Living beyond your means -- the US

[Aimless]

Okay, so there's all this talk about the US not being able to afford this or that because there's just not enough money.

But a while back we heard that about 40% of your "tax-payers" pay no federal income tax, or even a negative income tax, after all the deductions and rebates (which I suppose may include deductions for state income tax as well) etc. In a recent discussion we also touched on the question of corporate income tax--how much you may have expected to get from it and how much you DO get from it.




So here's what I'm wondering: would it be reasonable to focus on getting more money as well as on cutting spending?

[Wraith]

Money has to come from somewhere. If the US is getting more money, that means someone else is getting less. In a way, you're kinda dumping the spending problem on someone else. Aside from that, in the current economy any increase in effective taxes is going to make things worse.

[wiggin]

On the long term, it is unlikely that spending cuts will by themselves ensure fiscal security for the US (short of a pretty dramatic austerity plan). That being said, I would hesitate to recommend increasing tax rates significantly in the short term. Even in the long term, they should be kept as low as possible. Structural reforms to entitlement spending will help keep tax rates down - increase retirement age, comprehensively work to decrease healthcare costs (e.g. tort reform, insurance reform), etc.

I would argue that streamlining the tax code will help a lot. Getting rid of a few huge boondoggles that cost a lot of money and are needlessly complex would probably help. The mortgage tax credit artificially inflates the housing market, so I think it should probably go (or at least be phased out for higher incomes/bigger mortgages). The AMT, while potentially bringing in more money without the inflation band-aid Congress routinely passes, is just a huge mess and incredibly complex to calculate. Removing it and changing tax rates on some of the higher brackets (plus eliminating other exemptions) would probably be better. There are a bunch more nice ideas out there that fall short of wholesale increases in income tax rates or adding another tax (e.g. a VAT). Hell, reducing interest payments on the debt would probably help quite a bit as well - keeping deficits to 1-2% of GDP will result in significant improvements in debt levels and reduce funding costs. High government spending can crowd out the private market and limit future growth, which is definitely a major concern for the developed world nowadays.

[Lewkowski]

Okay, so there's all this talk about the US not being able to afford this or that because there's just not enough money.

But a while back we heard that about 40% of your "tax-payers" pay no federal income tax, or even a negative income tax, after all the deductions and rebates (which I suppose may include deductions for state income tax as well) etc. In a recent discussion we also touched on the question of corporate income tax--how much you may have expected to get from it and how much you DO get from it.

So here's what I'm wondering: would it be reasonable to focus on getting more money as well as on cutting spending?

Raising taxes is bad for economic recovery. Now getting more money isn't necessarily bad, it just needs to be done the right way. And that is pursing an environment that is friendly to capitalism and business growth. If you allow the rewards of innovation to be reaped without a crushing tax burden you will have more innovation. You will have more efficiency, you will grow the pie which will create a larger economy. With a larger economy a low tax rate can still bring it more money because now the economy itself is larger.

[wiggin]

Lewk, maybe that works in theory, but if the government still promises too much in services that are growing faster than any reasonable expectation for economic growth (e.g. healthcare) you're pretty much going to have to bring in some more money or cut services somewhere. Given the magnitude of the differential, we're probably looking at both.

[Lewkowski]

Lewk, maybe that works in theory, but if the government still promises too much in services that are growing faster than any reasonable expectation for economic growth (e.g. healthcare) you're pretty much going to have to bring in some more money or cut services somewhere. Given the magnitude of the differential, we're probably looking at both.

Well yeah I'm not in favor of cradle to grave socialism...

But in terms of getting more revenue long term the best solution is to foster an environment for growth. We certainty need to cut government programs as well.

[wiggin]

Even if the US managed a trend growth rate of 5% (which would be mind-bogglingly fast), healthcare costs are regularly growing at 6% or more. With an aging population, it's likely this will only accelerate short of some drastic changes. The extra money has to come from somewhere, and either way it's going to crowd out private investment.

[Dreadnaught]

Okay, so there's all this talk about the US not being able to afford this or that because there's just not enough money.

But a while back we heard that about 40% of your "tax-payers" pay no federal income tax, or even a negative income tax, after all the deductions and rebates (which I suppose may include deductions for state income tax as well) etc. In a recent discussion we also touched on the question of corporate income tax--how much you may have expected to get from it and how much you DO get from it.




