Tuesday, August 09, 2005

The road to serfdom

Demographics leading to a 33% GST? Niall Ferguson and Laurence J. Kotlikoff, in The New Republic, are offering up solutions for reforming American social security programs, programs that are predicted to come under serious strain in the future due to changes in demographics. We can learn a lot about the kind of suggestions Ferguson is going to advance by perusing the kind of books he writes. Are you ready? Ferguson and Kotlikoff are proposing a national sales tax, something along the lines of the Goods and Services Tax that we have been paying in Canada for years now. Our GST is set at 7% and is much reviled. Here is a look at the proposed Federal Retail Sales Tax (FRST):
The sales tax would be levied on all final-consumption goods and services. Its tax rate would be set at 33 percent--high enough to cover the costs of the new New Deal's Social Security and health care reforms as well as meet the government's other spending needs. This rate sounds high compared with an income tax in part because of the way sales taxes are levied. Earning a dollar and having to pay 33 cents in taxes when you spend it leaves you with only 75 cents of consumption, because 75 cents multiplied by 1.33 equals $1. The effect is the same as if you earn a dollar and pay a 25 percent income tax, which also leaves you with 75 cents of consumption. So a 33 percent sales tax is actually equivalent to a 25 percent income tax. Put in these terms, a 33 percent sales tax is actually not very high. Indeed, if you add up the personal income, corporate income, and fica taxes that households pay, either directly or indirectly, you find out that the vast majority face combined average and marginal direct tax rates above 25 percent. Will taxing consumption rather than income reduce spending and put the economy in recession? No, it will shift spending away from consumption goods and services to investment goods, which will help the economy grow through time. As today's China and yesterday's Japan show, economies that shift from consuming to saving and investment can achieve tremendous performance.
I'm no economist but my good heavens is there a bunch of crud jammed into this proposal, starting with this bogus distinction between "consumption goods" and "investment goods." It should be noted that the article does not define either term. People who produce so called consumption goods earn - and spend - real wages, just like other producers. The article also completely overlooks the amount of work that goes into taxing billions of transactions, as opposed to taxing income once a year. Then there is the possibility of all the money "generated" being abused, Enron style, by the government. Taxes, at also has to be pointed out, "generate" diddly squat. They re-direct the flow of money, assuming that the people who created it, can't possibly know how to spend it better than some guy armed with a degree in one hand and a study in the other. Simply put, you will never, never increase wealth by making production more difficult, or less rewarding, or by adding unnecessary oversight. You need workers who work, hopefully work smartly and efficiently. Not everyone needs to be an efficiency genius, however. How do you cut hair more efficiently? The most important factor is having healthy bodies on hand. In addition, distributed decision making is smarter than any expert, no matter how smart or how well educated. I'll take a hundred random IQ's over one 140 IQ any day of the week, especially if they are dealing with a area they are familiar with (don't believe me? Check out the returns on Index Funds vs. actively managed funds). That kind of decision making is what democratic free markets are supposed to tap into. Then one has to ask, who is going to hold up China as a better model, with low wages, crummy working conditions and little regard for the environment?
What is giving rise to such radical proposals? It's the demographics that will shape the future. Very simply put, the ratio of dependents to wealth creators is out of whack:
In 25 years, when almost all 77 million members of the baby-boomer cohort have retired, we'll have twice the number of elderly, but only 18 percent more workers to pay their benefits. The entire country will look, feel, and be a lot older than present-day Florida. By 2050, we will have as many old old (85 and over) people as the current populations of New York, Los Angeles, and Chicago, and as many centenarians as there are people in Washington, D.C. Meanwhile, the United Nations also projects that the total fertility rate (births per woman) may fall below two in the next decade, and it could be as low as 1.85 in 20 years. Immigration will only partially compensate for these trends. Taken together, they mean that the elderly dependency ratio (the ratio of the population 65 years or older to the population 15 to 64) could very nearly double over the next 45 years, from 0.18 to 0.33.
You don't think abortion or family planning has anything to do with this, do you? You don't think simple reforms based at supporting young families could fix this problem for considerably less than a 33% shuffling of the chairs on the intergenerational Titanic Roe has created, do you? When this plan fails you just know they'll propose offing the old people... if they don't die from neglect first. People working two jobs to put a roof over their heads don't have a lot of time to check on how Mom and Dad are doing.

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