Posted on 07/10/2006 10:59:12 AM PDT by Paul Ross
Synopsis
Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives.
It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.
The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.
_Preface
Is the U.S. bankrupt? Or to paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bear, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?
Many would scoff at this notion. They’d point out that the country has never defaulted on its debt; that its debt-to-GDP (gross domestic product) ratio is substantially lower than that of Japan and other developed countries; that its long-term nominal interest rates are historically low; that the dollar is the world’s reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries.
Others would argue that the official debt reflects nomenclature, not fiscal fundamentals; that the sum total of official and unofficial liabilities is massive; that federal discretionary spending and medical expenditures are exploding; that the United States has a history of defaulting on its official debt via inflation; that the government has cut taxes well below the bone; that countries holding U.S. bonds can sell them in a nanosecond; that the financial markets have a long and impressive record of mispricing securities; and that financial implosion is just around the corner.
This paper explores these views from both partial and general equilibrium perspectives. The second section begins with a simple two-period life-cycle model to explicate the economic mean-ing of national bankruptcy and to clarify why government debt per se bears no connection to a country’s fiscal condition. The third section turns to economic measures of national insolvency, namely, measures of the fiscal gap and genera-tional imbalance. This partial-equilibrium analy-sis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.
The world, of course, is full of uncertainty. The fourth section considers how uncertainty changes one’s perspective on national insolvency and methods of measuring a country’s long-term fiscal condition. The fifth section asks whether immigration or productivity improvements arising either from technological progress or capital deepening can ameliorate the U.S. fiscal condition.
--SNIP--[skipping ahead to the meat of the paper]
THE U.S. FISCAL CONDITIONAs suggested above, the proper way to consider a country’s solvency is to examine the life-time fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy. Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.
Consider, for starters, Gokhale and Smetters’s (2005) analysis of the country’s fiscal gap, which measures the present value difference between all future government expenditures, including servicing official debt, and all future receipts. In calculating the fiscal gap, Gokhale and Smetters use the federal government’s arbitrarily labeled receipts and payments. Nevertheless, their calcu-lation of the fiscal gap is label-free because alter-native labeling of our nation’s fiscal affairs would yield the same fiscal gap. Indeed, determining the fiscal gap is part of generational accounting; the fiscal gap measures the extra burden that would need to be imposed on current or future generations, relative to current policy, to satisfy the government’s intertemporal budget constraint.
The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion! This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.
The Gokhale and Smetters study is an update of an earlier, highly detailed, and extensive U.S. Department of the Treasury fiscal gap analysis commissioned in 2002 by then Treasury Secretary Paul O’Neill.
Smetters, who served as Deputy Assistant Secretary of Economic Policy at the Treasury between 2001 and 2002, recruited Gokhale, then Senior Economic Adviser to the Federal Reserve Bank of Cleveland, to work with him and other Treasury staff on the study. The study took close to a year to organize and complete. Gokhale and Smetters’s $65.9 trillion fiscal-gap calculation relies on the same methodology employed in the original Treasury analysis. Hence, one can legitimately view this figure as our own government’s best estimate of its present-value budgetary shortfall. The $65.9 trillion gap is all the more alarming because its calculation omits the value of contingent government liabilities and relies on quite optimistic assumptions about increases over time in longevity and federal healthcare expenditures.
_____________________________________________________
Laurence J. Kotlikoff is a professor of economics at Boston University and a research associate at the National Bureau of Economic Research.
© 2006, The Federal Reserve Bank of St. Louis. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.
Thanks. That's what I thought. So the tax is subtracted but the gain is not added. I wonder if the savings rate would be positive if gains were added?
In your case and assuming there is a 12% decrease in prices due o the removal of the income tax (keep in mind there's a 7.65% difference just in the Employer portion of payroll taxes alone plus the business income taxes), and spending all the $40,000 with no other taxable income you'd have a slight gain in purchasing power of something like) 0.31%. While that may not be much, if you economize by spending only, say, $34,100 (maybe putting some extra investments to work since they're tax free) you'd bump your purchasing up by from 0.31% TO 2.52%.
