What Now?
The New York Times asked 7 economists to advise the Obama administration under the title of “What Now.” With one exception they all seemed to be addressing what they thought was a given assumption:How can we get back to where we were before the crash? This seems to me to be singularly unhelpful. If the only task of the Obama Recovery is to restore America to a state in which 70% of GDP is consumer expenditures driven by excess credit and advertising, then we will have neither accomplished not learned anything from this crisis. As Jeremy Grantham has written.
An amateur economist could summarize and simplify the Chinese economy as 39-37-37: an astonishingly large 39% of the GDP is capital spending, 37% is internal consumption, and an amount equal to 37% of GDP is exported. (These numbers do not sum to 100 as we are not using exports net of imports because we are concerned with the vulnerability of total exports to a weak global economy.) The U.S., in comparison, is 19-70-13, disturbingly on the other side of normal; 70% consumption compared with 57% in both Germany and Japan, for example, and nearly twice that in China.
Our ability to raise our export earnings (both in our two export champions Aircraft and Software/Entertainment and by leading in the Green Tech revolution) is totally dependant on our ability to raise capital investment (i.e. massive infrastructure investment in both digital and concrete highways). Some of the capex, especially in Green infrastructure, must come from the federal government in the same way the first internet and networked computers were funded by DARPA. But much of it must come from the investments of individual savings of formerly dedicated consumers. I have seen evidence of drop off in spending across all classes in the U.S. and the rise of saving. But as Tom Frank (the one expection I mentioned in the New York Times article) points out, our tax system doesn’t favor savings and so he suggests an alternative tax plan.
Most federal revenue now comes from the income tax. Because a family’s annual income equals the amount it spends each year plus the amount it saves, we are effectively taxing savings. And savings rates have fallen precipitously, often dipping into negative territory as families have used home equity loans and credit card debt to spend more than they earned. Because the country needs to save more, taxing savings makes no sense.
The first reform that Barack Obama should consider is replacing the progressive income tax with a progressive tax on consumption. A family would report its income to the Internal Revenue Service as it does now, and also its savings, as it now reports contributions to retirement accounts. Annual consumption would then be calculated as the family’s income minus its savings. Its taxable consumption would be that amount minus a large standard deduction — say, $30,000 for a family of four.
A family that earned $60,000 and saved $10,000, for example, would have taxable consumption of $20,000. Initial tax rates on consumption would be low, and would then rise steadily with consumption, topping out at higher levels than the current top rates on income.
Such a tax could raise more revenue than the current system, yet would be far less burdensome for families at nearly all income levels. Because of the large standard deduction, middle-income families would pay less than they did before, and high-income consumers could limit their tax increases by saving more.
As I have been saying for the last year, the transition to a savings/investment economy from a consumption/debt economy will be painful for the retail mall trade and their Chinese vendors and the associate fast food chains.
People will need to seek new status not necessarily tied to their latest purchase. Cars will need to last for 7 years. Automatic savings deduction at work will be the default setting unless you opt out. We will entertain ourselves at home playing our old guitars and pianos.
It should be a culturally and spiritually interesting time.
Prof. Frank’s suggestion is an interesting one. Usually, consumption taxes are framed as sales taxes or VAT, with a rebate of some form for lower-income households. This is the first I’ve seen a proposal for taxing income not saved.
I am guessing that Prof. Frank is taking the classic economist definition of “savings”, meaning putting money in traditional bank instruments (e.g., certificates of deposit). If so, the result should be lower interest rates, at least for a while, as the influx of dollars will probably exceed businesses’ ability to adapt to the lower financing costs and take on new projects. However, such a tax would seem bad for retirement planning — now, instead of getting tax benefits for investing for retirement, you get penalized unless you *save* for retirement, and the interest rates just aren’t going to make that sensible.
One could imagine this model expanded beyond classic savings a bit, to include investments in retirement accounts and possibly government bonds (federal, state, municipal). That would lessen the blow on the average citizen’s ability to build a retirement nest egg, and the resulting lower interest rate on bonds would help governments do more with their existing tax base.
Where things get a little iffy is if Prof. Frank really means savings OR investment, of any type. I can definitely see “businesses” springing up for the sole purpose of wrapping expenses in a tax-free covering.
Prof. Frank’s suggestion is an interesting one. Usually, consumption taxes are framed as sales taxes or VAT, with a rebate of some form for lower-income households. This is the first I’ve seen a proposal for taxing income not saved.
