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Archive for the ‘Savings’ Category

The standard argument against an easy-money policy is that it creates distortions in an economy that lead to either rapid increases in the price level, like we endured in the 1970s, or unsustainable asset bubbles, like we experienced last decade.

Those arguments are completely valid, but they only tell part of the story.

Central banks also should be criticized because “quantitative easing” and “zero interest rate policies” create major imbalances in capital markets.

A major new study from Swiss Re quantifies the damage to savers. Here are some excerpts from a CNBC report.

The Federal Reserve’s efforts to stimulate the U.S. economy after the financial crisis ended up costing savers nearly half a trillion dollars in interest income, according to report released Thursday. Since the central bank dropped interest rates to near zero at the end of 2008, savers have labored under plain-vanilla bank accounts and money market funds that have yielded close to nothing. …In a landmark report, Swiss Re quantifies just how much savers and others have languished… The reinsurance firm put the number at $470 billion in the 2008-13 period studied, so the number is likely even higher now. …”the impact of foregone interest income for households and long-term investors has become substantial.” …Swiss Re said the “financial repression” has taken its toll not only on savers but also on some areas of investing.

Here’s a chart from the Swiss Re report. As you can see, an easy-money policy is a massive tool for redistribution, with savers being hurt and government being subsidized.

Indeed, Swiss Re actually calculates a “financial repression index.”

Financial repression reflects the ability of policymakers to direct funds to themselves that would otherwise go elsewhere.

And the level of this repression has been at record highs in recent years.

It is true that some households benefit from easy money and artificially low interest rates. Their debt expenses have been reduced and they also are enjoying higher asset values.

But those benefits may be fleeting if the end result is a bubble that bursts, as happened in 2008.

Writing for the Washington Times, my Cato colleague Richard Rahn agrees that central banks are hurting savers, but he augments this analysis by making the very important point that easy-money policies simply don’t work.

Government economic policymakers have been trying to solve a problem of too much government spending, taxing and regulation by inappropriately using monetary policy, which has not and cannot solve the fundamental problems (it is like using a hammer rather than a shovel to dig a hole). The major central banks have been holding down interest rates, which is actually a massive indirect tax levied on the world’s savers. Historically, savers would receive about 3 percent interest above the rate of inflation on their safest investments, but now interest rates often do not cover even the low inflation that is occurring in the developed countries. …Many economists expected savers to save less and consume more as a result of low or even negative interest rates… When businesses and individuals look at the world debt situation and the increased chances of another financial collapse, their rational response is to increase “precautionary” savings, even though they are not receiving interest on them.

So the bottom line is that central banks are engaging in “financial repression” today and creating risks of price instability and/or asset bubbles tomorrow.

But there’s no compensating benefit to make all these costs (and future risks) worthwhile.

That’s not a good deal.

So what’s the alternative?

In the short run, the best hope is that central bankers, including the ones at the Federal Reserve, will take their feet off the figurative gas pedal and follow some sort of monetary rule that precludes destructive intervention.

In the long run, the ideal answer would be a return to market-provided private currencies. This isn’t just silly libertarian fantasy. There actually have been countries that successfully used this “free banking” approach.

Professor Larry White has a must-read historical review of what happened before governments monopolized currency issue.

When we look into these episodes, we find a record of innovation, improvement, and success at serving money-users. As in other goods and services, competition provided the public with improved products at better prices. The least regulated systems were not only the most competitive but also by and large the least crisis-prone. …the record of these historical free banking systems, “most if not all can be considered as reasonably successful, sometimes quite remarkably so.”…Those systems of plural note issue that were panic prone, like those of pre-1913 United States and pre-1832 England, were not so because of competition but because of legal restrictions that significantly weakened banks. Where free banking was given a reasonable trial, for example in Scotland and Canada, it functioned well for the typical user of money and banking services.

The history of central banking, by contrast, is not nearly as successful. There’s been massive erosion in the value of money and central banks are largely responsible for the boom-bust cycle that has afflicted many economies.

At this point, you may be wondering why central banking triumphed over free banking if the latter is so superior.

The answer is simple. As Professor White explains, look at what’s in the best interest of the political elite.

Free banking often ended because the imposition of heavy legal restrictions or creation of a privileged central bank offered revenue advantages to politically influential interests. The legislature or the Treasury can tap a central bank for cheap credit, or (under a fiat standard) simply have the central bank pay the government’s bills by issuing new money. …Central banks primarily arose, directly or indirectly, from legislation that created privileges to promote the fiscal interests of the state or the rent-seeking interests of privileged bankers, not from market forces.

