Hate to just post a +1, me too, but this, it seems, just isn't be said or recognized enough. The US, with one of the lowest tax burdens in the western world (the lowest?) can easily afford to pay down it's debts but without any support for raising taxes in the slightest, not just amongst republicans but from what it seems are a vocal and loud minority (majority?) of Americans, no one can really act surprised by S&P's decision here.
It isn't our current debts that have people concerned. It's the combination of current debts and unsustainable future obligations, which are so large that they in fact can't be paid down by just raising taxes. Barring an adjustment in what they are, they grow to the point that they eventually consume 100% of the economy in something like 40 years in conjunction with interest payments, but of course they become completely unsustainable long before then.
There's no solution that doesn't involve cuts, and lots of them. That's not a political statement, at least to me it isn't... it's a math statement. We have obligations in excess of what we could possibly pay down even if we hypothesize a 100% tax that somehow magically draws from a perfectly healthy economy while its happening. The only questions are who gets them, how we do them, and when we do them. Failure to do them at all means we choose the default choice of economic collapse, at which point obligations will still not be paid. There's no solution where we simply honor all of our current "obligations".
(And I would point out that I can't emphasize this point enough. If we do nothing, the default answer is still that we default on everything when the economy collapses. If you value Medicare, Social Security, and everything else, truly value it and not just valuing it the way politicians do as a vote-buying mechanism, you ought to be leading the charge to turn them into something managable, because the worst case scenario doesn't come from Evil Repulicans, it comes from economic collapse. The "evil Republicans" are the only ones taking actions that may mean that Social Security still exists for anyone in 2050.)
Well, there is, technically, which is that some amazing breakthrough in technology suddenly makes us all a lot wealthier very quickly, which is such a long shot it's hardly worth talking about. (And still not worth planning for; should we become radically wealthier we can work out ways to use it when we have it.)
The US health care system is clearly on an unsustainable path. But the reason is that it's grotesquely inefficient compared to other health care systems. Some European health care systems cover everyone for less than half the share of GDP. So cutting costs is definitely necessary. Cutting services is not.
My apologies if this is just rampant ignorance talking (including ignorance of American future obligations), but it appears to me that "The US has future obligations so large that even a magical 100% tax in a magically healthy economy cannot pay for them" is, as they say, an extraordinary claim requiring extraordinary evidence. Or at least some evidence.
And even were that proven (or at least were that to be slightly persuasive), there's still substantial arguing yet to be done, to argue that a refusal to raise taxes at all is an action in _favour_ of coping with debt (indeed, allegedly the only such action).
"Health spending will rise by 5.8% each year from 2010 to the end of 2020, according to actuaries at the Centres for Medicare and Medicaid Services (CMS). In 2020 health care will account for one-fifth of America’s economy."
The article goes on to point out that surveys suggest that the Federal government will be liable for a huge amount of medical obligations... and all this will occur in the country which has the most expensive healthcare in the world.
Staggeringly poor article. Projecting out a trend line by effectively assuming sustained exponential growth is completely retarded. It's really the same as the projections predicting that the sustained 1990s bubble would continue and the US debt would be paid off by 2009.
Considering the demographics involved -- the population as a whole is getting older and health care for old people is expensive as all hell -- it seems the burden of proof is on you to demonstrate why sustained exponential growth in health-care costs will not take place.
The number of new drugs intering the market is decreasing, and once the patent expires on an existing drug most drugs effectivly become free.
Most importantly we spend twice as much of our GDP on heathcare as most contires with universal heathcare for reduced benifits. If the numbers keep getting worse the government can get involved in the supply side of the equation without reducing benifits to patents.
> It isn't our current debts that have people concerned. It's the combination of current debts and unsustainable future obligations, which are so large that they in fact can't be paid down by just raising taxes.
Who is proposing that we only raise taxes, without cuts? The entire Democratic 'compromise' is effectively all cuts.
> The "evil Republicans" are the only ones taking actions that may mean that Social Security still exists for anyone in 2050.
The "evil Republicans" hyperbole might be helpful in dismissing the fact that both parties are horribly complicit in the problem we have now. Neither one of them have done anything meaningful to cut budgets for any of their favorite projects. And that hyperbole ignores the fact that there is a significant percentage of Americans that do not identify with either party [1], and as such are not blaming the 'evil Republicans'.
PS: If growth avergages less than 1.6% for the next 9 years we are going to have an issue. But, a few of those 5+% years and things start to look vary diffrent. Except for SS which recives little benifit from GDP growth only population growth.
Wealth only indirectly influences GDP. If you had 1billion dollars’ worth of Sony stock and don't buy, sell, or receive dividends then the impact on US GDP of you owning that stock vs. someone in Japan is zero.
When you break it down short term GDP growth is dominated by the size of the working population and changes in the value of your currency. Over the long term you need to consider technology and infrastructure improvements but wealthy society’s both expect more from the government and can afford to have their government provide more so that's not really an issue. Thus linking government spending to GDP is fairly healthy activity.
PS: I would happily to drastically cut a lot of government spending, but I also realize doing so quickly would be vary damaging to our economy. I think a flat 25% federal tax including social security that starts at 70 and universal healthcare and excluding any and all tax breaks would be close to optimal, but good luck getting that passed.
<quote>Well, there is, technically, which is that some amazing breakthrough in technology suddenly makes us all a lot wealthier very quickly, which is such a long shot it's hardly worth talking about.</quote>
Wealth? Is there really a lack of wealth in the US? I though the problem was not a lack of wealth, but more a lack of those in the US that possess it in abundance to share it with those who don't (e.g., by paying taxes). Even if some 'technology' came along that could generate wealth, that would very likely still be owned by a minority of the population and would not solve any of the problems faced by the nation as a whole.