I am guessing that Prof. Frank is taking the classic economist definition of “savings”, meaning putting money in traditional bank instruments (e.g., certificates of deposit). If so, the result should be lower interest rates, at least for a while, as the influx of dollars will probably exceed businesses’ ability to adapt to the lower financing costs and take on new projects. However, such a tax would seem bad for retirement planning — now, instead of getting tax benefits for investing for retirement, you get penalized unless you *save* for retirement, and the interest rates just aren’t going to make that sensible.
One could imagine this model expanded beyond classic savings a bit, to include investments in retirement accounts and possibly government bonds (federal, state, municipal). That would lessen the blow on the average citizen’s ability to build a retirement nest egg, and the resulting lower interest rate on bonds would help governments do more with their existing tax base.
Where things get a little iffy is if Prof. Frank really means savings OR investment, of any type. I can definitely see “businesses” springing up for the sole purpose of wrapping expenses in a tax-free covering.
Jon,
Have you heard of FairTax? I’d be rather surprised if not, but assuming that’s the case, it’s a plan that would essentially do away with federal income tax in favor of a flat-rate federal sales tax of 23%. There are still a fair amount of deductions and charity loopholes, but it does a couple of things better than an income tax.
Firstly, with FairTax, everybody is paying the same rate in, which means that billionaires that are spending their money on new cars and expensive furniture get taxed for all of that. Likewise, illegal immigrants or “weekend border hoppers” still pay in tax on the money they spend here. Assuming some of this money is taken and given back to hospitals and police in areas where illegals sucking up community resources, this would be extremely beneficial and help balance some things out.
Secondly, it encourages savings because you’re not taxed on what you don’t spend. In fact, it goes beyond that by encouraging investment.
Finally, it cuts out personal tax returns in favor of businesses sending in taxes. This cuts out all the work for the working class and means we can cut down the IRS to a fraction of its current size.
I think it’s also useful to note that necessities shouldn’t be taxed. Your rent or mortgage, utility bills, phone service, basic groceries, etc. wouldn’t be taxed, similar to how things work now where many of those expenses can be deducted.
All in all, we cut out a bunch of paperwork, encourage saving, discourage spending for the sake of spending, and help infuse cash into businesses that could probably use it right now through investments.
Your thoughts?
Jon,
Have you heard of FairTax? I’d be rather surprised if not, but assuming that’s the case, it’s a plan that would essentially do away with federal income tax in favor of a flat-rate federal sales tax of 23%. There are still a fair amount of deductions and charity loopholes, but it does a couple of things better than an income tax.
Firstly, with FairTax, everybody is paying the same rate in, which means that billionaires that are spending their money on new cars and expensive furniture get taxed for all of that. Likewise, illegal immigrants or “weekend border hoppers” still pay in tax on the money they spend here. Assuming some of this money is taken and given back to hospitals and police in areas where illegals sucking up community resources, this would be extremely beneficial and help balance some things out.
Secondly, it encourages savings because you’re not taxed on what you don’t spend. In fact, it goes beyond that by encouraging investment.
Finally, it cuts out personal tax returns in favor of businesses sending in taxes. This cuts out all the work for the working class and means we can cut down the IRS to a fraction of its current size.
I think it’s also useful to note that necessities shouldn’t be taxed. Your rent or mortgage, utility bills, phone service, basic groceries, etc. wouldn’t be taxed, similar to how things work now where many of those expenses can be deducted.
All in all, we cut out a bunch of paperwork, encourage saving, discourage spending for the sake of spending, and help infuse cash into businesses that could probably use it right now through investments.
Your thoughts?
Suppose a guy worth $20 billion…and there are several of them…can earn eight percent on those billions. So annual income is $1.6 billion per year. He can spend a whopping three percent of that income and have $48 million in fun money for jets, cars, houses, jewelry. Let’s say for the sake of argument that his tax rate is 100% (which would make the right scream “MARXISM!” loud enough to make the NASCAR types polish their shotguns), so he pays another $48 million in taxes.
Ninety-four percent of his income goes onto the pile…after a year, the $20 billion grows to $21.5 billion. Now extrapolate that for 10 or 15 years and welcome to Potterville.
But then we already live in Potterville.
Unless the “tax rate” for the superwealthy can go over 100%, a sales tax is the shortest possible route outside of Halliburton-no-bid-style theft to funneling the remaining portion of the nation’s wealth upward into the top one percent.
One other thing, if this plan will result in lower tax burdens, which parts of the already massive-deficit-generating budget will be slashed or simply eliminated?
Suppose a guy worth $20 billion…and there are several of them…can earn eight percent on those billions. So annual income is $1.6 billion per year. He can spend a whopping three percent of that income and have $48 million in fun money for jets, cars, houses, jewelry. Let’s say for the sake of argument that his tax rate is 100% (which would make the right scream “MARXISM!” loud enough to make the NASCAR types polish their shotguns), so he pays another $48 million in taxes.
