The paper provides four main takeaways. First, thanks to the incredible complexity of the U.S. fiscal system, it's essentially impossible for anyone to understand her incentive to work, save, or contribute to retirement acounts absent highly advanced computer technology and software. Second, the U.S. fiscal system provides most households with very strong reasons to limit their labor supply and saving. Third, the system offers very high-income young and middle aged households as well as most older households tremendous opportunities to arbitrage the tax system by contributing to retirement accounts. Fourth, the patterns by age and income of marginal net tax rates on earnings, marginal net tax rates on saving, and tax-arbitrage opportunities can be summarized with one word - bizarre.
I don't get the arbitrage takeaway? I thought that income tax was only a part of the puzzle. Maybe half. The other taxes you pay aren't affected by what you put in retirement accounts.
Tax arbitrage means using the difference in tax rates to make extra money. If the tax rate when you contribute to a tax-deferred investment account is higher than the tax rate when you pull the money out, voila, you've profited from tax arbitrage. So I am not sure why you are thinking of income vs. other taxes. The authors are simply saying, if you are a high earner in a top federal tax bracket, it really pays to put money into tax-deferred investments.
OK, I thought the takeaways were implying that you were finding some inefficiency in the system. Rather they were simply saying that retirement accounts work as advertised.
Just an odd takeaway, since that's the expressly stated purpose of most retirement accounts. But fair enough.
The strange thing here is that retirement accounts with a tax deferment policy benefit the higher earners much more than they benefit people in lower tax brackets.
This isn't very consistent when the social issue that has really driven these polices into existence is trying to convince lower earners to save for retirement so that the state doesn't have a huge outgoing on pensions etc.
> First, thanks to the incredible complexity of the U.S. fiscal system, it's essentially impossible for anyone to understand her incentive to work, save, or contribute to retirement acounts absent highly advanced computer technology and software.
If the article is arguing that everyone pays roughly the same taxes, that would mean we have a de facto flat tax anyway so the incentives should be clear.
> Second, the U.S. fiscal system provides most households with very strong reasons to limit their labor supply and saving.
That would mean unemployment would be low, given the lower labor supply.
> Third, the system offers very high-income young and middle aged households as well as most older households tremendous opportunities to arbitrage the tax system by contributing to retirement accounts.
If one had a crystal ball, yes. Marginal tax rates are at some the lowest in 60 years, so it is entirely possible that they will be higher at the time of retirement withdrawal.
> Fourth, the patterns by age and income of marginal net tax rates on earnings, marginal net tax rates on saving, and tax-arbitrage opportunities can be summarized with one word - bizarre.
thanks to the incredible complexity of the U.S. fiscal system,
it's essentially impossible for anyone to understand her incentive to work
The second line is true regardless if the first. Under what circumstances is $0.3, $0.6 or $.09 worth performing an extra $1 of labor? It depends on how you value your leisure time, whether you have a specific goal for the money in mind, whether your math skills are sufficient to even understand how much extra the $1 will net you, etc. That's not a reason for not simplifying the system, but it is a reason for the first and second argument to be plainly false: households do not, and are often incapable of, reason(ing) based on the fiscal system.
I beg to differ. Go to someone in the street and tell them if they'll work an extra shift for X amount of money: most people can answer that question.
So maybe you meant that it's impossible to generalise it to the whole population because everyone has different "goal for the money in mind" and value of "leisure time"?
I've used 50% as a conservative estimate for all my back-of-the-napkin calculations for years and it has served me well, especially in consulting projects. Sure I can lower that by showing expenses etc. but in the general sense, if I charge $100/hour, what I'm really doing is enabling myself to spend $50/hour in the future. The true benefit of this is that I don't have to feel worried about over/under charging my clients.
I charge $100 because I really feel the effort is worth $50 to me and the client won't pay more than $100. Think of it this way: The lower bound is set by how much I feel the effort is worth after taxes. The upper bound is set by how much I think/know the client will pay. If half of the upper bound is less than my lower bound, I don't do it. This way I don't under-charge.
By over-charge, I meant to say that even though I feel my effort is truly worth $50 after taxes, I don't have to worry about charging $100, because I'm not really over-charging the client since half of $100 is going to taxes. Without taking 50% taxes into account (which is what a lot of people do), asking $100 for something I truly feel is worth only $50 feels like overcharging.
Over-charging new clients is never a personal issue because they can always say no and walk away. But over-charging existing clients can cause you to lose a steady stream of income, especially after you've invested time and effort to establish a relationship and understanding of their needs.
eh, it always seemed to me that consulting was really only a win if you were consulting to support another business... e.g. if I can earn $100/hr and turn around and plow that money into my hosting business the same year, that seems huge in terms of net-worth growth. Yeah, I still gotta pay the piper when the money comes out, but meanwhile I can use it to grow more money. (and really, once I'm rich, I like to think that losing a bunch to the tax man will hurt less.)
The problem with this approach is, of course, that if you screw up your accounting and get audited, you can come away with some silly high tax bills that can't be discharged by bankruptcy.
Very cool, it seems the researchers took into account all sorts of things like state sales tax, state income tax, corporate tax, welfare / handout type programs, and spending + savings habits.
From what I can tell the key inflection points in the graph come from four issues.
1.) How much can one contribute to retirement accounts to avoid paying income tax that year?
2.) Where are the key discontinuous cutoff points in the tax system? (social security maxes out, certain payments to the needy disappear, etc)
3.) What is the typical marginal propensity to consume?