In other words, a system of competitive currencies is perfectly plausible, but it’s not in the interest of politicians (just as having no income tax is plausible, but also not in the interest of politicians).

For more information on free banking, here’s a video I narrated for the Center for Freedom and Prosperity.

Professor White also has a good video explaining why a central bank isn’t needed.

P.S. For those of you who like the gold standard, Professor George Selgin (now head of Cato’s Center for Monetary and Financial Alternatives) has some major concerns (at least if the government is in charge of it).

P.P.S. Don’t forget that the Federal Reserve also imposes a lot of costly regulation on the financial sector.

P.P.P.S. Thomas Sowell has some wise observations on why we shouldn’t grant more power to the Fed and John Stossel explains why monetary competition would be good.

P.P.P.P.S. To end with some humor, here’s the famous “Ben Bernank” video. And if that doesn’t exhaust your interest in the topic, here’s a snarky cartoon video mocking the Fed and another video with 10 reasons to dislike the Fed.

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In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system.

1. High tax rates that penalize productive behavior.

2. Pervasive double taxation that discourages saving and investment.

3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

The two GOP senators have a column in today’s Wall Street Journal, and you can read a more detailed description of their plan by clicking here.

But here are the relevant details.

What’s wrong with Rubio-Lee

In the interest of fairness, I’ll start with the most disappointing feature of the plan. The top tax rate will be 35 percent, only a few percentage points lower than the 39.6 percent top rate that Obama imposed as a result of the fiscal cliff.

Even more troubling, that 35 percent top tax rate will be imposed on any taxable income above $75,000 for single taxpayers and $150,000 for married taxpayers.

Since the 35 percent and 39.6 percent tax rates currently apply only when income climbs above $400,000, that means a significant number of taxpayers will face higher marginal tax rates.

That’s a very disappointing feature in any tax plan, but it’s especially unfortunate in a proposal put forth my lawmakers who wrote in their WSJ column that they want to “lower rates for families and individuals.”

What’s right with Rubio-Lee

This will be a much longer section because there are several very attractive features of the Rubio-Lee plan.

Some households, for instance, will enjoy lower marginal tax rates under the new bracket structure, particularly if those households have lots of children (there’s a very big child tax credit).

But the really attractive features of the Rubio-Lee plan are those that deal with business taxation, double taxation, and international competitiveness.

Here’s a list of the most pro-growth elements of the plan.

A 25 percent tax rate on all business income – This means that the corporate tax rate is being reduced from 35 percent (the highest in the world), but also that there will be a 25 percent maximum rate on all small businesses that file using Schedule C as part of a 1040 tax return.

Sweeping reductions in double taxation – The Rubio-Lee plans eliminates the capital gains tax, the double tax on dividends, and the second layer of tax on interest.

Full expensing of business investment – The proposal gets rid of punitive “depreciation” rules that force businesses to overstate their income in ways that discourage new business investment.

Territorial taxation – Businesses no longer will have to pay a second layer of tax on income that is earned – and already subject to tax – in other nations.

No death tax – Income should not be subject to yet another layer of tax simply because someone dies. The Rubio-Lee plan eliminates this morally offensive form of double taxation.

In addition, it’s worth noting that the Rubio-Lee plan eliminate the state and local tax deduction, which is a perverse part of the tax code that enables higher taxes in states like New York and California.

Many years ago, while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways & Means Committee.

Here’s another version of that matrix, this time including the Rubio-Lee plan.

As you can see, the Rubio-Lee plan gets top scores for “saving and investment” and “international competitiveness.”

And since these components have big implications for growth, the proposal would – if enacted – generate big benefits. The economy would grow faster, more jobs would be created, workers would enjoy higher wages, and American companies would be far more competitive.

By the way, if there was (and there probably should be) a “tax burden” grade in my matrix, the Rubio-Lee plan almost surely would get an “A+” score because the overall proposal is a substantial tax cut based on static scoring.

And even with dynamic scoring, this plan will reduce the amount of money going to Washington in the near future.

Of course, faster future growth will lead to more taxable income, so there will be revenue feedback. So the size of the tax cut will shrink over time, but even a curmudgeon like me doesn’t get that upset if politicians get more revenue because more Americans are working and earning higher wages.

