Social Security: Let’s Call It Like It Is

                A government report came out yesterday stating that social security reserves, which pay for retirement and disability benefits, will run dry by 2033. When the year 2033 comes to a close, I will have paid my fair share of taxes to this fund through income taxes, but will only be forty-five years old. I will have to wait another seventeen years before I can start collecting early benefits and another four years after that before I will be able to collect full benefits. My future is looking very bleak.

                Social Security needs reform. With the baby boomer generation nearing retirement age the benefits will quickly run out. There are not enough employed young people out there to cover all these costs of retirement since the post-grad generation is fighting to secure jobs and pay off their student loans. The Wall Street Journal this morning reported that, in 2011, social security benefits paid out $596.2 billion to 44.8 million Americans. Right now the ratio of tax payer to beneficiary is 2.8 to 1, down from 3.3 to 1 in 2007. The baby boomers have hit their retirement age and the able bodies are struggling to cover the cost. According to the Social Security Administration’s current projections, the annual cost of social security benefits expressed as a share of workers’ taxable earnings will grow from 11.3 percent in 2007, the last pre-recession year, to roughly 17.4 percent in 2035. We are running out of people who can afford to pay into this archaically organized program and, hence, need a transition.

                One way to reform this program is an idea proposed by George W. Bush in 2005: privatization. Even though this legislation did not pass the Republican Congress back in 2005, it is an idea that needs to be reconsidered. Although politicians may find this a scary act to propose in an election year due to the fact that the older generation is one of the strongest majorities at the voting booths, action needs to be discussed now before it’s too late. My solution is to grandfather in a new privatized social security system. If we taxed for benefits and put the individual’s money into a social security investment portfolio, then we kill two birds with one stone. We invest tax dollars back into the economy to stimulate growth and the individual saves and grows their investment for their desired retirement package. A criticism of this would surely be the volatility of the markets; however, it’s better than being taxed my personal income that will be put into a fund that I may never see.

                I have been a proponent of this type of reform since I was a freshman in college. Investing in my future makes sense to me. If we work hard, then we should enjoy the nice retirement package that we earned. With money left over we can help those less fortunate; but, how are we going to help anyone if we run out of money to do so? Economic prosperity and sound financial planning is the way ensure America’s future.

Minimum Wage, Student Loans, and Unemployment: It’s All Related

                Coming across a few articles this morning I couldn’t help but think, “Has anyone connected the dots to bring the country out of the recession yet?” Countless ideas have been thrown into the mix of possible economic solutions, but few have any real merit. Student loan debt is approaching $1 trillion, we’re still at 8.2% unemployment with only 120,000 jobs created in the month of March, and we’re so focused on class warfare that we have essentially ignored what the free market can provide: good business. It is simply good business that people will want to invest in opportunities, however, when you stretch those opportunities in search of what one thinks is, “fair,” then you are only going to deplete business and string along a sluggish economy. In an article in Bloomberg Business Week, one advocates to raise the minimum wage so that lower income households have more money to spend the following year. Here’s the irony: by raising the minimum wage the government would put more pressure on small businesses, the main contributors to job growth according to congress’s recent small business tax break (JOBS Act), and would actually cause a disincentive to hire an additional worker. So, while the left is so bent on helping the less fortunate by raising the minimum wage, they’ll actually lose their jobs entirely. What’s fair now?

                If we see the world from the recent graduate standpoint, raising the minimum wage will hurt them. If a business is now required to pay a new hire $10 per hour then the business is more likely to hire less workers and be less willing to hire someone with such little experience. According to an article in USA Today, about 1.5 million, or 53.6%, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed. Raising the minimum wage would only increase these figures. You have to let the market speak for itself. In any good business, when the business becomes profitable and the workload too great, they hire an additional worker to help. Raising minimum wage is a disincentive for the business to hire, thus stretching its business with as few workers as possible. Business growth is essential for the market and for the work force. The more business is allowed to grow naturally, the more people it will employ. 