4.) How much wealth has one accumulated by a certain age in life, which can be invested, which is only taxed at lower capital gains / dividend rates?
My thoughts on the first are mixed. Yes, we don't pay taxes this year on money we stash into a non-roth 401k, but I hope they aren't doing the bad accounting of treating that as 0% tax... we will eventually pay SOME tax when we withdraw on it, just not this year.
The second point is very valid... there is a magic range around $110-$160K income right now where your marginal tax rate from paying social security is almost 12% lower than the guys making $80K-$110K. In the US, you and your employer each pay 6.2% of your earned income to social security, but it caps at $110K (the rationale being you won't get credit for more than that at retirement, so they won't take more).
The final points are a bit bogus in terms of providing us guidance, but they are more of the author's observations from the data they studied. Poor people consume more as a percentage of their income and hence pay more sales tax each year. Wealthier people buy more, but less as a percentage of their income, so they pay less sales tax, and save more over time which can be turned into investment income.
Really rich people have little or no income. The dodge comes in taking your jet, car, residence, living expenses etc as work expenses. While you OWN billions, your income may be thousands.
If you own "billions," you presumably own equity or debt (maybe some commodities, but it's not likely). If you own debt, you're paying taxes on the interest. If you own equity, the value of that equity is the net present value of future cash flows--meaning it's 'taxed' at the rate at which corporations are taxed.
In addition, spending a lot of money and then making it a 'work expense' still requires lots of income. You can't effectively write off your limo charges unless your income at least equals them.
And I don't know how common it is to treat a residence as a work expense. There's a home office tax deduction, but that is a common audit flag.
As a side note, one interesting difference between owning equities from a company that you started versus that you purchased from savings is that your work invested into the company is NOT taxed.
If you can create $100k of value a year in your own company or earn a salary of $100k (which after taxes nets you only $60k that you can contribute to purchasing assets), it will take you a lot longer to build up the value of your assets. Of course, capital gains distributions from either asset are taxed the same.
Your work is not normally taxed; your income is. If your company is worth something, it's based on some kind of future earnings. And those future earnings are taxed.
Consider two developers that make 100k per year before taxes and live off of 40k / year. Now assuming they work for each other they pay 100k and get 65k after taxes, spend 40k and get to invest 15k which they spend on advertizing for their company.
Now assume the work for themselves They pay they only need to live off of 40k so they pay themselves 70k and get to invest 30k on advertizing without paying taxes on that value. Note: numbers are not accurate but they do give context. The idea, is companies can invest in future earns though things like advertizing or R&D without paying taxes on the income uses to pay for that advertizing.
Now you are supposed to pay yourselves market rate, but if you generate 300k in value each year you don't need to pay yourself that money.
Right, if you invest that money, you will only realize the value through dividends or selling a stake. And the value of that stake is once again based on the NPV of future cash flows, which are taxed.
What rich people do to avoid paying income tax is to structure the payment as long term capital gain. Capital gain is taxed at a lower rate than income tax. Of course if you stuff the jet/car/residence/gold-cards as corporate expenses, the capital gain would be lower, too.
If you think that's high you should be happy you don't live in Denmark.
"The large public sector (30% of the entire workforce on a full-time basis) is financed by the world's highest taxes. A value added tax of 25% is levied on the sale of most goods and services (including groceries). The income tax in Denmark ranges from 42.9% to 63% progressively, levied on 4 out of 10 full-time employees. Such high rates mean that 1,010,000 Danes before the end of 2008 (44% of all full-time employees) will be paying a marginal income tax of 63% and a combined marginal tax of 70.9% resulting warnings from organisations such as the OECD"
Oh and if you want to buy a car you'll be hit with a 180% taxation of your new car on top of the 25% valueadded tax.
The people who do live in Denmark seem pretty happy about doing so, though (http://www.sciencedaily.com/releases/2006/11/061113093726.ht...). One reason might be that they're fairly wealthy to begin with, so it's taking a large percentage out of a large pie (Denmark's per-capita GDP is ~DKK 375,000 = ~$62,000). The social safety net is also rather strong as a result of the government's large amount of income, and it's popular, partly because nearly everyone uses parts of it--- free education, free adult education, free health care, free child-care, pensions, job retraining, etc.
And interestingly their unemployment rate is lower than ours* (at least since 2004). Evidence that providing more government services doesn't lead to people just sitting on their asses and cashing their welfare checks.
I don't think anybody's seriously arguing that a majority of people would just sit around, but more government funding or regulation services would throw incentives out of whack.
Everyone is brought up to think it's the best country in the world. But I'm glad I emigrated and the other people I know who moved seem pretty happy about it too.
No that stuff isn't free just because it's paid for by taxes. And because the government has kept growing the government is now running a deficit. It will have to do reforms to avoid growing the debt.
Some think the big government system is great. I don't. But even if you do think it's nice, the problem is that it's not sustainable.
The growth of the economy is projected be the 2nd lowest in OECD only in front of Japan.
Denmark has been a rich country for a while but as the government has grown it has been falling down the list and is now out of the top 10.
Bombs. Lots and lots of bombs. And, apparently, we love to use them. Prisons. We're good at those. Oh, and flags. We like to wave those a lot, too. Especially about the fact that we are "free" compared to those "socialist" menaces around the world. So, we pay an average of 40% in taxes, but does that pay for your higher education or your kid's higher education? Not likely. Does it pay for your health care? Probably not all of it (in some cases, none at all). Does it pay for daycare? Good retirement? So, when you factor that and a lot more into the equation, some countries don't have it so bad. The sad thing is, we could be doing SO well here if we just tweaked things a bit. Tweaking, apparently, is out of the question,
I've often tried to point this out to US taxpayers I've met. While in my country the tax rates are about the same, or perhaps a bit lower, our defence force is miniscule in comparison and thus social spending takes place instead.