That's a heckuva' lot better than a poke in the eye with a sharp stick and there's no gift or estate tax to be concerned and no AMT and no filing or reporting of any sort of paperwork about your income of any sort to the government - it's none of their business.
It's called FREEDOM!!
Great, so my income tax goes from 0% to 0% and my sales tax jumps to 20%?
Let's say you're married and that for 2006 you spent your entire $40,000 on taxable things.
Reread my post, my $40,000 is Muni bond interest. Non-taxed.
Let me get this straight, my income is no longer taxed and prices I pay for things will decrease? Where do I sign up for such a wonderful system?
It's called FREEDOM!!
I call it perpetual motion!!
First of all your taxes presently are NOT zero - you merely think they are (and you're assuming that none of your investment money will ever yield taxable results which may or may not be true); your current taxes are in fact a good bit more than zero since there are hidden taxes embedded in all that you buy (whether used or not). In #220 I was illustrating your spending the entire $40,000 for taxable things under the FairTax (not the income tax) - a worst case scenario.
When income taxes go away with the FairTax, prices will drop (before being taxed again with the FairTax). There is a 7.65% amount in the employer's portion of payroll taxes plus the amount of business income taxes plus compliance costs all embedded into prices presently. These become zero under the FairTax and you may get the $4,508 prebate amount for the year which helps make your EFFECTIVE tax rate under the FairTax 11.73% even when you spend the entire $40,000 on taxable things.
I also showed that your purchasing power will increase under the FairTax meaning that you can buy more "stuff" with the same amount of money. If the price decrease caused by removing the income tax system amounts to only 12% you'll have the purchasing power increase as pointed out in #222. Nowhere in either post did I say your taxes would be 20% - where did that come from?
And read what I said in #222 more closely, I did not say that prices would drop and remain there after income tax removal. I said that in that case prices would drop when the income tax went away and THEN with the advent of the FairTax the total amount you'd pay including the FairTax) would go back up but that this would be offset by both the price decrease from the IT removal AND the receipt on your part of the prebate (the $4,508 figure for 2006), making your purchasing power increased as I showed in #222. That's certainly neither magic nor hard to understand (unless you wish not to for some reason).
You'd get a much better insight into the benefits of the FairTax by spending a bit of time on FairTax website.
There's lots of helpful information there on many, many different topics. Check the FAQs and Rebuttals for example.
I never said all my taxes were zero, just my income tax.
your current taxes are in fact a good bit more than zero since there are hidden taxes embedded in all that you buy (whether used or not). In #220 I was illustrating your spending the entire $40,000 for taxable things under the FairTax (not the income tax) - a worst case scenario.
Sales taxes and embedded taxes in my purchase price, right?
I also showed that your purchasing power will increase under the FairTax meaning that you can buy more "stuff" with the same amount of money.
So, my income increases (income and Soc Sec taxes now zero), prices will fall (that's what you mean by increased purchasing power) and I get a prebate?
Does the FairTax raise the same revenues for the government?
If you realize that even with what appears to be zero income tax you still actually pay some income tax that is hidden you are far ahead in understanding compared to many taxpayers.
Does the FairTax raise the same revenues for the government""So, my income increases (income and Soc Sec taxes now zero), prices will fall (that's what you mean by increased purchasing power) and I get a prebate?
The answer to both points is yes (but it's really not your income that increases but your DPI - disposable personal income or purchasing power). At the 23% tax inclusive rate presently in HR25, the FairTax is revenue neutral as several different economic studies have shown. Keep in mind that the FairTax base of consumption is much greater than the income (wage) base. Roughly the same percentage rate in each (both are expressed in tax inclusive rates) yields more revenue under the FairTax than under the income tax due to the greater base.
