question is still unresolved.

Some, like legendary investor Jim Rogers, embrace China as the next great nation and the rightful heir of the 21st century. Others, quite frankly, view China as an environmental black hole, an ongoing human rights disaster, and a large-scale military conflict waiting to happen.

Which view is correct? As global investors, we here at Taipan lean much more toward the Jim Rogers view. But, as with many things in life, the answer is not black and white. Instead there are many shades of gray.