That simply means another opportunity to push for more tax relief!

What’s missing in Rubio-Lee

There are a few features of the tax code that aren’t addressed in the plan.

The health care exclusion is left untouched, largely because the two lawmakers understand that phasing out that preference is best handled as part of a combined tax reform/health reform proposal.

Some itemized deductions are left untouched, or simply tweaked.

And I’m not aware of any changes that would strengthen the legal rights of taxpayers when dealing with the IRS.

Let’s close with a reminder of what very good tax policy looks like.

To their credit, Rubio and Lee would move the tax code in the direction of a flat tax, though sometimes in a haphazard fashion.

P.S. There is a big debate on the degree to which the tax code should provide large child credits. As I wrote in the Wall Street Journal last year, I much prefer lower tax rates since faster growth is the most effective long-run way to bolster the economic status of families.

But even the flat tax has a generous family-based allowance, so it’s largely a political judgement on how much tax relief should be dedicated to kids and how much should be used to lower tax rates.

That being said, I think the so-called reform conservatives undermine their case when they argue child-oriented tax relief is good because it might subsidize the creation of future taxpayers to prop up entitlement programs. We need to reform those programs, not give them more money.

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Last week, I shared a TV interview about Obama’s budget, but much of the discussion was routine and didn’t warrant special attention.

But there was one small part of the interview, dealing with the silly claim that America became a rich nation because of socialism, that got me all agitated.

Well, to quote the great Yogi Berra, it’s deja vu all over again. Here’s an interview I did with CNBC about labor unrest. As you might expect, I made the standard libertarian argument that it’s not the job of government to pick sides when labor and management have squabbles.

That’s a point I’ve made before (here, here, here, here, here, and here), so there’s no need to elaborate on that issue.

But if you pay attention at the 3:00 mark of the video, you’ll notice that the discussion shifts to income inequality. And this is what got me agitated. I’m completely baffled that some people think that redistribution is more important than growth.

As I point out in the interview, nobody wins in the long run if you have a stagnant economy and politicians are fixated on re-slicing a shrinking pie.

The goal of everyone – including unions and leftist politicians – should be growth. If we get robust growth, that will mean tight labor markets, and that’s a big cause of rising wages.

But here’s my hypothesis to explain why statists don’t support good policies. Simply stated, I think they hate the rich more than they like the poor.

That sounds like a rather bold claim, but is there any other explanation for why they reject the types of tax policies (such as lower corporate rates, reduced double taxation, and expensing) that will increase investment, thus boosting productivity and wages?

Heck, look at this chart showing the relationship between capital formation and labor compensation.

Any decent person, after looking at the link between capital and wages, should be clamoring for the flat tax.

Yet Obama wants to move the tax code in the opposite direction!

I confess that I have no idea if this is because of malice or ignorance, but I do know that no nation has ever generated faster growth with class warfare.

I realize I’m ranting, but the more I think about this topic, the more upset I get. Politicians and their allies are making life harder for workers, and I hope I never stop being outraged when that happens.

P.S. On a totally separate subject, here’s a good joke forwarded to me by a friend this morning. It definitely belongs in my collection of gun control humor.

A state trooper in Kansas made a traffic stop of an elderly lady for speeding on U.S. 166 just East of Sedan, KS. He asked for her driver’s license, registration, and proof of insurance. The lady took out the required information and handed it to him.

In with the cards, he was somewhat surprised (due to her advanced age) to see she had a concealed carry permit. He looked at her and asked if she had a weapon in her possession at this time. She responded that she indeed had a .45 automatic in her glove box.

Something, body language, or the way she said it, made him want to ask if she had any other firearms. She did admit to also having a 9mm Glock in her center console. Now he had to ask one more time if that was all. She responded once again that she did have just one more, a .38 special in her purse.

He then asked her “Ma’am, you sure carry a lot of guns. What are you so afraid of?”

She looked him right in the eye and said, “Not a damn thing!”

You can enjoy other examples of gun control humor by clicking here, here, here, here, here, and here.

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Since all economic theories – even Marxism and socialism – recognize that capital formation is a key to long-run growth, higher wages, and improved living standards, it obviously doesn’t make sense to penalize saving and investment.

Yet that’s exactly what happens because of double taxation in the United States, as can be seen by this rather sobering flowchart.

So how can we fix the problem? The best answer, particularly in the long run, is to shrink the burden of government spending so that there’s no pressure for punitive tax policies.