The real concern is that with the economic improvement that comes with the FairTax, the rate will most likely need to be lowered before too long so that too much is not taken in ... and it'll be up to us as voters to raise hell with the congressmen to keep government from raising spending apace. We'll need to be hard on them to reduce spending as well as reduce the tax rate. Both will be possible.
Yes, I realize you weren't referring to state sales tax.
The answer to both points is yes (but it's really not your income that increases but your DPI - disposable personal income or purchasing power).
So, DPI increases, prices fall and government revenues stay the same? And I get a prebate. Still sounds like a free lunch.
That, I totally agree with. There is no doubt that elimination of state usury laws in the 70s when inflation was rampant has allowed "financial" institutions to rape Americans with credit card interest rates well beyond Mafia rates has been a difference. The recent changes in bankruptcy laws will likely keep the true scofflaws under control and perhaps stop young financial illiterates (I have one child who is one and it cost me a lot to bail her out) and compulsive spenders from ruining their lives. While the bankruptcy law change was good, I'm strongly in favor of a return to usury laws, be it state or federal. Easy credit is not a good thing. Credit needs to be earned and sadly, some people need to be protected. It is unconsiencealbe what these credit card companies do to people.
But the point of my post was that if you look at the raw debt numbers without looking at other measures, the year 1946 would have seen the United States slip abruptly into 3rd world status. I haven't bothered to look at the relevant numbers, but I know that the national debt compared to GDP then was staggering compared to today. Instead of collapsing, we went on to what has been a 60 year nearly unbroken economic expansion.
"So, DPI increases, prices fall and government revenues stay the same? And I get a prebate. Still sounds like a free lunch."
No it's not a lunch and it's not free - it's merely simple economics. Read the paragraph in #227 that starts "The answer to both points is yes ..." very slowly a few times and reflect upon what it says. It's something a lot of people miss.
I guess I'm not as impressed by those numbers, but - like you - I really detest the runaway debt economy that we now have (and yes, I've got one of those plastic babies, too). At some point that is going to have to cause a severe correction I think.
Okay.
The answer to both points is yes (but it's really not your income that increases but your DPI - disposable personal income or purchasing power). At the 23% tax inclusive rate presently in HR25, the FairTax is revenue neutral as several different economic studies have shown. Keep in mind that the FairTax base of consumption is much greater than the income (wage) base. Roughly the same percentage rate in each (both are expressed in tax inclusive rates) yields more revenue under the FairTax than under the income tax due to the greater base.
So, revenue neutral means the government gets the same money. "DPI increases" means I have more money in my pocket.
I also showed that your purchasing power will increase under the FairTax meaning that you can buy more "stuff" with the same amount of money.
Great, this must mean prices will drop. Is there anything the FairTax can't do?
I'm telling you, this is perpetual motion. Sign me up!!
I think the "old math" provides a much better foundation from which to judge. I'm sticking to the old stuff.
Now how do I post a picture of a geezer-ette in a rocker?
Mark
I wonder if the savings rate would be positive if gains were added?
I have never seen a break down of wins vs losses on dollar volume basis or how much of asset sales revenue is rolled right back into the same markets essentially continuing its character as an unrealized gain or loss as opposed to what would be produced income if we were discussing it in a business inventory sense.
At the 23% tax inclusive rate presently in HR25, the FairTax is revenue neutral as several different economic studies have shown. Keep in mind that the FairTax base of consumption is much greater than the income (wage) base. Roughly the same percentage rate in each (both are expressed in tax inclusive rates) yields more revenue under the FairTax than under the income tax due to the greater base.So, revenue neutral means the government gets the same money. "DPI increases" means I have more money in my pocket.
Yea, more money in your pocket, but pay no attention to the 30% sales tax. Apparently, unless someone is using clever double talk, "revenue neutral" means the government gets MORE money...On the one hand it's revenue neutral, on the other it "yields more revenue"...depending on what you want to believe I guess.
BTW, The Fairtax is "23% OF the gross payments"(including itself) not 23% ON the price.
$100 = $130.00...$30 is 23% OF $130(gross payment).