Ninety-four percent of his income goes onto the pile…after a year, the $20 billion grows to $21.5 billion. Now extrapolate that for 10 or 15 years and welcome to Potterville.
But then we already live in Potterville.
Unless the “tax rate” for the superwealthy can go over 100%, a sales tax is the shortest possible route outside of Halliburton-no-bid-style theft to funneling the remaining portion of the nation’s wealth upward into the top one percent.
One other thing, if this plan will result in lower tax burdens, which parts of the already massive-deficit-generating budget will be slashed or simply eliminated?
Where does the money go that folks are not spending? Into banks? What happens then if the banks can’t get people to borrow money that’s going to then be taxed when it’s spent? I guess it’s not so bad because banks become what they used to be…safe vaults full of cash. But what happens to the consumer society and all the people who make their living selling geegaws? I guess there’s a massive shift in how the whole economy works and there are millions of unemployed people who used to work making and selling stuff. Not that I’m totally against that. It points toward a future where people may not have to work 40 hours a week; the stuff they own lasts a lot longer and thus does not need to be replaced so often; and we are not owned by our possessions. A rapid shift in that direction will result in huge turmoil in society, though, and we’re really not good at multi-generational planning…”the Long Now” as the foundation of that name would have it, though if we could ease into that change, it would be great. But short term greed gets in the way all too easily.
One other thing to consider is the real possibility that zero or even negative population growth will become normal in industrialized societies. That has interesting economic repercussions, especially mixed with all of the current upheaval.
Where does the money go that folks are not spending? Into banks? What happens then if the banks can’t get people to borrow money that’s going to then be taxed when it’s spent? I guess it’s not so bad because banks become what they used to be…safe vaults full of cash. But what happens to the consumer society and all the people who make their living selling geegaws? I guess there’s a massive shift in how the whole economy works and there are millions of unemployed people who used to work making and selling stuff. Not that I’m totally against that. It points toward a future where people may not have to work 40 hours a week; the stuff they own lasts a lot longer and thus does not need to be replaced so often; and we are not owned by our possessions. A rapid shift in that direction will result in huge turmoil in society, though, and we’re really not good at multi-generational planning…”the Long Now” as the foundation of that name would have it, though if we could ease into that change, it would be great. But short term greed gets in the way all too easily.
One other thing to consider is the real possibility that zero or even negative population growth will become normal in industrialized societies. That has interesting economic repercussions, especially mixed with all of the current upheaval.
My God, yours is a beautiful post, Jon. Yes, you have been saying right along that “the transition to a savings/investment economy from a consumption/debt economy will be painful for the retail mall trade and their Chinese vendors and the associate fast food chains.” Just so.
Just, so…one remebers that as our colonies became states in the eyes of our forebear visionaries, a joint government became possible with the twin stipulations that generational tumult would, with rigorous civic preparation, desirably occur on schedule; and that, forgoing the rigor in all likelihood, we’d need to be looked over in the meantime not only by the best and brightest, but also by the richest therefor. That made, and still makes, for a challengingly complex and Platonic recipe, but then so does Escoffier consist of, and so did he subsist upon,
same.
Yours reminds me that our constitutionalism comprised previous models inherited from the Dutch, the Swiss, the Iroquois alliance. These shared a rare wisdom: if the many are to be one, especially in the one true freedom to seek, then lines, not to be crossed, had to be drawn. Today our psychodebilitating psycho-enablers (hereinafter, “psychos”) would have us call that “boundary-setting”. Where, then, the boundaries of the next eight years?
The three model alliances were chosen for their promise as springboards backward toward Athens. Each of the three brought their peoples sustained peace, from which prosperity, from which, more peace and prosperity. And that, in a nutshell, was Athens itself. For awhile.
My God, yours is a beautiful post, Jon. Yes, you have been saying right along that “the transition to a savings/investment economy from a consumption/debt economy will be painful for the retail mall trade and their Chinese vendors and the associate fast food chains.” Just so.
Just, so…one remebers that as our colonies became states in the eyes of our forebear visionaries, a joint government became possible with the twin stipulations that generational tumult would, with rigorous civic preparation, desirably occur on schedule; and that, forgoing the rigor in all likelihood, we’d need to be looked over in the meantime not only by the best and brightest, but also by the richest therefor. That made, and still makes, for a challengingly complex and Platonic recipe, but then so does Escoffier consist of, and so did he subsist upon,
same.