Though, to be fair on countries like mine (and Denmark) we receive positive externalities from excessive US Defense Force spending, because we don't have to maintain a full sized force due to our treaties with the USA. As a negative, we're compelled to join in on such adventures as Iraq and Afghanistan as a result.
However, many of the smaller nations with similar tax bases and larger social benefits compared to the USA tend to forget about the effective subsidies paid by the US taxpayer for our national defense.
Additionally, there is definitely a component of the US Defense spending that is arguably social policy - even if it is part of the military-industrial complex. It does provide a lot of people with taxpayer-funded positions, and allows otherwise-jobless areas to enjoy employment opportunities with establishment of bases.
I clearly think there is a case for a reduced defense force in the USA - just one or two less Nimitz class carriers could build a lot of public hospitals, for one example, and removing bases from Europe and Japan would be another saving. But I don't think you can have an honest and full comparison with other countries until you start looking at the massive US defense force spending, and it's effects on other countries who effectively get to forgo that same spending.
As a result of their tax rate and size of government? That's ridiculous.
Denmark is wealthy and comfortable because it's full of Danes. I bet you Danes in the US are even wealthier and more comfortable than Danes in Denmark.
To be honest your point seems completely vacuous (far more ridiculous than the point you are responding to). It appears to reduce to "Danes are magical - I think". What makes Danes special? Is this not related to the sort of government they would create and support?
To be fair, in the few cases where I've seen good data, most groups do better in the US than in their native countries.
For instance, Asian Americans have average income of $65,000. Japan, the richest country in Asia, has average income of about $40,000. Japanese Americans also live 2 years longer than Japanese.
Like it or not, ethnicity plays a big role in many social measures. The US is very diverse, and certain groups drag our averages down (groups that are very small in Europe and Asia).
Yeah, but that's a self-selected group. People who are capable of moving their families to another country to pursue a career are more likely to be successful. Similarly people who grow up in poor, backwards communities (trailer parks and projects, meth and crack), tend to wind up poor and backwards. Maybe I'm a reactionary liberal but I have an easier time believing that than the inherent genetic superiority of the danes (oh and that's just SO close to certain ideologies I'm always wanting to accuse the Tea Party of harboring).
Wanna see something really cool? Look at a satellite image of Denmark. It's almost entirely farmland, with little spots of ultra-dense village or city every so often. No suburban wasteland. I'd be 20% happier just for that.
Swedish Americans are the descendents of lower class agricultural workers who left religious repression in Sweden between 1860 and 1910. In the case of Japanese Americans, they are descended from manual laborers who left Japan between 1882 and 1924.
In any case, I don't get how you could read either of my factoids and suggest I was pushing genetic determinism. Clearly, some environmental factors are important. For example, living in the US rather than Sweden or Japan seems to cause people to earn 50% more money. Using US health care rather than Japanese health care seems to increase life expectancy by 2 years (no, I don't actually believe this latter point).
But on the other hand, ethnicity does also seem to have some measurable effects. Asian Americans beat whites on most social measures in spite of the head start whites had.
Feel free to call me a racist tea partier if you like.
Oh, I wasn't accusing you at all, just noting it was funny that we were talking about the Danish with their blonde hair and blue eyes, in the context of genetic determinism -- been reading about Hitler and Stalin's respective rises to power recently, so it's on my mind.
As far as the Asian American thing, I'm personally partial to social factors there as well. At the risk of being a stereotyping a-hole, there's a lot of Asian Americans in SAT prep classes. Correlation with ethnicity doesn't necessarily mean that asians are genetically predisposed to be better at the SATs.
Really, I just wanted to highlight those satellite pictures of Denmark.
EDIT: Also, RE: the impoverished and hardworking immigrants, I agree, it's not like they were Saudi princes when they came to America, but those who did come were the ones who had the motivation to pull off the journey -- then, now that they've bitten it off, they're obligated to succeed. Still self-selecting to some degree to me.
Given the obvious bias displayed in the sweeping conclusions drawn in that post, I'm not inclined to put a lot of faith in the author. There are so many possible biases in that comparison.
For example, it's pretty well accepted that it's better to be high-income in the US than in Sweden, so if you for some reason have a population that is in the upper income levels in the US (due to being white and long-resident, for example) it's not surprising that they would have higher income than in Sweden. As Sweden is a much more redistributive society than the US, the upper income levels in the US are, as a matter of speaking, subsidized by the lower-income levels. And there are a lot more lower income levels in the US than in Sweden.
The conclusion that "The U.S would be even richer and have much less poverty if it was made up entirely of Swedes" is ridiculous. It's equivalent to saying "the US would be even richer if it was made up entirely of the people that make a lot of money", which completely ignores the fact that the US economy depends on low-wage earners to a completely different degree than Sweden does.
Comparing average incomes is meaningless for at least two reasons:
1) The cost of living will not be the same; and
2) Income is no measure of quality of life/satisfaction.
As an example, what if average incomes are higher, but so is income inequality? What effect does this have on the society (and the standard of licing of those within it) as a whole?
I also think jbooth has a point in that these are self-selected groups.
