At a 3.0% GDP growth rate, the present value of future federal revenues equals infinity.
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You can calculate a stream of earnings off the asset, apply an assumed discount rate and determine a present value for the assets.
The lower the interest rate, the higher the present value of those future payments.
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The Woodhill Curve shows the combinations of tax take and real GDP growth rate that produce the same present value of future Federal revenues.
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At rates of economic growth above the interest rate on federal debt, the present value of both GDP and federal revenues is infinity.
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The present value of future federal revenues is exquisitely sensitive to the rate of economic growth.
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Three factors determine the health of any pension fund: asset returns, company contributions and the discount rate, which is used to calculate the present value of pension liabilities and is tied to interest rates.
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Low interest rates reduce the discount rate on corporate earnings and cash flow, raising their present value.
The Net Present Value of the two options considered here are calculated using a 6 percent discount rate.
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At average annual real economic growth rates above the real interest rate on federal debt (about 3%), the present value of future federal revenues is infinity, regardless of tax rates.
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It calculates an intrinsic value by discounting a stream of future earnings back to the present, using a discount rate that is a function of both Aaa bond yields and the creditworthiness of the target company.
Crucially, it states that the present value of future liabilities must be calculated by using the yield on long gilts as a discount rate.
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