Yours reminds me that our constitutionalism comprised previous models inherited from the Dutch, the Swiss, the Iroquois alliance. These shared a rare wisdom: if the many are to be one, especially in the one true freedom to seek, then lines, not to be crossed, had to be drawn. Today our psychodebilitating psycho-enablers (hereinafter, “psychos”) would have us call that “boundary-setting”. Where, then, the boundaries of the next eight years?
The three model alliances were chosen for their promise as springboards backward toward Athens. Each of the three brought their peoples sustained peace, from which prosperity, from which, more peace and prosperity. And that, in a nutshell, was Athens itself. For awhile.
P.S. And each, in its own way, would have embraced, did in fact embrace, versions of staus-seeking based on things “not necessarily tied to their latest purchase”; embraced conveyances that would “last for 7 years”; hard work toward “savings” as the “default” mode; and entertainment, “at home”, on heirloom instruments. Of such things are great and enduring cultures made, no?
P.S. And each, in its own way, would have embraced, did in fact embrace, versions of staus-seeking based on things “not necessarily tied to their latest purchase”; embraced conveyances that would “last for 7 years”; hard work toward “savings” as the “default” mode; and entertainment, “at home”, on heirloom instruments. Of such things are great and enduring cultures made, no?
Current car: 95 Saturn with 150 kmiles. Previous car until just five years ago: 72 Volvo wagon with less than 100 kmiles. Drive ‘em ’til the doors fall off and the floor rots out or the engine or tranny just goes kablooie. I remember old money in the New England of my youth driving old cars. That kind of practice is how they got to be old money; new cars were for doctors or traveling salesmen. And old money took the B&M trains into work in Boston and back home again. I can still smell the coal smoke in the air.
Current car: 95 Saturn with 150 kmiles. Previous car until just five years ago: 72 Volvo wagon with less than 100 kmiles. Drive ‘em ’til the doors fall off and the floor rots out or the engine or tranny just goes kablooie. I remember old money in the New England of my youth driving old cars. That kind of practice is how they got to be old money; new cars were for doctors or traveling salesmen. And old money took the B&M trains into work in Boston and back home again. I can still smell the coal smoke in the air.
Well, that’s the frugal, flinty Yankee in you, Rick.
I am to return in three weeks to my native L.A., preparatory to a three-year gig. What should I drive there, please? Any thoughts? I want something Turnerish, though I’m also Gary-Snyderish, and so will want it to do Mountain Rescue work when required. I’d love to have a good used Outback, but they’re pricey. And I’ve no sense of what the new tax incentives will hold.
Well, that’s the frugal, flinty Yankee in you, Rick.
I am to return in three weeks to my native L.A., preparatory to a three-year gig. What should I drive there, please? Any thoughts? I want something Turnerish, though I’m also Gary-Snyderish, and so will want it to do Mountain Rescue work when required. I’d love to have a good used Outback, but they’re pricey. And I’ve no sense of what the new tax incentives will hold.
Subaru. Outback or Forester. Yeah, pricey because they last forever. Or a small Toyota pickup truck…or Mitsubishi, aka Dodge Ram 50 or equivalent. That was my pre-Volvo ride. With a pickup, put a lid on the bed for better gas milage; the air eddy currents in back there rob you of a good one or two mpg on the highway. Small pickup trucks are the best deal out there, especially when they’re bare bones…no power windows to break, only two doors, reasonable gas milage, pretty easy to fix, and you can throw a camper shell on them and hit the road or live in it when the shit hits the fan. Which it may… The survival crowd used to love VW mini busses because they’re so easy to work on and there are parts everywhere, but that was more than a few years ago…
Subaru. Outback or Forester. Yeah, pricey because they last forever. Or a small Toyota pickup truck…or Mitsubishi, aka Dodge Ram 50 or equivalent. That was my pre-Volvo ride. With a pickup, put a lid on the bed for better gas milage; the air eddy currents in back there rob you of a good one or two mpg on the highway. Small pickup trucks are the best deal out there, especially when they’re bare bones…no power windows to break, only two doors, reasonable gas milage, pretty easy to fix, and you can throw a camper shell on them and hit the road or live in it when the shit hits the fan. Which it may… The survival crowd used to love VW mini busses because they’re so easy to work on and there are parts everywhere, but that was more than a few years ago…
Jon,
To echo Mark’s comment, what qualifies as savings in this scenario? Money market and bank deposits? Investments in equities and bonds?
This would be one, radical, way to achieve tax simplification. Obama made stump promises on that item too.
Jon,
To echo Mark’s comment, what qualifies as savings in this scenario? Money market and bank deposits? Investments in equities and bonds?
This would be one, radical, way to achieve tax simplification. Obama made stump promises on that item too.
A Subaru it shall be, then, Rick. Thanks.
A Subaru it shall be, then, Rick. Thanks.