The data I gave is adjusted for cost of living. (Fun fact: adjusting for cost of living hurts Sweden, living there is more expensive, not less.) This blog post describes the methodology:
As you can clearly see from the graph linked to in my previous comment, the bottom 15% or so of Swedish Americans are slightly poorer than Swedes. The top 85% or so are richer. That's the effect of inequality.
As for quality of life/satisfaction - I'll focus on wealth since I don't really know what you mean when you say "quality of life" or "satisfaction" (they are fairly subjective terms).
Thanks for linking to the post with the methodology, it was interesting. It does show the difficulty of trying to get accurate numbers, although the author has clearly made an effort to.
Re: the effect of inequality: sure, that's the effect on income. But that is obviously not all that matters.
Yes, the things I am referring to are subjective. Yes, they are hard to measure. But this doesn't mean we should just ignore them, and focus on what we can easily measure. Sounds like a recipe for optimising the wrong thing.
Canada is quite similar: In 2006, from $14k up to $88k the combined Federal+BC income taxes, payroll taxes, and sales tax credits worked out to a flat rate of 26% plus or minus $250. (Above $88k the rate goes up, but mostly due to a cap on the amount which can be "hidden" in retirement funds.)
Graduated tax rates plus low-income tax credits equals a flat tax.
Well, it depends in part on what you include. The 26% I mentioned is for income taxes, payroll taxes, and (income-based) sales tax credits; but Canadians also have to pay a federal sales tax of 5% and provincial sales taxes (typically around 7-8%) on most purchases.
I believe the total tax burden ends up being fairly similar between the US and Canada -- while Canada spends far more (per capita) on social services and health care, the US spends a similarly larger amount on the military.
Canadians also pay much more for gasoline than Americans. Of course, not all of this is in taxes.
To check this: find a "gas buddy" site for a place in Canada, then find one for the nearest US city/town close to it (to control for price disparity due to shipping).
Multiply cost per liter by 3.6 to get equivalent US Gallon; then adjust it by current exchange rate.
Example: lowest for Vancouver, BC: http://www.vancouvergasprices.com/ is currently 106.9 per liter ($1.069 CAD) , times 3.6 = $3.85 CAD , about $3.66 per US Gallon in USD.
Closest city on the US side is Bellingham, WA, lowest price there is $2.82, or about US $ 0.80 difference per gallon.
Assuming a fill-up is 12 gallons, that is ~$10 per tank difference.
Canadians also pay much more for gasoline than Americans. Of course, not all of this is in taxes.
I think most of the difference is taxes -- unlike pretty much everything else, advertised gasoline prices include federal and provincial sales taxes. In Vancouver they also include a carbon tax (currently $0.048/L) and an additional fuel tax to fund mass transit (currently $0.12/L).
Perhaps not advertised as much as gasoline, but at least in NB and NS, the displayed price on alcohol includes all sales taxes, but that's the only other thing I can think of.
I wish it was $2.50 in Seattle. I'd even be overjoyed to pay the Bellingham price of $2.82. I paid $3.11 to $3.17 the last two times I filled up last week.
I've read that a critical difference between the US and Canadian budgets is that Canada consistently balances its budget while the US does not. In the short term this means that the US can avoid collecting taxes on its full expenses, while Canada has to collect expenses in full. In the long run the tax implication should reverse.
When I was looking for work after University I was astonished to find that I would be pay much more taxes in Texas than I would in Ontario. I would still have had a better standard of living though because housing is so much cheaper there and the wages are about 15% higher, but still, it was sobering. One point the original poster forgot to include was that you do eventually have to pay taxes on your RRSP contributions, so it is just tax delayed, not really less taxes. One reason I don't contribute to my RRSP is that I think taxes are going to go well north of where they are today due to the baby boomer strain on social services. Better to take it out now than later.
The US is less competitive than it likes to believe in the tax wars, when all is included. We just spend an incomparable amount on military instead of social services.
I moved from a job in Canada to a job in the USA with a similar salary in the US. The deductions from my paycheck were noticeably higher. Sales tax was slightly lower.
The author didn't do that. Instead he reported on research that found that the effective marginal tax rate across a broad range of incomes and life situations was generally close to 40%. So no matter what your income, your marginal tax rate is probably close to 40%.
The "marginal" think really does throw this off. The "marginal rate" means the amount you'll be taxed for the next dollar you earn.
So this tells us little about the rate that each person already paid for the amount below the margin, the "body" of earnings, if you will.
Actually, the more I think about it, the more I think that the idea of a flat marginal rate is a good thing: that means there's little disincentive to produce more. I would have thought that a flat marginal rate with a curved "body" rate would be darned near impossible to implement, but this makes it sound like that's been fairly successful.
Of course, the fact that the marginal rate is 40% is a very bad thing. The government should not make up a plurality of our spending.
The theorem only works for continuous functions. Tax rates are anything but continuous. They have sharp elbows (e.g., AMT), and some taxes wink into existence and back out again within a finite range (e.g., EIC).
I'm not sure that these exceptions are sufficient to allow it to work out, but I'm pretty sure that this rule isn't the impediment.
Then the marginal rate must be flat except for discontinuities. It will effectively not be a flat marginal rate except for finite intervals. And if the tax burden is meaningfully curved, the tax rate must have discontinuities in meaningful places.
Wouldn't a completely flat tax with a fixed deduction/rebate achieve that? Say, 25% of your income minus $10k. The marginal rate is always 25%, the average rate is negative for incomes below $40k and asymptotically approaches 25% as it increases.