                As mentioned earlier, the student loan debt is rapidly approaching $1 trillion. I understand the need to ensure good paying jobs for the recent graduates, but raising the minimum wage will not help this. If President Obama really wants to give everyone a fair shot, then he has to lower the cost. I’d love to have minimum wage start at $50 but basic supply and demand economics will not allow it. Right now, we have a low supply of jobs available due to the high cost of hiring in a slow economic recovery. Reduce the cost to hire an additional worker and the unemployment rate will drop. However, what incentive is there for an unemployed person to take a job believed to be slightly below their skill level when the unemployment benefits from the government are so good? 

                When one looks at minimum wage, unemployment, and student loans, they quickly realize how interconnected the three categories are. Raising minimum wage increases unemployment and student loan debt outstanding. Lowering minimum wage would decrease unemployment and student loan debt outstanding. Although I’m not advocating lowering the minimum wage, I believe that raising it would be detrimental. In this recovery we need to let business do what it does best: be profitable. Growth for business means growth for the people.

It's Official!

As of yesterday, April 1, 2012, the United States officially has the highest combined federal and state corporate tax rate among industrialized nations at 39.2%. We finally made number one and now we must face the consequences. Japan lowered their rate yesterday from 39.5% total corporate taxes to 38.01%. This is only a minor reduction; however, it’s enough to have us rethink our twenty-six year old corporate tax structure.

Thomson Reuters reported that of the 30 companies in the Dow Jones industrial average, 19 told shareholders their effective rate for their 2011 fiscal years, mostly ending December 31, was below Obama's proposed new tax rate. For the other twenty-seven companies, effective rates reported ranged from 2.7 percent to 43.3 percent. Clearly the tax breaks provided in the tax code have clearly disrupted the efficiency of the entire system. These convoluted tax breaks can cause high compliance costs—at times an estimated $40 billion per year or more than 12 percent of the revenues collected according to the President’s Economic Advisory Board.

Now is the time we start thinking about more progressive tax reform. How progressive should we be? The more I discuss the issue with fellow economists the more I realize there is a potential solution that would lower the tax on corporations, reduce complexities in the current tax system, increase opportunity for jobs and wage increases, incentivize the American population to save money which would also strengthen the dollar’s value, and create economic prosperity.  It’s time to incorporate a consumption tax.

There are several types of consumption taxes. Sales tax, for instance, is a type of consumption tax. A value added tax or VAT tax is the more popular form of a consumption tax on corporations and most commonly used among industrialized nations. Then there is something referred to as a BAT tax, or business activities tax—an idea brought to light by a corporate tax reform paper by the U.S. Department of the Treasury in a 2007. The idea behind a consumption tax is that, in its most basic form, it taxes the difference between sales and purchases (the value added). This tax occurs at every step of the process in the exchange of goods. The difference between this and a sales tax is that a sales tax is only levied on the final sale.

A consumption tax has several benefits and one major problem. The benefits are easy. It broadens the tax base which lowers the tax on saving and investment; encourages capital investment which helps spur job growth and labor productivity; and also greatly decreases the compliance costs. A consumption tax has no effect on when money is used to consume a good, thereby encouraging people to save; however, an income tax creates a bias towards spending right away to avoid higher taxation on consumption in the future. Compliance costs for firms would also greatly decrease. The Congressional Budget Office estimates that the cost for businesses of complying with a VAT with a $25,000 small business exemption would have been from $4 billion to $7 billion in 1988. As previously mentioned, these costs are currently about $40 billion annually. The major issue and concern with a consumption tax is the cost of implementing it. Implementing a consumption tax would take time, patience, and a small hit to firms during the transition period but it would be worth it afterwards.

I do not expect a consumption tax to be talked about and implemented for at least another five years, but I do believe it is worth keeping an eye on. Twenty-nine of the thirty OECD countries have VATs. The United States is the exception. In a modern world where we are trying to encourage saving and investment whilst competing globally for economic expansion, we cannot continue with a twenty-six year old tax system. The time for thinking about innovative ideas for implementing a pro-growth tax system is upon us. There are options and there are solutions, but we must be open to all possibilities.