Good reform is also possible in the medium run. Policy makers could implement a big bang version of tax reform, replacing the corrupt internal revenue code with a simple and fair flat tax. That automatically would eliminate the tax bias against saving and investment since one of the key principles of the flat tax is that income gets taxed only one time.

That being said, there’s no chance of sweeping tax reform for the next few years (and maybe ever), so let’s look at some pro-growth incremental reforms that would reduce or eliminate the extra tax penalties on income that is saved and invested.

On the investment side of the ledger, any policies that lower or end the capital gains tax and the double tax on dividends would be desirable.

But let’s focus today on the saving side. And let’s start by explaining how a fair and neutral system would operate. Here’s what I wrote back in 2012 and I think it’s reasonably succinct and accurate.

…all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn. If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings. From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

The key takeaways are in the first and last sentences. All savings should be protected from double taxation, not just what you set aside for retirement. And that means government can tax you one time, either when you first earn the income or when you consume the income.

Our friends to the north can teach us some lessons on this issue.

Here are some excerpts from a column in the Wall Street Journal, authored by my colleague Chris Edwards and Amity Shlaes of the Calvin Coolidge Foundation.

Some Republicans are advocating a giant child tax credit, but there are more effective means for helping the middle class. One is a tax program already road-tested in the country whose populace most resembles our own, Canada. It’s called the Tax-Free Savings Account and TFSA, as most Canadians refer to it, is a roaring success. …what is this Canadian savings account? The nearest U.S. equivalent would be Roth Individual Retirement Accounts. With a Roth, workers pay taxes on earnings before they put their cash into the account. The money then grows tax-protected, and people pay no tax when they withdraw it.

But these accounts are much better than Roth IRAs.

Though these savings accounts were introduced only five years ago, 48% of Canadians have already signed up. That compares with only 38% of U.S. households owning any type of IRA—though IRAs have been around for decades….Roth accounts have numerous restrictions. You can’t open a Roth easily if your earnings are above certain limits: $191,000, for example, for a married couple filing jointly. You can’t withdraw cash whenever you feel like it, at least not without daunting penalties. …Canada’s TFSAs are like Roth IRAs—but supercharged. Citizens may deposit up to $5,500 after-tax each year, and all account earnings and withdrawals are tax-free. However, unlike Roth IRAs, funds can be withdrawn at any time for any reason with no penalties or taxes. Another feature: The annual limit on a contribution carries over from year to year if a citizen doesn’t reach it. So if a Canadian contributes $2,000 this year, he can put away up to $9,000 next year ($3,500 plus $5,500). There are other attractive features: Unlike in a Roth, there are no income limits for individuals contributing to a TFSA, and there are no withdrawal requirements at retirement.

In other words, the Canadian accounts are like unlimited or unrestricted Roth IRAs.

And because the government isn’t trying to micro-manage how people save, Canadians are very receptive. Chris adds some additional information in a post for Cato at Liberty.

…released new data confirming the popularity of TFSAs. In just the past year, TFSA account assets increased 34 percent, and the number of accounts increased 16 percent. In June 2014, 13 million Canadians held $132 billion in TFSA assets. Given that the U.S. population is about 10 times that of Canada, it would be like 130 million Americans pouring $1.3 trillion into a new personal savings vehicle. …In just five years, TFSAs have become the most popular savings vehicle in Canada, outstripping the Canadian version of 401(k)s.

Here’s a chart Chris included in his blog post.

And he adds some more analysis on the importance of simple vehicles to protect against double taxation.

Everyone agrees that Americans don’t save enough, so why don’t we kick-start a home-grown savings revolution with a U.S. version of TFSAs? …Canada has now run the real-world experiment on such accounts, and it has succeeded brilliantly. TFSAs, or USAs, are a better way to handle savings in the tax code. Currently, many people are scared off by the complexity of U.S. savings vehicles and by the lack of liquidity in retirement accounts. TFSAs solve these problems.

I guess we’ll have to wait and see whether American policy makers pay attention and follow Chris’ sage advice.

P.S. I realize I’m being picky, but I wish the Canadians didn’t use the term “tax-free savings accounts.” After the all, the income is taxed before it gets put into the accounts. Though even a nit-picker like me realizes that it might be a bit awkward to call them “no-double-taxation savings accounts.”

