Arnold Kling  

U.S. as Debtor

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Economics vs. Populism... Stock Options as Tax Deferral...

Ken Rogoff, former chief economist of the International Monetary Fund, finds it odd that the United States is a borrower rather than a lender in international capital markets.


Isn't it even stranger that this borrowing includes sizable chunks from countries such as India and China, many of whose 2.3 billion people live on less than a dollar or two a day
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Even with the morality of it all set aside, pure self-interest ought to dictate that the United States be a net lender to the rest of the world rather than a borrower. We are an aging population that ought to be saving for retirement in real assets abroad.

For Discussion. Rogoff does not make any specific policy proposals. He allows that with our economy operating below potential, now is not the time to restrain consumption. In the mediurm term, what policies would increase national saving in the United States?



COMMENTS (16 to date)
Sean writes:

For starters, eliminate the biases in the tax code against savings.

Eric Krieg writes:

I would be a very happy man if places like India and China saved less and spent more. There is global overcapacity in every industry. This overcapacity would be addressed if countries like India, China, Japan, and Germany became less export oriented and more domestic consumption oriented.

I have a theory, tell me if you agree or not. One reason Americans don't save is that interest rates are so low here. One reason that interest rates are low is that foreigners are so eager to buy US debt. If China, Japan, and others weren't so eager to reinvest their trade dollars in US Treasury debt, or other US debt, interest rates would rise and Americans would save more.

I wonder to what extent the trade deficit and our low savings rate are related, and to what extent the mercantilist trade policies of China, Germany, and Japan are responsible.

Boonton writes:

Bias in the tax code for savings? Which is a more lucrative way to earn a living from a tax perspective: Making a living off of accumulated savings or making a living off of wage income?

Eric Krieg writes:

>>Which is a more lucrative way to earn a living from a tax perspective: Making a living off of accumulated savings or making a living off of wage income?

That would depend if you do your accounting correctly or not.

Do you account for the double taxation of corporate income taxes?

On the other hand, you have the TRIPLE taxation of Socialist Insecurity (payroll tax, income tax on your wages, income tax on your benefits).

I honestly don't know which would come out ahead.

Boonton writes:

Considering that long term capital gains are taxed at a reduced rate, that you can shelter a lot of income generated from savings in 401K's, IRAs, those college plans etc.... You are almost certainly better off making $50K per year from savings generated income than you are making $50K from a regular job.

Corporations are only doubly taxed if they distribute income to you in the form of dividends (which has recently been changed). Even calling it double taxation is dubious because the whole point of a corporation is that it is a legal 'person'. It is a distinctly different entity from its owners.

Eric Krieg writes:

>>Even calling it double taxation is dubious because the whole point of a corporation is that it is a legal 'person'. It is a distinctly different entity from its owners.

Yes, but an income stream is an income stream. Just because it runs through a "legal entity" doesn't change the fact that it eventually is dispersed to a stockholder. It is double taxation.

As for tax deferred savings, the operative word is deferred. It eventually is taxed at income tax rates. So almost by definition it is no different than income.

In actuality, the Feds are banking on the fact that, if you take your 401k seriously, you will pay more in income taxes at retirement than you would if you had kept the money in a taxable account, paying long term capital gains taxes.

Look into the rules about minimum disbursements. If you have a lot in your 401k, you need to disburse a sizable amount every year. It doesn't take much to get into the 25% tax bracket these days.

Boonton writes:

I disagree with the conventional conservative wisdom regarding double taxation on corporations. Income stream or not corporations are seperate entities that enjoy protections that other business forms do not (limited liability). If I pay Eric $150 to write my econ paper that is taxable income to Eric, no one considers it 'double taxation' that I paid taxes also to earn that $150. But if you insist then the tax game remains in the savers favor since payments by corporations to employees and vendors should also be considered 'already taxed' making wage income 'double taxed' as well.