If your marginal tax rate is approximately constant, then it will also approximately equal your overall ratio of tax/income. So even though the article doesn't seem to be particularly careful with the difference, it doesn't really matter in this case.
The numbers don't add up to the macro numbers, though--- the governments at all levels added together pull in about 25-30% of U.S. GDP in taxes, not 40%.
One thing throwing off his numbers is that he assumes all income to be ordinary income, whereas a large proportion of Americans' income, especially at the high end, get classified as capital gains or qualified dividends, which are taxed at lower rates. I believe Warren Buffett calculated that his real tax rate was 18%, for example.
I make considerably less than Warren, and virtually none is capitol gains. After home mortgage deduction, charitable deductions, etc. My effective federal tax rate was like 7.2% (If I remember what TurboTax told me correctly). The previous year it was 6.9%. My marginal federal bracket rate is 28% ($82,400-171,850).
Warren really like to talk that crap up about how he pays less taxes than his secretary. To me his secretary just needs a better tax guy.
I just hope that capital gains taxes stay reasonable. I think they provide a large incentive for small companies to grow and NOT just be lifestyle businesses.
This is one of the least enlightening articles I've seen in a long time. I understand that it's a challenge to succinctly summarize a 73 page paper in 300 words, but here the author seems to be happy to use the paper's "findings" to support a extremely simplified "fact" about the current tax system.
The numbers cited in the article are based on a wide collection of parameters/assumptions, but that is ignored in the summary.
Interestingly, the paper on which the article is based was directly supported by fairtax.org- an organization solely dedicated to a drastic restructuring of the tax system.
The all in tax burden at different levels of income is a very interesting concept to explore. But here it seems like both the journalist and the paper's authors have addressed the issue with a bias which takes away from what could otherwise be a very interesting subject.
As a person who wants to pay as little tax as possible (until of course, they start spending the tax money in ways that I see fit, which don't include blowing things up), I have always been against the concept of a single national sales tax, or a flat tax. However, more and more I am realizing that the benefits of axing most of the IRS (wow, talk about administrative overhead) would actually effectively lower everyones tax burden by several percentage points. You can't dodge a sales tax aside from buying used (great incentive to curb our plastic consumer culture), but the good might outweigh my original objections. Let the states decide if they want to makeup the rest with property or sales tax, and the simplified tax system results in huge benefits.
Where that sounds like a good idea, I think the reality would be grossly unfair. First of all, what's an income? Is it just money I earn? What about interest (paid and earned), capital gains (money I don't actually have, but earned) or government benefits? You're already making exceptions defining income.
Second, there's the practical matter of people/business who operate on extremely thin profit margins and if you could even practically tax them.
I think in reality a flat tax has great benefits to the wealthy but gets progressively more burdensome as you get poorer. After all, the more money you have, the more money you can make, thus making the "flat tax" exacerbate the gap between rich and poor.
A flat tax could be modified by a minimum income, age exception etc. But the trick is to make the calculation dead simple, and unavoidable. So thousands of smart people turn their attention to something else, like creating real value for instance.
I pay 120$ a year for someone else to do my taxes, I make ~80k per year. So add 1/6 of 1% so we are now up to 1/2 of 1%. Anyway, there is going to be a cost to administering any tax so while simplifying things may save money it's never going to zero.
PS: I could see a simplified tax code saving people 20 billion a year, but good luck implementing that.
Edit: For example, CC transaction fees cost more than current transition costs, so a sales tax would have higher compliance costs.
You could always try the military... you've got one hell of an expensive lean, mean fighting machine there. I'm pretty sure it would still be as good for defence at a fraction of the cost.
Be careful with that. Warfighting is every bit as complex, technical and dynamic a discipline as computers. Maybe more so. Do you have a developed opinion on ballistic defense, our nuclear posture, our relative emphasis on COIN vs. conventional warfare? No? Then you are in the position of an executive eying the expensive IT department with a foggy notion that it could get the job done for half the cost, without a clear idea of what a server is or does or why the administrator is so dang expensive.
I recommend poking around the Quadrennial Defense Review site to get a primer on the major issues. It's a report the DOD does every four years to evaluate its priorities and capabilities, explain its budget, etc. There are lots of executive reviews, intelligent and opinionated commentaries, that sort of thing. http://www.defense.gov/qdr/
Indeed, the military is one of the most studied, analyzed and questioned branches of the government (speaking as a former military man). I remember the time I read the GAO report on the Patriot Missle System, it was a huge eye opener for me. The government is much more transparent than we give it credit for, we just have to be willing to put the time in.
There is a huge gap between the US and the second best military in the world. After a 15% cut in DoD budget we would still maintain that #1, so the real question is how much of a lead do we need to feel safe? Must we be able to crush #2 - 5 at the same time?
Well, it's not a horse race. It's not a question of being able to beat the other guy, but of capability. It's not about who you can beat, but what you can do. (Though the amusing answer to your last question is yes -- for many recent years, the direction was that the military needed to be at a level to prosecute two overseas wars while maintaining homeland defense).
One of the QDR review panels talked about current issues in defense. It's not authoritative direction, but it does give a taste of how the military is about more than just competing with the next peer. Here's what they had to say about its goals:
1. America has for most of the last century pursued
four enduring security interests:
a. The defense of the American homeland
b. Assured access to the sea, air, space, and
cyberspace
c. The preservation of a favorable balance of power
across Eurasia that prevents authoritarian domination
of that region
d. Providing for the global ―common good through
such actions as humanitarian aid, development
assistance, and disaster relief.