P.P.S. I do like that Chris and Amity argued that the accounts would be better than big child tax credits, particularly since I also argued in the Wall Street Journal that there were better ways to help the middle class.

P.P.P.S. Canada also can teach us important lessons on other issues, such as spending restraint, corporate tax reform, bank bailouts, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

P.P.P.P.S. No wonder the two most capitalistic places in North America are in Canada. And Canada ranks above the United States in the Economic Freedom of the World Index.

P.P.P.P.P.S. Though there are still plenty of statists north of the border, so I’m not sure it’s the best escape option for advocates of small government. Though I doubt leftists no longer see it as an escape option, which was the premise of this joke that circulated after the 2010 election.

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I confess that I get a bit of perverse pleasure when a left-leaning media outlet screws up and inadvertently shares information that helps the cause of limited government.

A New York Times columnist, for instance, pushed for a tax-hiking fiscal agreement back in 2011 based on a chart showing that the only successful budget deal was the one that cut taxes.

The following year, another New York Times columnist accidentally demonstrated that politicians are trying to curtail tax competition because they want to increase overall tax burdens.

Now it’s happened again.

In a major story on the pension system in the Netherlands, the New York Times inadvertently acknowledged that genuine private savings is the best route to obtain a secure retirement.

Let’s look at a few excerpts, starting with some very strong praise for the Netherlands in the article.

Imagine a place where pensions were not an ever-deepening quagmire, where the numbers told the whole story and where workers could count on a decent retirement. …That place might just be the Netherlands. And it could provide an example for America… “The rest of the world sort of laughs at the United States — how can a great country like the United States get so many things wrong?” said Keith Ambachtsheer, a Dutch pension specialist who works at the University of Toronto… The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. …The Dutch approach bears little resemblance to the American practice of shielding the current generation of workers, retirees and taxpayers while pushing costs and risks into the future, where they can metastasize unseen.

Interestingly, the article doesn’t explain what makes the Dutch system so superior to its American counterpart, but the phrase “each generation should pay its own costs” is a big hint.

That basically means that the system is not based on inter-generational redistribution, which is a core feature of pay-as-you-go schemes such as America’s bankrupt Social Security system.

That’s important, but what’s really key is that the Dutch system is based on private savings and private investment. It’s not a pure libertarian system, to be sure, since there are government mandates (such as high mandatory savings to finance generous old-age payments), but it is definitely a far more market-based system than what we have in America.

Here are some details.

About 90 percent of Dutch workers earn real pensions at their jobs. Their benefits are intended to amount to about 70 percent of their lifetime average pay… For this and other reasons, the Netherlands has for years been at or near the top of global pension rankings compiled by Mercer, the consulting firm, and the Australian Center for Financial Studies, among others. Accomplishing this feat — solid workplace pensions for most citizens — isn’t easy. For one thing, it’s expensive. Dutch workers typically sock away nearly 18 percent of their pay, most of it in diversified, professionally run pension funds. That compares with 16.4 percent for American workers, but most of that is for Social Security, which is intended to provide just 40 percent of a middle-class worker’s income in retirement.

And it’s worth noting that a system based on private savings also means that there is lots of money that can be invested.

And “lots of money” isn’t just a throwaway line. The Netherlands leads the OECD in private pension assets, measured as a share of economic output.

It’s worth pointing out, by the way, that the leading nations in this chart (Chile, Iceland, Australia, Switzerland, and Denmark) generally have systems based at least in part on private mandatory savings.

And given that big piles of money are very tempting targets for greedy governments, it’s also worth noting that the Dutch haven’t allowed the system to get politicized.

There’s not the slightest whisper of a rumor, for instance, that the government will grab the money.

Moreover, unlike the United States (particularly when discussing the pension systems operated by state and local governments), pension funds actually have to maintain adequate assets to pay promised benefits.

And no using funky math!

Imagine a place where regulators existed to make sure everyone followed the rules. …standing guard over it is a decidedly capitalist watchdog, the Dutch central bank. …the central bank in 2002 began to require pension funds to keep at least $1.05 on hand for every dollar they would have to pay in future benefits. If a fund fell below the line, it had just three years to recover. …The Dutch central bank also imposed a rigorous method for measuring the current value of all pensions due in the future. …Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. …He explained that in the Netherlands, regulators believe that basing the cost of benefits today on possible investment gains tomorrow is the same as robbing tomorrow’s workers to pay for today’s excesses.