At the same time I found out that the flat rate income tax that was overturned was like the one Lincoln used a few decades earlier with no SCOTUS problems. Let me know when you find that link that says those guys make sense and follow the same constitution we do-- you're sure to find that link because you don't make mistakes like I do --at least none to speak of that is.
SCOTUS barring the vat tax,
Since a retail sales tax is not a VAT as it does not tax the purchases of businesses, such would not be applicable in any case, not to mention that taxes on any articles of consumption are indeed taxable as an indirect tax under the Article I Section 8 clause 1 of the Constitution.
the link I'd been using turned to be for the flat tax
Oh the Civil War income tax that was ruled on in Pollock decisions.
You are indeed right that Pollock decided that portions of the Civil War income tax was unconstitutionally applied.
SCOTUS ruled that taxes on the rent from real estate, dividends and interest from financial instruments were actually fruit of property ownership and to be considered an integral part of that property thus taxation of such must be by the rule of apportionment by state population rather than the rule of uniformity which requires the tax to be applied the same regardless of the state in which it is collected.
Taxation of owners on the basis of their ownership of property is considered a direct tax under prior rulings of SCOTUS:
Hylton v. United States(1796), 3 U.S. 171
"A general power is given to Congress, to lay and collect taxes, of every kind or nature, without any restraint, except only on exports; but two rules are prescribed for their government, namely, uniformity and apportionment: Three kinds of taxes, to wit, duties, imposts, and excises by the first rule, and capitation, or other direct taxes, by the second rule. " "[T]he DIRECT TAXES contemplated by the Constitution, are only two, to wit, A CAPITATION OR POLL TAX, simply, without regard to property, profession, or any other circumstance; and a tax on LAND."
in light of Hamilton's characterizations and Congress' historical application of property taxes as direct taxes.
- "A nation cannot long exist without revenues. Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province. This is an extremity to which no government will of choice accede. Revenue, therefore, must be had at all events. In this country, if the principal part be not drawn from commerce, it must fall with oppressive weight upon land."
- "It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation."
- "The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury."
- It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. ... Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country.
Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment. Either the value of land, or the number of the people, may serve as a standard. The state of agriculture and the populousness of a country have been considered as nearly connected with each other. And, as a rule, for the purpose intended, numbers, in the view of simplicity and certainty, are entitled to a preference.
The Court in the Pollock ruling found that portion of the income tax to be unconstitutional for not being apportioned by state population under the rule of apportionment, improperly treating such as indirect taxes instead.
The Pollock Ruling lays their rationale and the limits of their rulings very clearly:
POLLOCK v. FARMERS' LOAN & TRUST CO., 158 U.S. 601 (1895):
- "We have considered the act only in respect of the tax on income derived from real estate, and from invested personal property, and have not commented on so much of it as bears on gains or profits from business, privileges, or employments, in view of the instances in which taxation on business, privileges, or employments has assumed the guise of an excise tax and been sustained as such."
- "If that[rents from land] be stricken out, and also the income from all invested personal property, bonds, stocks, investments of all kinds, it is obvious that by a r the largest part of the anticipated revenue would be eliminated, and this would leave the burden of the tax to be borne by professions, trades, employments, or vocations; and in that way what was intended as a tax on capital would remain, in substance, a tax on occupations and labor. We cannot believe that such was the intention of congress."
- "We do not mean to say that an act laying by apportionment a direct tax on all real estate and personal property, or the income thereof, might not also lay excise taxes on business, privileges, employments, and vocations. "
- Our conclusions may therefore be summed up as follows:
First. We adhere to the opinion already announced,-that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes.
Second. We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes.
Third. The tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate, and of personal property, being a direct tax, within the meaning of the constitution, and therefore unconstitutional and void, because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid.
- Mr. Justice WHITE, dissenting.