2. Five key global trends face the nation as it seeks
to sustain its role as the leader of an international
system that protects the interests outlined above:
a. Radical Islamist extremism and the threat of
terrorism
b. The rise of new global great powers in Asia
c. Continued struggle for power in the Persian Gulf
and the greater Middle East
d. An accelerating global competition for resources
e. Persistent problems from failed and failing states.
3. These five key global trends have framed a range of
choices for the United States:
a. These trends are likely to place an increased
demand on American "hard power" to preserve regional
balances; while diplomacy and development have
important roles to play, the world‘s first-order
concerns will continue to be security concerns.
b. The various tools of "smart power" – diplomacy,
engagement, trade, targeted communications about
American ideals and intentions, development of
grassroots political and economic institutions –
will be increasingly necessary to protect America‘s
national interests.
c. Today‘s world offers unique opportunities for
international cooperation, but the United States needs
to guide continued adaptation of existing international
institutions and alliances and to support development of
new institutions appropriate to the demands of the 21st
century. This will not happen without global confidence
in American leadership, its political, economic, and
military strength, and steadfast national purpose.
d. Finally, America cannot abandon a leadership role in
support of its national interests. To do so will simply
lead to an increasingly unstable and unfriendly global
climate and eventually to conflicts America cannot
ignore, which we must then prosecute with limited
choices under unfavorable circumstances -- and with
stakes that are higher than anyone would like.
It's not a question of just saying, "Do the same job with less." The military we have exists to do certain jobs and there are a lot of very smart people interested in doing those jobs very efficiently. No, if you want a cheaper military, you need to do less. You need to start picking goals to give up. If you really wanted to pare the military down to just homeland defense, you probably could do that job with a lot less, but you wouldn't be able to render humanitarian aid or make the world a safer place for everyone (us included).
Here's another example of a policy goal not directly related to homeland defense or beating someone else's military (This from the Nuclear Posture report):
Toward a World Free of Nuclear Weapons
The long-term goal of U.S. policy is the complete
elimination of nuclear weapons. At this point,
it is not clear when this goal can be achieved.
Pursuing these NPR recommendations will strengthen
the security of the United States and its allies and
partners and bring us significant steps closer to
the President’s vision of a world without nuclear
weapons.
The conditions that would ultimately permit the
United States and others to give up their nuclear
weapons without risking greater international
instability and insecurity are very demanding.
Among those are the resolution of regional disputes
that can motivate rival states to acquire and
maintain nuclear weapons, success in halting the
proliferation of nuclear weapons, much greater
transparency into the programs and capabilities of
key countries of concern, verification methods
and technologies capable of detecting violations of
disarmament obligations, and enforcement measures
strong and credible enough to deter such violations.
Clearly, such conditions do not exist today. But we
can – and must – work actively to create those
conditions.
Applying effort toward achieving those goals may require a larger or smarter (more expensive) military. We do it, not because we want to beat China, but because it's something we want to do and think is worth the cost.
> You could always try the military... you've got one hell of an expensive lean, mean fighting machine there. I'm pretty sure it would still be as good for defence at a fraction of the cost.
The US military is about 6% of Federal spending and didn't jump significantly during Iraq.
For example, Iraq cost about $1T over 8 years. At least one of the stimulus cost about that, and we've had several since 2007.
The long term trend for US military spending is down. It was over 20% before Vietnam.
It's closer to 1/4 of total spending. Out of $3.552 trillion in total federal spending:
Defense-related expenditures outside of the Department of Defense constitute between $216 billion and $361 billion in additional spending, bringing the total for defense spending to between $880 billion and $1.03 trillion in fiscal year 2010.[6]http://en.wikipedia.org/wiki/Military_budget_of_the_United_S...
PS: The range of costs depends on what and when you consider something military spending. Do you count future pensions under current spending or do you count current pensions? etc.
You're kidding right? Replacing income tax with a national sales tax would immediately create a massive black market that didn't exist.
Its always humorous to me when people claim that a national sales tax would allow the IRS to be done away with. Uh, think it through. the sales tax would need to be around 25% to replace our income taxes. So you don't think people would be trying to dodge that? And the IRS wouldn't be going around checking retailers to make sure they were paying the tax? LOL...you think the IRS is intrusive now, wait until they are trying to track EVERY SINGLE TRANSACTION. Now there's some big government for you!
Value-added taxes are hard to avoid because they're collected at every level of production. A black market would only be able to easily avoid the tax on the difference between the wholesale price and the retail price.
The main issue is that we're still taxing income, instead of taxing consumption.
We (no matter the country) could save billions in administrative costs simply by moving all tax to point of sale style VATs. (As a sidenote this does not mean that something like the FairTax proposal is a good example of this concept.)
I'm no fan of excessive taxing, but if you shifted the source of all current tax revenue to consumption based transactions, this would cripple the poor and middle class.
For much of the lower/middle class, a significant, sometimes 100% of their income goes to consumption. For the wealthy, consumption as percent of income can be very small.
Your argument makes a major assumption: That this isn't already the case.
The current system is regressive in practice, though not in theory. If this wasn't the case, Buffet wouldn't be paying 17%.
Spending 100%+ of your income on consumption can be the norm for lower income earners, it is true. That does not extend however into 100%+ of income spent on consumption that is required for basic sustainability, especially in rich countries such as in North America or Europe.
There is no incentive under the current system for any income bracket to spend within their own means, regardless of what those means may be. The high levels of unsustainable personal debt illustrate this perfectly.