So here's what I'm wondering: would it be reasonable to focus on getting more money as well as on cutting spending?

It's of course reasonable, but ultimately I think many Western countries are in a situation where they haven't reduced their spending obligations. So they are hunting for more money, but for all the wrong reasons (IE to fund entitlements and projects that simply can't be afforded).

I'm not sure what comparable data various EU countries looks like, but in the US our tax rates have varied a lot over the past 65 years. Yet our total government revenue as a percentage of GDP has remained roughly 20%. It's known as "Hauser's Law".



http://books.google.com/books?id=X7z...page&q&f=false



http://online.wsj.com/article/NA_WSJ...728420184.html

There are a few flaws with the data, but I think the rough observation makes a compelling point: you can only raise so much revenue from the population before they have a clear incentive to just dodge taxes a-la Italy and Greece. The ultimate solution is for government to stop overcommitting financially, especially in the long term.

[Hazir]

Even if the US managed a trend growth rate of 5% (which would be mind-bogglingly fast), healthcare costs are regularly growing at 6% or more. With an aging population, it's likely this will only accelerate short of some drastic changes. The extra money has to come from somewhere, and either way it's going to crowd out private investment.

Which probably is why Germany is opting for a no-deficit situation.

With regards to the USA; given that there seems not a single politician who's serious about dealing with the deficit at one point economic logic demands that people rethink their decision to actually grow older while not maintaining good health.

[wiggin]

Yes, but Germany's 'zero deficit' (or nearly zero) necessitates significant cuts in services (and some increases in taxes). They have advocated a fairly radical case of austerity, which is predicated on continued demand for their exports. This won't work if the recovery is fragile, and will certainly result in some significant reduction in government services.

I think at the end of the day careful deficit controls are necessary, but aiming for a 'zero deficit' is silly and wholly unnecessary - it just needs to be consistently below growth rates.

The obvious solution can't be simply a fiscal one (e.g. raising taxes/cutting services/etc.). If a growing portion of national income (public or private) is going to pay for a basic need (e.g. healthcare, energy, whatever), there needs to be careful restructuring of the system to contain cost growth. That's the only real solution to the mess.

[GGT]

With regards to the USA; given that there seems not a single politician who's serious about dealing with the deficit at one point economic logic demands that people rethink their decision to actually grow older while not maintaining good health.

As of 2008, the latest data available, people aged 65 to 74 were spending 12.3% less than they did ten years earlier, in inflation-adjusted terms. They cut spending on cars and trucks by 46%, household furnishings by 35% and dining out by 27%. At the same time, they spent 75% more on health care and 131% more on health insurance.

The impact isn't limited to people on the verge of retiring. Younger people, too, will have to reduce consumption now to save enough money to get by in retirement. That's one reason Richard Berner, chief U.S. economist at Morgan Stanley in New York, estimates that even after the economy recovers, consumer spending will grow at an annual, inflation-adjusted rate of about 2% to 2.5% in the long term, compared to an average of 3.6% in the ten years leading up to the last recession.

http://online.wsj.com/article/SB1000...929070948.html

Paradox of Thrift, Irony of Longevity. Are these Consumption Services almost like cannibalism?

[Steely Glint]

So they are hunting for more money, but for all the wrong reasons (IE to fund entitlements and projects that simply can't be afforded).

As opposed to the right reason, such as a massive naval build up to counter a fictional threat from the Chinese which is already countered by the existing US naval forces and which would inevitable go nuclear in the event of a conflict anyway?

[Aimless]

I'm interested in this business of simplifying the tax-code and doing away with some of the exemptions. I am wondering this: if you chomp off some of those deductions and exemptions and the like, then wouldn't that influence behaviour in fairly selective ways? Surely there are SOME behaviours and things that you no longer need to keep encouraging through your taxes...

[wiggin]

Yet the capital gains tax is increasing, which discourages private investment. Sometimes you want to encourage certain activities. It's just that homeownership isn't one of them (IMO); neither is certain numbers of children.

[GGT]

Right, like we can change our Military Might Complex by cutting capital gains taxes.