No wonder the Netherlands ranks so much higher than the United States in the rule of law index.

Now that I’ve said what’s good about the system, I’ll be the first to admit that it could be improved.

First and foremost, the Dutch system is basically a near-universal defined-benefits regime, which means that workers get a guaranteed amount of money and it is up to the fund administrator to make sure there is enough money.

This type of system has been very unstable in the United States because of chronic underfunding. The Dutch so far seem to have avoided that problem, but I still prefer the defined-contribution systems, which means that workers get back exactly what they paid in, plus all the earnings.

And the good news, from this perspective, is that the Dutch are moving in this direction according to a British service that monitors global pension developments.

Occupational pension schemes in the Netherlands are still mostly defined benefit (DB) schemes. But as companies are seeking to control costs and risk, a massive shift from final salary career average plans is taking place. Also, the popularity of defined contribution (DC) and hybrid schemes is growing.

One thing I wouldn’t change about the Dutch system is the tax treatment. The Dutch have what is sometimes called an exempt-exempt-tax (EET) system, which is sort of like a traditional IRA (i.e., no double taxation).

The Dutch government explains that the income is taxed only one time.

No tax is levied on pension contributions. And the growth of pension rights via the pension fund’s investment performance remains untaxed. Pension benefit is only taxed when it is received.

And let’s hope it stays that way, though the welfare state in the Netherlands is so large that the nation does have some significant long-run fiscal challenges. And that could lead future politicians to sacrifice the stability of the private pension system in order to prop up big government.

That being said, I would gladly trade the U.S. Social Security system for the Dutch mandatory pension system. An imperfect system based on private savings is always a better bet than a perfectly terrible tax-and-transfer scheme.

For more information, here’s the video I narrated explaining why personal retirement accounts are far superior to government-run schemes such as Social Security.

By the way, since I began this column by making fun of the New York Times, I may as well close it by sharing examples of biased and/or sloppy reporting by that outlet.

And none of this counts Paul Krugman’s mistakes, which are in a special category (see here, here, here, here, here, here, here, and here for a few examples).

P.S. I shouldn’t be too critical of the New York Times. After all, they ran a great piece by Pierre Bessard dealing with tax competition, fiscal sovereignty, and financial privacy. Heck, they once even let me pontificate on those issues.

P.P.S. While the Dutch system is far better than the American system, I think Australia is the best role model. Chile also is a big success.

P.P.P.S. You can enjoy some Social Security cartoons here, here, and here. And here’s a Social Security joke, though it’s too close to being true to be funny.

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Allister Heath, the superb economic writer from London, recently warned that governments are undermining incentives to save.

And not just because of high tax rates and double taxation of savings. Allister says people are worried about outright confiscation resulting from possible wealth taxation.

It is clear that individuals, when at all possible, need to accumulate more financial assets. …Tragically, it won’t happen. A lack of trust in the system is one important explanation. People simply don’t believe the government – and politicians of all parties – when it comes to long-terms savings and pensions. They worry, with good reason, that the rules will keep changing; they are afraid that savers are an easy target and that they will eventually be hit by a wealth tax.

Are savers being paranoid? Is Allister being paranoid?

Well, even paranoid people have enemies, and this already has happened in countries such as Poland and Argentina. Moreover, it appears that plenty of politicians and bureaucrats elsewhere want this type of punitive levy.

Here are some passages from a Reuters report.

Germany’s Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.

Since data from the IMF, OECD, and BIS show that almost every industrialized nation will face a fiscal crisis in the next decade or two, people with assets understandably are concerned that their necks will be on the chopping block when politicians are scavenging for more cash to prop up failed welfare states.

Though to be fair, the Bundesbank may simply be sending a signal that German taxpayers don’t want to pick up the tab for fiscal excess in nations such as France and Greece. And it also acknowledged such a tax would harm growth.

“(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required,” the Bundesbank said in its monthly report. …the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth.

Other German economists, however, openly advocate for wealth taxes on German taxpayers.

…governments should consider imposing one-off capital levies on the rich… In Germany, for example, two thirds of the national wealth belongs to the richest 10% of the adult population. …a one-time capital levy of 10% on personal net wealth exceeding 250,000 euros per taxpayer (€500,000 for couples) could raise revenue of just over 9% of GDP. …In the other Eurozone crisis countries, it would presumably be possible to generate considerable amounts of money in the same way.