This results in overspending on "luxury" (i.e. not "required") goods - even by the "poor". There are few incentives that encourage the poor to establish wealth through savings. There is also no incentive in the system to have individuals increase their income to match their spending, although that's admittedly a much harder accomplishment.
With an income tax system that isn't perfectly flat, the problems you highlight are simply hidden, if not encouraged. With a flat based taxed, they are not, but it is regressive.
With a flat consumption based tax with a level of social control through either personal spending exemptions or through item based exemptions (baby food, for example) we could do a better job of managing the regressive nature of tax systems in general than we do right now.
In addition, we expose basic economics to those who have difficulty understanding the concept by providing strong incentives to build wealth and consume less, regardless of income bracket. This is something we should do.
In all forms of sales tax, the devil is in the details. The differences are not in the concept but how one chooses to administer the particulars. Where and if you choose to credit low income, what "sales" you choose to tax or not, and the overall tax rates themselves.
FairTax, in my personal opinion isn't the best example of where to draw these lines. It is rightly criticized for that, but that says nothing about the fact that overall, taxing consumption is a better idea than taxing income - a move that was largely bred from the need to fund a massive increase in government spending.
A tax that allows for funding of government programs, encourages the creation of wealth and the growth of personal income and discourages rampant consumerism (as in buying things you can't afford - and having prices bubble accordingly) is a much "fairer" system in my books.
I discount a lot of the notions of this type of system being inherently regressive because that argument insinuates that the current system is not. I believe Mr. Buffet quite aptly supported this assertion with real numbers a few years back.
It's not like the entire tax goes into a black hole -- it would be interesting to see what the return is on the average tax rate: how much benefit is derived from state, federal, and city services (roads, water, security, libraries, parks) and benefits (unemployment, social security, disability).
It's not like the entire tax goes into a black hole
It's arguable that we'd be better off were that so... part of the tax burden is all the people employed by those taxes who don't actually contribute anything to society on net (that is, whose jobs wouldn't be done at all on the free market)... in this way, taxes can have something like double their cost in harm, potentially.
I'll concede that's true for government agencies where the work could be done more efficiently in the for-profit world (say the USPS), but there are plenty of agencies whose jobs "wouldn't be done at all on the free market" because there is little profit motive, but are essential none the less. Could you imagine regulatory agencies (SEC, EPA) as for-profit entities? Job and Family services?
I think the fact that a job wouldn't be done in a free market system is not a justification for saying that they don't contribute on net. The free market doesn't lend itself to funding a lot of work that is still worth doing - basic research being an obvious example.
I'm not sure that's the case, since I'm not sure if government-funded research was more of an effect or a cause of the decline of privately-funded research.
I can think of quite a few technologies that are the unforeseen side-effect of some government funded research, and would have probably never occurred otherwise. For example MRI, the Web, and the Internet. I would imagine quite a bit of research on green technologies and so on have also mostly been government funded until recently.
Companies mostly fund research that brings immediate results. Sure, some (like IBM) may be looking further down the line, and some probably just subsidise some research as PR. But areas where there is no clear advantage and in addition carry a large risk, are mostly shunned by corporations.
Really, though, it's hard to find credible reasons why companies would fund fundamental (say) physics research, isn't it? The benefits of such research are often felt decades down the line.
Companies and individuals have certainly funded activities with decades-later payoffs before. If it's not currently done as much, it may be partly because the decades-hence future is more uncertain than it used to be, for both technological and legislative reasons. Again, I don't see an empirically obvious answer.
However, I think there might be a naming problem, here. If it seems likely to have practical applications at some point, it's not "fundamental" or "pure" research anymore. Companies doing research into quantum computers or molecular assembly are certainly doing so because they expect to make a profit on it eventually, but the very fact that they have this expectation means that it's disqualified from fundamental research. I still think that there are examples of companies funding general research on the assumption that something will come of it, but it's hard to disentangle the effects of government. The most prominent example, Bell Labs, was run by a government-supported monopoly, for example.
I'm willing to entertain the argument, though I'm not familiar with any arguments that airlines are inherently unprofitable without using force on someone.
Depends on where you are. Airlines wouldn't fly into rural North Dakota because it would simply not be worth their while. That doesn't mean that people supporting energy and agricultural production don't need to fly. If you weren't subsidizing them with your tax dollars, you would be with your airline tickets. This would probably lead to fewer people flying, less tourism dollars, etc. thus requiring the government to come in and subsidize them again :)
If you took the government out of the airline industry now, the country would look very different.
This is an interesting idea. What jobs would not exist on the free market? Let's just take, for example, a traffic engineer. Someone whose job it is to make sure the network of roads runs smoothly, interconnects between states and more or less provides a consistent infrastructure for the transportation of goods. It's quite possible this wouldn't exist in the free market, just look how long it's taken to standardize the web. Of course, we were able to standardize on TCP/IP, but that was probably government influence.
I'm not trying to troll, but I'm curious how different the world would look if we left things like infrastructure to the free market.
Funny you mention the internet (TCP/IP, etc). That's one thing I'm glad the government--be it university funded researchers and DARPA among others--took care of. I can't imagine a large Telco designing the internet. We certainly wouldn't have net neutrality and the Googles would probably not exist.
If you can find even a single agency on that list which performs a function you wouldn't be willing to pay for, the rest of my comment follows for you, specifically: that agency is a net cost to you comprising both the taxes you pay to fund it (proportionately) and the decrease in wealth caused by keeping those people from contributing to the economy by doing something productive. This isn't specific to the US government, of course; that's just the easiest example.