[Dreadnaught]

I'm interested in this business of simplifying the tax-code and doing away with some of the exemptions. I am wondering this: if you chomp off some of those deductions and exemptions and the like, then wouldn't that influence behaviour in fairly selective ways? Surely there are SOME behaviours and things that you no longer need to keep encouraging through your taxes...

Probably a ton of things don't need to be encouraged. But I think the bigger appeal of a simpler tax code is...simplicity. Not having to pay accountants massive amounts of money to sort through your books and file paperwork for myriad tax credits/deductions available to businesses who have lobbied for it.

Or, in the case of many countries over by you, not paying VAT on things that are exempt. The bigger idea is that the government shouldn't be playing political favorites with its tax policy. Rates should be clear and strict to avoid wasting enormous amounts of resources (and creating more confusion) interpreting the tax code.

[wiggin]

Simple tax codes also reduce the possibilities (and incentive) to evade taxes. It's both easier to enforce, and without the complexity most people are willing to pay it.

[Lewkowski]

Even if the US managed a trend growth rate of 5% (which would be mind-bogglingly fast), healthcare costs are regularly growing at 6% or more. With an aging population, it's likely this will only accelerate short of some drastic changes. The extra money has to come from somewhere, and either way it's going to crowd out private investment.

Didn't I just say I don't support cradle to grave socialism? I really think Medicare is going to be the big issue. As SS is adjusted upwards for longevity I think Medicare should too...

[Lewkowski]

Even if the US managed a trend growth rate of 5% (which would be mind-bogglingly fast), healthcare costs are regularly growing at 6% or more. With an aging population, it's likely this will only accelerate short of some drastic changes. The extra money has to come from somewhere, and either way it's going to crowd out private investment.

Didn't I just say I don't support cradle to grave socialism? I really think Medicare is going to be the big issue. As SS is adjusted upwards for longevity I think Medicare should too...

[Hazir]

Didn't I just say I don't support cradle to grave socialism? I really think Medicare is going to be the big issue. As SS is adjusted upwards for longevity I think Medicare should too...

Hence my remark about the economic sense of living longer while not staying healthy.

[wiggin]

Didn't I just say I don't support cradle to grave socialism? I really think Medicare is going to be the big issue. As SS is adjusted upwards for longevity I think Medicare should too...

Won't help much. SS is paid out consistently (with COL adjustments) over the course of a retirement - Medicare is paid out almost entirely in the last 6 months of life.

[Hazir]

Won't help much. SS is paid out consistently (with COL adjustments) over the course of a retirement - Medicare is paid out almost entirely in the last 6 months of life.

Is that so? That's a remarkable statistic. It makes the rhetoric about death panels a weebit more understandable.

[GGT]

Paid out "almost entirely" in the last 6 months of life is misleading. Medicare is used from the moment they enroll, to pay for doctor's visits, hospitalizations, surgeries, etc. The largest chunk of overall money spent is in the last two years of life; especially the last 6 months. The same is true of ALL insurance here, because we spend more on trying to keep very ill or terminal people alive, than on prevention or wellness. Also, the most expensive care is the kind of high-tech reserved for the seriously ill.

[Aimless]

It's probably a problem that could be ameliorated to some extent through proper guidance, better use of advanced directives, better use of institutionalised care, etc. But yeah, a disproportionate amount of health expenses--both through medicare and through other means--occur in the last year of life (less so for people who die at 85+ than for people who die around 65-75) and a disproportionately large amount of that is in the last month.

[GGT]

Yep, but the US isn't so great at big picture remedies. We think it saves money by denying elderly home health aides while they "Age in Place". Next thing you know, 85 yr old granny falls and breaks a hip, gets pneumonia or a staph infection after her hip replacement, extending her length of stay and complications. THEN she is sent home with O2 and needs visiting nurse care, Para-transport for PT....pretty soon the family has to decide if granny needs to live with them, but who can quit their job to tend her? So nursing homes and continuing-care retirement facilities have waiting lists.

<There are articles about these tiered-skill elder facilities. The average pay-in deposit is over $200,000, often non-refundable (if granny dies), plus monthly fees.>

for minx: http://finance.yahoo.com/focus-retir..._in_retirement

[wiggin]

Is that so? That's a remarkable statistic. It makes the rhetoric about death panels a weebit more understandable.