16. The injustice of the conclusion points to the error of adopting it. It takes invested wealth, and reads it into the constitution as a favored and protected class of property, which cannot be taxed without apportionment, while it leaves the occupation of the minister, the doctor, the professor, the lawyer, the inventor, the author, the merchant, the mechanic, and all other forms of industry upon which the prosperity of a people must depend, subject to taxation without that condition.
Let me know when you find that link that says those guys make sense and follow the same constitution we do
Pollock and Hylton serve quite well, seeing as both appear to be remaining true to the powers of Congress as they are expressed in the Constitution.
The prior ruling of Spinger, found the Civil War income tax to be an indirect tax on the basis that it did not tax the whole of a personal estate as would be the situation in a property tax, thus not a direct tax on property.
Springer v. United States(1880), 102 U.S. 586
"The central and controlling question in this case is whether the tax which was levied on the income, gains, and profits of the plaintiff in error, as set forth in the record, and by pretended virtue of the acts of Congress and parts of acts therein mentioned, is a direct tax." "The tax here in question falls within neither of these categories. It is not a tax on the 'whole . . . personal estate' of the individual, but only on his income, gains, and profits during a year, which may have been but a small part of his personal estate, and in most cases would have been so. This classification lends no support to the argument of the plaintiff in error." "Our conclusions are, that direct taxes, within the meaning of the Constitution, are only capitation taxes, as expressed in that instrument, and taxes on real estate; and that the tax of which the plaintiff in error complains is within the category of an excise or duty." "[W]hen ever the government has imposed a tax which it recognized as a direct tax, it has never been applied to any objects but real estate and slaves." "If the laws here in question involved any wrong or unnecessary harshness, it was for Congress, or the people who make congresses, to see that the evil was corrected.
The remedy does not lie with the judicial branch of the government."
Let me know when you find that link that says those guys make sense and follow the same constitution we do
You might try to read the actual case decisions rather than to read other's mischaracterisations of them for one thing. It is occasionally eye opening.
Does the SCOTUS get it wrong at times, yep I would say so, however any suit in law must come to a conclusion at some point, the Constitution placed a limit on settling cases by making the SCOTUS as that court of last resort. Like it or not, that is what we have. Fortunately, with time even Courts that show a tendency to be in error are ultimately correctable with eventual new blood and retesting of issues in error.
you're sure to find that link because you don't make mistakes like I do --at least none to speak of that is.\
Seeing as I have shown the ability to adjust when my opinions are in error in this thread, over the issue of capital gains as a a component of discretionary income. It is demonstrable that mistakes are made by anyone. That however does not prevent discussion, nor does it indicate that all who are in error at some point, must be always in error in all things.
Sorry, but you appear to be trying to construct a logical fallacy here. I know you can do better than that to get your valid points across. The invalid one, one should be ready to backtrack and reevaluate just where they do stand and need correction.
The portents in the direction of eventual fiscal collapse, if nothing is changed in regard current programs and the spendthrift behaviours of Congress, are not encouraging.
This is not the fault of government as government does that which comes naturally to it, grow and become more burdensome.
The fault, where such can be attributed, must be laid directly at the doorstep of the American people. For only the electorate are, in the ultimate analysis. those responsible for final oversight of what this nation's Republic becomes.
The condition upon which God hath given liberty to man is eternal vigilance; which condition if he break, servitude is at once the consequence of his crime and the punishment of his guilt."
-John Philpot Curran: Speech upon the Right of Election, 1790. (Speeches. Dublin, 1808.)
http://www.heartland.org/Article.cfm?artId=10714Can the liberties of a nation be thought secure when we have removed their only firm basis, a conviction in the minds of the people that these liberties are a gift of God? Indeed I tremble for my country when I reflect that God is just; that His justice cannot sleep forever.
Thomas Jefferson
Notes on the State of Virginia (1781-1785) Query 18“A general dissolution of principles and manners will more surely overthrow the liberties of America than the whole force of the common enemy. While the people are virtuous they cannot be subdued; but when once they lose their virtue they will be ready to surrender their liberties to the first external or internal invader.”
--- Samuel Adams
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