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.

Tax on the Higher Achieved

Don’t we need the “rich”? For our society to prosper don’t we need investment and innovation from hard working educated Americans? Almost every day an article comes out promoting a tax on the “rich” or the “Buffett” tax. Taxes promote one thing: safeguarding our money. The average American wants money for two basic reasons: to purchase something of value to them or to invest to make more money. Both of these result in stimulating the economy while taxation stifles it.

Most of the wealthy Americans are charged with being rich as a bad thing. However, these people worked hard to get where they are. Relying on data provided by the U.S. Census Bureau, in 2010, a worker with a high school degree made an average of $50,561; a person with a bachelor's degree made an average of $94,207; someone with a master's degree made an average of $111,149. Obviously, there is trend: the higher the degree earned the higher the income received. So as soon as we achieve the higher income level after paying, what can be imagined as, a fortune for our education, we are then taxed at a high rate. What, then, is our incentive to invest our newly earned incomes?

Has someone ever asked you what you would do if you won the lottery? Or maybe, what you would do if someone handed you a million dollars today? Have you ever heard anyone say, “I would hoard it all”? I don’t think so. They’d spend it on yachts, cars, vacations, or maybe even invest most of it (this is what I would do). The best part is that all of this promotes economic growth in some form. Giving people the opportunity to choose what they do with their money will encourage spending. In 1981, President Ronald Reagan slashed the top marginal income tax rate to 50%, down from 70%. This tax rate was again slashed to 28% after the 1986 Tax Reform Act. Total tax receipts in the 1980s doubled from $517 billion in 1981 to $1,030 billion in 1990, according to a recent study by Laffer Associates. By lowering the tax rate, more revenue flowed into the government, as a result of more investment, and out to programs to help those less fortunate.

Increasing tax rates on the “rich” would only encourage potential tax revenue to be invested outside the United States. In contrast, by lowering the tax rates more tax revenue comes into the government and the wealthy have more freedom to invest; thus, stimulating economic growth, job creation, and a higher standard of living for all Americans. Let the “rich” invest in our future.

"That's not class warfare; that's common sense."?

The phrase, “That’s not class warfare; that’s common sense,” has now become President Barack Obama’s signature catch phrase. From his State of the Union speech to his late release of the 2013 budget, President Obama uses this to invoke the support of the middle class and deflect the comments thrown at him from the Republican side. However, I can’t help but ask the question. Is it really common sense?

With the release of the 2013 fiscal year budget I, perhaps naively, was looking forward to spending cuts and programs that would grow the economy out of the recession. We had finally shown signs of life, albeit very dim signs, that we were creating jobs as we saw the unemployment rate slowly creep down to 8.3% last month. So what did we get in this new proposal? $137 billion in spending inside a $3.8 trillion budget while our hopes of reducing the deficit have been delayed from the original 2014 date to now 2018. Common sense you say Mr. President? I believe history wins that argument.

One of the main focuses for President Obama in the past months and will be at the forefront of the 2012 Presidential election campaign is the tax on what President Obama deems, “The wealthy.” This has been done before in American history and it did nothing but decrease cash flow in the economy. In 1930, President J. Edgar Hoover placed a major tax hike on the wealthy to balance the budget. The top marginal tax rate for incomes rose from 25 percent on incomes in excess of $100,000 to 63 percent on incomes in excess of $1 million. By doing so, President Hoover actually decreased household spending as their disposable income dropped significantly and it led to further contraction of the US economy.

In reference to this idea of spending to reduce the deficit, this has only worked as a major factor once in history: World War II. After the Great Depression of the 1930s a massive influx of military funding flooded the market. This worked because men left their jobs to fight in the war while women worked more in the factories. The number of unemployed workers declined by 7,050,000 between 1940 and 1943 as the number in military service rose by 8,590,000, according to the Library of Economics and Liberty. It’s apparent that it wasn’t so much the economic recovery as it was the draft that decreased unemployment, tightened budgets and rationed goods during war time. A recovery through spending is, thus, not the right solution.

It’s clear that America needs to be more focused on a supply-sided economy to see recovery. The current administration should be instilling consumer confidence back into the dollar. Economies grow when citizens have money, believe in it’s worth, and are given a low marginal tax rate so they can keep putting the money back into the market. If you tax someone with higher tax rates then they are less likely to invest that money back into the market. On the other hand, if you devalue the currency then the country will go back into a spending frenzy because they don’t believe the money will be worth anything as seen in drastic circumstances, such as the Great Depression of the 1930s. Value through steady cash flow of a strong currency and innovation will grow the economy, not taxing those who have already worked hard to be where they’re at.

It’s the American dream to work your way to the top and achieve your goals. What incentive is there to work your way to the top if getting to the top means you have to pay a substantial percentage more back to the government on issues that do not, and possibly will never, have an influence in your life? What are taxes but a number on a piece of paper that tells you how much you owe the government for something you may never use? We must all do our part to help the less fortunate, but at what cost to ourselves. When does it stop becoming affordable for us to help others? As they say in airline emergency guidelines, “Place your mask over your nose and mouth before assisting others.”