A lot of doctors I know feel pretty strongly that older individuals in poor health should include 'comfort care only' on their living wills for this reason (that and quality of life concerns). Obviously it shouldn't be mandated by law, but it kinda makes sense for us to develop a culture of acceptance for the terminally ill rather than last-ditch attempts to extend life by a month or two.

I exaggerated some with the 'almost entirely', but the bulk of the medical costs in a person's lifetime certainly accrue at the very end of life.

[GGT]

But that's where the "Death Panels" scare came from. How do you tell an 80 yr old they shouldn't have hip surgery, when they can live to be 90? How do you tell a 78 yr old they shouldn't have cardiac bypass surgery, when they can live to be 88?

These aren't terminally ill people, and "poor health" in old age can be "normal", depending on how we define health. Failing vision, hearing, and organs are "normal" as we age. Corrective glasses, cataract removal, hearing aids, dentures, bladder control, oxygen, walkers and wheelchairs, handicapped accessible ramps....they all cost money, and it's not cheap. Quality of Life for the elderly means more than comfort care only, but it's subjective and hard to quantify.

Bottom line though, getting old can be expensive. 80 million baby boomers aging, some 40 million in just the next ten years, is going to test our mettle.

[Loki]

It's of course reasonable, but ultimately I think many Western countries are in a situation where they haven't reduced their spending obligations. So they are hunting for more money, but for all the wrong reasons (IE to fund entitlements and projects that simply can't be afforded).

I'm not sure what comparable data various EU countries looks like, but in the US our tax rates have varied a lot over the past 65 years. Yet our total government revenue as a percentage of GDP has remained roughly 20%. It's known as "Hauser's Law".

http://www.gpoaccess.gov/usbudget/fy11/hist.html (look at Table 1.2)

Kind of ironic that we passed 20% shortly after the Hauser chart ends (it also starts 15 years after we collected ~21%). A more important point is that in 2009, we collected the least in taxes since 1950, which is plainly ridiculous (the estimates of when we'll get back to ~19% depend on very rosy predictions). As things stand, we're collecting about $500-600 billion less in revenue than we should be. Of course that's only one side of the ledger. Current spending figures are far above the norm (highest since 1946), and should be reduced by at least 3-4% of GDP to return to historical levels. Unfortunately, I don't see either happening for the foreseeable future, which isn't a good sign for America's financial health. The politicians here have no guts. They absolutely refuse to make tough choices (which is surprising, since most of them have virtually no chance of losing their seats; the Democrats wouldn't even have to worry about primary challengers).

A lot of doctors I know feel pretty strongly that older individuals in poor health should include 'comfort care only' on their living wills for this reason (that and quality of life concerns). Obviously it shouldn't be mandated by law, but it kinda makes sense for us to develop a culture of acceptance for the terminally ill rather than last-ditch attempts to extend life by a month or two.

I exaggerated some with the 'almost entirely', but the bulk of the medical costs in a person's lifetime certainly accrue at the very end of life.

I'd like to see the doctors tell that to their own parents (or to themselves). Of course the doctors probably have enough money saved to pay for their own procedures.

[Aimless]

I think it depends on what they mean with "poor health". Sometimes people are at a point where life-saving measures don't benefit them very much, or are down-right harmful. And they're torn between the desire to let go and die in peace and the terror of dying and the guilt involved with hanging on "past" their time and the desire to keep hanging on because of that very guilt Death-counselling helps a little (for patients and their loved ones), explaining the medical aspects help, deciding in advance helps a little but is complicated by other problems. Also, I think a lot of doctors have had enough time to think about their own mortality








On another note, 500 - 600 BILLION??!?! What on earth is going on over there??!

[Loki]

Receipts from income taxes are down 2% of GDP ($300 billion) since 2007, or roughly down a quarter, corporate taxes are down about 1.5% of GDP ($225 billion) since 2007, or roughly down 2/3, and an assortment of other taxes are down by smaller amounts. It's basically the government acting like chicken little and giving tax breaks to everyone and their dog.

Edit: Actually, looking at other recessions, the issue isn't so much that we have sharply lower revenue, it's that we already had a historically low revenue when the recession hit (thank you Bush!).