The pro-tax crowd at the International Monetary Fund has a similarly favorable perspective, relying on absurdly unrealistic conditions to argue that a wealth tax wouldn’t hurt growth. Here’s some of what the IMF asserted in its Fiscal Monitor last October.

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

The IMF even floats a trial balloon that governments could confiscate 10 percent of household assets.

The tax rates needed to bring down public debt to precrisis levels…are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.

Many people condemned the IMF for seeming to endorse theft by government.

The IMF’s Deputy Director of Fiscal Affairs then backpedaled a bit the following month. He did regurgitate the implausible notion that a wealth tax won’t hurt the economy so long as it only happens once and it is a surprise.

To an economist, …it’s close to an ideal form of taxation, since there is nothing you can now do to reduce, avoid, or evade it—the holy grail of what economists call a non-distorting tax. …Such a levy would entail a one-off charge on capital assets, the precise base being a matter for choice, but generally larger than cash left on kitchen tables. Added to the efficiency advantage of such a tax, many see an equity appeal in that such a charge would naturally fall most heavily on those with the most assets.

But he then felt obliged to point out some real-world concerns.

…governments have rarely implemented capital levies, and they have almost never succeeded. And there are very good reasons for that. …to be non-distorting the tax must be both unanticipated and believed certain not to be repeated. These are both very hard things to achieve. Introducing and implementing any new tax takes time, and governments can rarely do it in entire secrecy (even leaving aside transparency issues). And that gives time for assets to be moved abroad, run down, or concealed. The risk of future levies can be even more damaging; they discourage the saving and investment that generate future capital assets.

Though these practical flaws and problems don’t cause much hesitation on the left.

Here’s what Joann Weiner recently wrote in the Washington Post about the work of Thomas Piketty, a French economist who apparently believes society will be better if higher taxes result in everyone being equally poor.

A much higher tax on upper income — say 80 percent — coupled with a significant tax on wealth — say 10 percent — would go a long way toward making America’s income distribution more equitable than it is now. …capital is the chief culprit… Piketty has another pretty radical, at least for the United States, way to shrink the share of wealth at the top — introduce a global tax on all capital. This means taxes on not just stocks and bonds, but also land, homes, machines, patents — you name it; if it’s wealth or if it generates what tax authorities call “unearned income,” then it should be taxed. One other thing. All countries have to adopt the tax to keep capital from fleeing to tax havens.

Writing in the New York Times back in January, Thomas Edsall also applauds proposals for a new wealth tax.

…worsening inequality is an inevitable outcome of free market capitalism. …The only way to halt this process…is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.

Not surprisingly, there’s support in academia for confiscating other people’s money. One professors thinks the “impossible dream” of theft by government could become reality.

…this article proposes a yearly graduated tax on the net wealth of all individuals in excess of $100 million. The rate would be 5% on the excess up to $500 million and then 10% thereafter. …Such taxes are attacked as “class warfare” that runs counter to America’s libertarian and capitalist traditions. However…the time may once again be ripe for adopting a new tax to combat the growing wealth inequality in the nation. …wealth inequality harms the very social fabric of society. …The purpose of the proposed Equality Tax would not be to raise general revenue, although revenue would be raised. Instead it would be focused on establishing a societal value that for the health of society, no individual should accrue wealth beyond a certain point. Essentially, once an individual has $100 million of assets, …further wealth accumulation harms society while providing little economic benefit or incentive to the individual. …At a minimum such a tax would raise
at least $140 billion a year.

Let’s close by looking at the real economic consequences of wealth taxation. Jan Schnellenbach of the Walter Eucken Intitut in Germany analyzed this question.

Are there sound economic reasons for the net wealth tax, as an instrument to tax stocks of physical and financial capital, to be levied in addition to taxes on capital incomes?

Before even addressing that issue, the author points out that policy actually has been moving in the right direction, presumably because of tax competition.

There has been a wave of OECD countries abolishing their personal net wealth taxes recently. Examples are Spain (abolished in 2008), Sweden (2007) as well as Finland, Iceland and Luxembourg (all 2006). Nevertheless, the net wealth tax repeatedly surfaces again in the public debate.

So what about the economics of a wealth tax? Schnellenbach makes the critical point that even a small levy on assets translates into a very punitive rate on actual returns.