Spending Cuts or Higher Taxes: Is This Really A Question?

Did we learn nothing as children? When we wanted to go to the candy store to buy ourselves whatever $10 worth of candy could get us, we did. When our allowance dropped down to $5 and the jumbo candy bag was $7, we spent a little less that week and saved the rest for our next allowance.  This is called a spending cut because the need to pay for something else has caused us to decrease our current expenses. This makes sense right? So why are European countries favoring higher taxes rather than spending cuts to cover their budget deficits?

Europe will probably be facing another recession this year and their overall economy is expected to contract in 2013. Many countries are trying to avoid this by simply increasing taxes. The truth is this is not the recommended method and has actually proven to be ineffective in generating more revenue. Great Britain’s 50% top marginal income tax rate has actually reduced tax revue by as much as 5% this year, according the Wall Street Journal. Any idea why? Because those in the top marginal income tax rate did not get there by being careless about their money! When the taxes increase, citizens will simply shift their incomes and affairs into a more appropriate situation in a less tax burdensome country. So, the country either loses its population, and tax revenue, or they come up with a better way to handle the budget deficit.

As we know, higher taxes typically hurt new business and, at times, are a dangerous beginning to inflation; but they do offer a positive value that, I believe, most politicians enjoy: a short term fix. France and Greece are due to hold election this spring so both of them are looking for that sort of solution before dealing with the real problem at hand. Their plan is to increase taxes to start paying for the budget deficit, show positive signs of diminishing debt, and get reelected based on how “good” of a job they’re doing. These “excuses” are why Europe will face another recession this year and see their economy contract next year. They’re not fixing the problem; they’re delaying it with temporary ineffective solutions.

Positive signs of the right track are coming though. Portugal is looking to decrease their deficit by a plan of 70% spending cuts and 30% tax increases. Ireland, on the same token, looks to have two thirds of their deficit recovered by spending cuts and one third by higher taxes, which is the typical allocation. Unfortunately, as mentioned before, France, Greece, and Italy all look to balance their budget with tax revenue as the main contributor.

We’ll see what happens in the coming months as we watch the strategies of Portugal and Ireland as compared with France, Greece and Italy. Who will choose the best strategy? Who will save the most money? And who will eventually be able to afford their jumbo bag of candy the following week?

China's Glass Ceiling

 

                China has seen roughly 32 years of economic prosperity brought in by governmental reform under the leadership of Deng Xiaoping. Considered to be the architect of the Chinese economy after the death of General Mae Zedong, Xiaoping adopted a policy under the idea that, “Black cat, white cat, what does it matter what color the cat is as long as it catches mice?” With such a metaphor in mind he brought an average annual 10% growth in GDP from 1979-2010. Unfortunately, 32 years later from Xiaoping’s reforms, the cats have grown old and tired bearing the weight of old economic practices.

                In 1979, Xiaoping pushed through new economic policies that would initiate ownership incentives for farmers, establish economic zones to attract foreign investment, boost exports, import high technology products, encourage citizens to start their own business, and decentralize economic policy making. Prior to 1979, China’s real annual GDP growth was estimated at 5.6%. After these economic reforms were enacted China was able to double in real terms the size of its economy in real terms every eight years. The biggest factors in this were its large capital investment from foreign investment, savings percentage, and rapid productivity growth. Chinese foreign direct investment (FDI) grew from $2 billion in 1985 to $92 billion in 2008 while Chinese gross savings as a percentage of GDP rose to 53.9% in 2010. As a comparison, the United States gross savings as a percentage of GDP in 2010 was 9.3%. With the influx of foreign investment and the savings rate kept so high it’s not difficult to see how their economy grew so quickly. But what made it fall?

                Economic policy has changed in the 21^st century. Innovation and entrepreneurs are now at the forefront of economic sustainability and that’s unlikely to change anytime soon.  China’s major problem lies in their state owned enterprises (SOE). SOEs make up roughly 45% of the country’s economy; however, they act as a major barrier to innovation and entrepreneurs. With the state controlled system it increases the real estate values and deters foreign investment: two factors that can easily destroy a small business starting out. China was always known for importing parts and they’ll export the whole since labor was so cheap, but this is not how a small business works. China has recently made a push to encourage entrepreneurs by creating a $2.5 billion fund to lend to small and medium sized businesses along with relevant tax breaks. This is a great stride for small businesses but the struggle still comes with the looming real estate inflation bubble that could pop at any moment. 

                “China 2030,” an economic report produced by the Chinese bank and a government think tank, is due to be released on Monday, February, 27^th.  This report will hopefully contain guidance on economic sustainability for China.  This comes at a crucial time as their 2011 Q4 GDP was at its lowest in two and a half years at 8.9%. 32 years of strong economic growth have finally started to cool off. It’s time for the Chinese government to move in a different direction to get pass their current economic barrier.