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Taxation for Suckers
Mike Ahlf
Slate's got an interesting pair of articles on taxation up today. The first explains why US tax policy has made
saving money a sucker's bet for the lower and middle income brackets, offering that up as a possible reason why the US personal savings rate is steadily dropping. The second offers up some
rather insane "bold ideas" on how to change the tax code.
The second article offers up some odd ideas - one being a tax system in which a basic threshold of income was tax-free, another bracket taxed at 50%, and anything other than that at 30%, which would make the "richest" pay at a rate that equates to just about 30%, while the poorest paid nothing and those who earned exactly enough to match the 50% bracket were actually paying 25% of their total income. The basic idea is to make "extra work" and "extra income" taxed at less of a rate than the "base" income, not more. Intriguing to play with in theory, but I doubt you'd be able to get most of the US taxpayers to understand the math.
A tax on the middle-aged? Ouch. Seriously; based on general life-cycle, one would expect that the 40-45 year old bracket are the ones trying to pay for their kids' college educations. Slap a tax on them right at that moment, and watch the pain ripple everywhere.
As for the genetics thing, see
Gattaca.
The first article is the more intriguing, because it offers up an interesting picture - that people are investing less because they are making a conscious choice that saving money isn't worth it. I'm not quite ready to accept that explanation, mostly because it assumes far too much intelligence on the part of people who've proven (in general) not to have it. Don't get me wrong: the math definitely holds up. However, it's my opinion that the phenomenon of less savings is driven more by conspicuous consumption and a generation of people who've grown up not being taught how to live within their means; thrift, savings, and money management were just something that didn't seem to get taught to the generations who were kids during the 70s and 80s, and society may be paying that price today.
The other thing is that certain investments (indeed, some investments people ought not be making) have become more attractive than personal savings accounts and Certificates of Deposit. Primary among these has been home ownership, the housing market, and the "Home Equity Loan" (a great renaming of the proper term, which used to scare a lot of people off: "Second Mortgage").
People are being told that they are supposed to consume. Movie rental businesses are down, movie buying is up - not surprising when the price of new and used DVD's has become what it is. Instead of a "reasonable" television, a lot of people are spending way too much on a larger screen TV; they also don't do proper shopping research on the make, the model, and the longevity of the purchase. The end result is that people have replaced the old pattern of researching what they needed, finding a product to match, comparing prices to get the price range, saving up money to purchase, and then going and purchasing it from the supplier who offers the best price and options (paying a little more to a company more likely to honor the warranty, for example, might be warranted).
What's it been replaced with? "Ooh, shiny" and the production of a credit card. Not a good economic model for people to live by.
Observations
<i>However, it's my opinion that the phenomenon of less savings is driven more by conspicuous consumption and a generation of people who've grown up not being taught how to live within their means; thrift, savings, and money management were just something that didn't seem to get taught to the generations who were kids during the 70s and 80s, and society may be paying that price today.</i>
I think that's definitely a large factor. Another factor (that's probably only applicable to the slice of the population in which I was raised) is people expecting the same sort of lifestyle right out of college that their parents worked twenty years to be able to afford. That's not reasonable and attempts to do so are sinking people in consumer debt.
"expecting the same sort of lifestyle right out of college that their parents worked twenty years to be able to afford"
I'd think that is almost the textbook example of someone who doesn't know how to live within their means, and I see a lot of that - the college kids passing through the halls today, the neighbors down the street. I'm rather fortunate to have a good job, and to be working on paying down my debts (which are the result of housing changes and automobile repairs, not my spending habits) at a good pace right now.
[i]why the US personal savings rate is steadily dropping.[/i]
Unfortunately, the premise isn't true -- or rather, it's only true if you exclude investments like homes, 401ks, IRAs, and the like from the "savings" equation. Then you discover that yes, Americans find that the return on passbook savings accounts isn't very good, and they don't invest most of their money in such instruments.
The fact is, American household wealth has never been higher -- and it's growing. That's a much more important indicator of American financial health than how much Americans use low-interest passbook savings accounts.
This nagging about the alleged lack of savings is mostly a confused lament that we're no longer in the 1950s any more, Toto, and that Americans invest their enormous household wealth in instruments others than passbook savings accounts. Good for us!
/I'd think that is almost the textbook example of someone who doesn't know how to live within their means,/
I don't think the issue is that they don't know how to live within their means so much as they believe that they are due a lifestyle wherein the can't live within their means.
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