…every tax on domestic wealth needs to be paid out of the returns on wealth, every net wealth tax with a given rate is trivially equivalent to a capital income tax with a substantially higher rate. …even an – on aggregate – non-confi scatory wealth tax may at least temporarily actually have confi scatory eff ects on individuals in periods where they realize sufficiently low returns on their capital stock.

He then looks at the impact on incentives.

…a net wealth tax will have similar distortionary e ffects as a capital income tax. …Introducing a comprehensive net wealth tax would then, through the creation of new incentives for tax avoidance and evasion, also diminish the base of the income tax. Scenarios with even a negative overall revenue eff ect would be conceivable. There is thus good reason to cast doubt on the popular belief that a net wealth tax combines little distortions and large amounts of revenue. …A wealth tax aggravates the distortions and the incentives to evade that already exist due to a pre-existing capital income tax.

And he closes by emphasizing that this form of double taxation undermines property rights.

The intrusion into private property rights may be far more severe for a wealth tax compared to an income tax. …It takes hold of a stock of wealth that consists of saved incomes which have already been subject to an income tax in the past… Our discussion has shown that economically, the wealth tax walks on thin ice.

In other words, a wealth tax is a very bad idea. And that’s true whether it’s a permanent levy or a one-time cash grab by politicians.

Some may wonder whether a wealth tax is a real threat. The answer depends on the time frame. Could such a levy happen in the next year or two in the United States?

The answer is no.

But the wealth tax will probably be a real threat in the not-too-distant future. America’s long-run fiscal outlook is very grim because of a rising burden of government spending.

This necessarily means there will be a big fiscal policy battle. On one side, libertarians and small-government advocates will push for genuine entitlement reform. Advocates of big government, by contrast, will want new revenues to enable and facilitate the expansion of the public sector.

The statists will urge higher income tax rates, but sober-minded folks on the left privately admit that the Laffer Curve is real and that they can’t collect much more money with class-warfare tax policy.

That’s why there is considerable interest in new revenue sources, such as energy taxes, financial transaction taxes, and the value-added tax.

And, of course, a wealth tax.

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As part of his State-of-the-Union speech, President Obama announced he was going to unilaterally create a new retirement savings account that supposedly would be available to all workers.

Employers would be mandated to facilitate these”MyRA” accounts, and the money collected would be invested in “guaranteed” government bonds.

There are some good features to the MyRA plan, most notably the fact that money in the accounts would be protected from double taxation. Workers would put after-tax money in the accounts, but there would be no additional layers of tax on any earnings, or when the money is withdrawn.

In other words, a MyRA would be akin to a back-ended (or Roth) IRA.

But there are some bad features, including the fact that taxpayers would be subsidizing the earnings, or interest, paid to account holders (though this would be a relatively benign form of government spending, at least compared to Obamacare, ethanol, etc, etc).

My biggest complaints, though, are the sins of omission, which I discuss in this interview for Blaze TV.

Simply stated, if Obama was concerned about low returns for savers, he should be directing his ire at the Federal Reserve, which has artificially pushed interest rates to very low levels as part of its easy-money policy.

But more importantly, MyRAs will be very inadequate for most workers with modest incomes. If the President really wanted to help ordinary people save for retirement, he would follow the successful example of more than 30 other nations and allow workers to shift their payroll taxes into personal retirement accounts.

This video explains why reform is so desirable.

Critics say it would be very expensive to make a transition to this modern system, and they’re right. If we let younger workers put their payroll taxes in a personal accounts, we’ll have to come up with a new source of revenue to finance benefits being paid to current retirees and older workers.

And we’re talking lots of money, as much as $7 trillion over the next few decades.

But that’s a lot less than the $36 trillion cash shortfall that we’ll have to somehow deal with if we maintain the current system.

In other words, we’re in a very deep hole. But if we shift to personal retirement accounts, the hole won’t be nearly as large.

P.S. The video mentions that Chile and Australia deserve special attention. Click here if you want to learn about Chile’s successful system and click here if you want to see how Australia’s “superannuation” system has been a big winner.

P.P.S. Some people already have asked me whether I was too Pollyannish in saying that there’s no risk for several decades that Washington will default. I could be wrong, of course, and I have shared BISOECD, and IMF data that reveals the United States has gigantic long-run fiscal challenges. But as I said in the interview, I think most other welfare states will collapse first, and that will lead to “flight capital” coming to America, which will help prop up our system.

P.P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate dark humor.

P.P.P.P.S. You probably don’t want to know how Obama would like to “fix” the Social Security shortfall.

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