I agree that tax deferred is not the same thing as tax free, but it's closer. While you won't be able to avoid all taxes if you build up a massive 401K, the ability to have some control over your disbersements means you can time them to minimize taxes in a way that is not easy to do for wage income. The Roth IRA even eliminates this problem by making the withdrawls tax free. You still have limits on how much you can put in but that is almost certain to be raised in the future.

Jim Glass writes:

"...finds it odd that the United States is a borrower rather than a lender in international capital markets"

That's like saying it's odd that on net there are more good investment opportunities in the US economy than elsewhere.

I dunno, where else would it seem there should be superior investment opportunities on sufficient scale? Japan? Germany?

"Isn't it even stranger that this borrowing includes sizable chunks from countries such as India and China..."

Well, as to China this is the result of explicit government policy based on capital controls. It's not like it's the result of free financial markets at work.

Eric Krieg writes:

If we didn't have progressive income tax rates, and capital gains and income were taxed at the same rates, there wouldn't be any reason to defer taxes. You would end up with the same after tax income in retirement whether you paid the taxes now or then.

But we do have a progressive income tax, and you as an individual have to determine at what time point you are going to pay the least taxes. For the best savers, that MIGHT not be in retirement.

Eric Krieg writes:

>>I dunno, where else would it seem there should be superior investment opportunities on sufficient scale? Japan? Germany?

To what extent are the Germans and Japanese and other foreigners investing in the productive capacity of the American private sector, and to what extent are they just buying Treasuries?

Or does it simply not matter?

If they are buying Treasuries, does that artificially lower interest rates overall? And what effects does that have, on the entire economy as well as the personal savings rate of Americans?

If the Japanese did not recycle their trade dollars into American investments, that would cause the dollar to fall and the yen to rise. That would help US export oriented industries, but it might not be the best thing for the economy overall. Inflation would increase, that's for sure. I'm not sure what the savings implications would be.

Boonton writes:

Actually it would make sense to defer taxes even in a flat tax world. Like deferred payments, deferred taxes are able to sit in your account earning you returns until you finally pay them.

Lawrance George Lux writes:

The reason Americans do not save more comes for the predatory Price scheduling of Corporations today. They are the determinant element in setting Prices in the Economy, and they set prices to maximize their own Investment schedules. This practice robs the individual consuming Household of the elasticity necessary to invest at rates equivalent to China or Japan.

The questions of IRAs and Progressive taxes are over-complicated. Corporations should be taxed because they are an operating entity within the economy, and their operational income should be taxed as Income. The idiotic nature of Income taxes today incites the need for Deferments. A Flat tax would not alter a need for Deferments, as Investment income would be added to Wage income like previous Post has mentioned. The Progessive Income tax, though, should have all deductions, tax credits, and other tax reductions removed; this with the purpose of setting realistic tax rates. A tax rate starting at 5%, increasing 2% per Ten Thousand dollars additionally earned, and increased up to $200,000 of Income per year would be best; if taxation started at Income above $20,000, and all Income--Income, Capital Gains, Corporte Income, etc.--was taxed. lgl

Monte writes:

>>In the medium term, what policies would increase national saving in the United States?

Eric Krieg writes:

>>But this idea seems to have lost some traction due, I suspect, to an omnipotent anti-national sales tax lobby.

Come on, Monte. That's just another scheme to increase taxes on the poor and let the rich get richer. Sales taxes are regressive, after all. The proportion of taxes paid by the rich would fall dramatically.

In all seriousness, wouldn't a national sales tax have to be set so high as to guarantee a huge black market?

Monte writes:

>>Come on, Monte. That's just another scheme to increase taxes on the poor and let the rich get richer. Sales taxes are regressive, after all. The proportion of taxes paid by the rich would fall dramatically.>In all seriousness, wouldn't a national sales tax have to be set so high as to guarantee a huge black market?

Monte writes:

>>Come on, Monte. That's just another scheme to increase taxes on the poor and let the rich get richer. Sales taxes are regressive, after all. The proportion of taxes paid by the rich would fall dramatically.

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