Not beneficial to me personally does not mean "people ... who don't actually contribute anything to society on net", and it would take more research than I have time for to completely dismiss any US federal agency (except perhaps the DOD).
> it would be interesting to see what the return is on the average tax rate
You won't see it. It's not possible to know how receivers of government action value it without selling them for a price (ie, not being government action).
In UK the income tax for high-rate earners (anyone earning about $70k) is 40%. As in, that's what is reflected in your pay check.
Then you add on council tax (equiv of state tax although it's calculated based on value of house), VAT (sales tax, 17.5% moving to 20% next year), property tax (only at sale and if you own more than one), and all the sin taxes (cigarettes and gas is WAY higher cos it's mostly tax).
I like living in California and America... the taxes are so low here!
(caveat: yes we get health care paid for in UK which I have to pay for here)
If I buy something for $100, I would pay sales tax on it. But is that really it for purchases? Isn't the government collecting taxes at several other points as the good is being made and brought to market? Taxes on raw materials, on components making the product, taxes on shipping, etc.
All in all, if I buy something for $100, how much is the tax collected by the government (in addition to what is taken from my income leaving me this $100 to spend)? Is all of that taken into account in this report?
Semi-related: Can someone explain to me California CRV on recyclable containers? My understanding is that this is meant to encourage recycling, but the deposit amount you pay at the store doesn't equal what you get when you recycle your containers. I checked out the Wikipedia page, and it explains how the "Redemption Value" has changed over the years. If you take one of those large 2.5 Gallon containers of Arrowhead Water you are charged an additional $.50 each! There is no way you get that much to recycle it. How many bottles are sold annually in California? That looks like clear additional tax revenue. To add insult to injury, you are charged sales tax on the CRV deposit!
I believe the private recycling companies that operate the redemption centers do get the full CRV, rather than the state keeping it (though the state keeps the sales tax on the CRV). If you go as an individual to a recycling company to return containers for a refund, they pay you less than the CRV, the difference going to their costs and profit. Since it seems to not be a very competitive market (recycling centers aren't really competing for your business by offering higher redemption values), almost all of them pay the minimum redemption value that CA law requires them to pay.
Thanks for the explanation, but I don't think I feel better about it. If the recycling center gets my deposit I'm wondering why they need it. I thought the point of a recycling center was that the material they collect (aluminum, plastic, paper etc.) is profitable to collect. The CRV is labeled as a "deposit". To me that should be like a bank term, i.e., you can reclaim what you leave initially. I'm at a loss to understand why this deposit is not fully refunded (which would further encourage recycling!), or at least something reasonable like say 75%.
I think only aluminum is unquestionably profitable to collect; everything else is marginal or a loss. But yeah, there does seem to be some bait-and-switch here.
Man, those percentages in the chart at the end are really whacky.
Someone making $75,000/year pays a higher % tax their entire life than someone making $200,000/year? Someone making $20,000/year (at 30) pays almost twice the % as someone making $50,000/year (at 30)?
SS and FICA are very regressive. It's interesting that the lowest rates roughly correspond with the median income - as if the rates were tailored to get the lowest rates to the majority of the voters, while screwing (relatively) much smaller groups at the ends of the scale.
It's not so much regressive as it is "supposed" to be a penion insurance plan separate from the rest of your taxes. There is a cap on benefits, so there's a cap on what you contribute to it, not unlike the cap on contributions to a 401(k) or IRA.
Of course, we never got our lockbox so the upcoming generation of retirees elected governments that spent that retirement money on other stuff now wants to raise taxes so that the current young folks can pay for their irresponsibility.
The cap is per person. However, payouts increase by 50% for married couples where only one person worked. This is then cut in half if the spouse who worked dies. If the non working spouse dies then the worker is left with their normal benefit.
Edit: Each benefit is considered independently, so if you both made the same amount then there is no increase in maximum payout, however you can take the spouses lower benefit early (62) and put off using your benefit till (67) which would increase your total payout assuming you lived to 85.
It's not. We British like to complain about being ripped off but we're better off than we think. Having moved to Canada much more leaves my paycheck than it would in the UK and, according to an online calculator, the same would be true if I moved to the States.
The things that really hurt in the UK are things like power and fuel costs, council taxes, and various other mortgage-related taxes. That's where I'm really seeing the difference.
I'm guessing they assume a 30-year old couple has purchased a house recently (large mortgage interest deduction), and has student loans still (student loan interest deduction up to 6K/year I think, which goes away after 80K or so. IANAA).
Between those two things, plus the general tax benefits of being married (and 50K not being that much for two people imho) give them a low tax rate.
the true tax rate = total government spending divided by GDP.
This is why Republicans, who've historically increased government spending, thus have increased real tax rate (while of course giving narrowly targeted breaks to themselves)
http://www.kotlikoff.net/sites/default/files/Does%20It%20Pay...
and perhaps the most practical bit is here:
The paper provides four main takeaways. First, thanks to the incredible complexity of the U.S. fiscal system, it's essentially impossible for anyone to understand her incentive to work, save, or contribute to retirement acounts absent highly advanced computer technology and software. Second, the U.S. fiscal system provides most households with very strong reasons to limit their labor supply and saving. Third, the system offers very high-income young and middle aged households as well as most older households tremendous opportunities to arbitrage the tax system by contributing to retirement accounts. Fourth, the patterns by age and income of marginal net tax rates on earnings, marginal net tax rates on saving, and tax-arbitrage opportunities can be summarized with one word - bizarre.