In this debate in particular, I think it's critically important to distinguish between "dollars", a currency controlled by the US government, and "wealth", the real things those dollars can buy. As has been pointed out, nobody denies that technically the US can spin up the printing presses and make as many dollars as it wants. However, even ignoring the other catastrophic consequences that would have, there's also the considerations of the real wealth consequences we're committing to. It isn't just "lots of money", it's also things like committing real people to build real facilities so that other real people will take care of the real old people living in those facilities for years at a time on the government's dime. To exaggerate for clarity, we can't afford to have an economy in which everybody is dedicated either to caring for old people, treating old people, or supporting those who do. Somebody's actually got to be able to produce something to feed the economy. Obviously we can't get to this point, but it's not clear how much of our real economy can actually be dedicated to these things, because the support networks can end up being a lot deeper than surface intuition would expect. Studying modern military logistics can be very helpful; in particular, look for the statistics about how many support personnel there are per front-line soldier doing the "actual" military work, and apply the lessons to the "real" economy.
I agree. "Wealth" is what is lost when workers who want to work sit idle because the fed decides that protecting the value of "dollars" is a more important mandate than full employment.
It is a political statement. As the Gr.Grandfather comment said, our debts are denominated in dollars, and can be paid off instantly, simply by printing the money. The only reason we can't is because the interest rates on treasuries would go asymptotic if we did that, because investing in bonds denominated in a currency that has a history of doing that would be a risky thing to say the least.
If the reason for the S&P downgrade was based on the debt, it would be purely political, because along with US treasuries, every security denominated in dollars would have to be equally downgraded simultaneously to make economic sense. They understand this, so this is not the reason they gave - they graded the US on its willingness to pay its debts. I think that's a vast overestimation of the power of unpopular spoiler Republicans (edit: and anti-Chinese xenophobia), but a case can be made.
But, even with the fiscal shape of the US now, investors are buying treasuries with interest rates at historic lows, because if you're not investing in US treasuries, what are you going to invest in? The property bubble was largely a response to super low treasury rates, and since it has burst, there has been a massive run-up in precious metals as a way to store savings and get a rate that beats inflation. Investors (the only people that have to be answered to in questions of government debt) make their evaluation of US debt available in real time, and the evaluation is excellent, no matter what any individual investors/pundits say with their mouths.
The worst outcome of more money printing is that those interest rates start to rise, making the dollar less valuable with respect to other currencies, which will make imported products more expensive for domestic consumers, and make our exports cheaper abroad, stimulating a rise in domestic manufacturing and employment. If in addition, that newly printed money was used to make investments in infrastructure, or simply handed to people with low to negative savings who will immediately spend it, the domestic inflationary effect would be captured by a rise in domestic wages. To the degree that all of this happens is the degree to which the massive trade deficits we've been running since Reagan decline or reverse, and the national debt (the combination of domestic public and private debt) is an accumulation of those deficits.
(And I would point out that I can't emphasize this point enough: If we do nothing to Social Security, it will be able to pay exactly as it has until 2035, and if no fixes have been made until then, 80% of what it has been paying until the earth plunges into the sun. This 80% will go further than the 100% being paid now due to the productivity gains between now and then, unless our response to the underutilized economy of this demand crisis is to make cuts that further underutilize the economy.)
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edit: that's what I get for not RTFA before commenting. I gave S&P a benefit of the doubt that it didn't deserve, and most of this was actually said by the treasury except for the "weak dollar is good and SS is fine" stuff. Well, a weakened dollar is good and SS is fine:)
> if you're not investing in US treasuries, what are you going to invest in?
You could fund my mortgage. I pay 7% floating in a currency with a pretty good record of late. My property could halve in value and you would still get your money back, and I can fund the the loan from my current income.
I also can't just decide to not pay you without you being able to foreclose.
I wonder where this lowest tax burden comes from. My BC Canada income tax is pretty much identical to my California Income Tax. Does it really mostly come from the mortgage intrest deduction??
Our tax burdens are not the lowest by any means. My total tax rate partially due to living in California (although it is mostly Federal) is ~40%. There are plenty of countries in Europe that would be happy to tax me less.
My buddy in Singapore pays about 8% all told and he's in the same income range.
The temptation to become an expat gets stronger as I earn more money.
My sin is not being a fat cat living off capital gains. I have to actually earn my income, so I get fucked.
How do you manage to get an effective 40% tax rate in California? I could see that as a marginal rate on the last few dollars, but you'd have to make in the millions to get there for your overall tax rate.
For example, if you make $100k and take only the standard deduction, you'll pay $19k in federal taxes (19%) and $6k in California taxes (6%), for 25% total. If you include payroll taxes, that's another ~7.5%, so 32.5%. Of course, many people take much larger deductions than the standard deduction, so pay considerably less.
Unless he's a multi-millionaire who has one of the worst tax preparers in history, he doesn't have a 40% tax rate.
The reason why he thinks his tax rate is 40% is because he's making the mistake that common among financial illiterates, which is confusing the maximum tax rate with the marginal (i.e., actual) tax rate.
The highest Federal tax rate is currently 35%. That bracket applies to people who earn $379,150 or more. But if you earn $379,151, that means that only one of the many dollars you earned is actually taxed at the 35% rate.
Similarly, the highest California tax bracket is currently 11%, for people who earn a million bucks a year or more. But again, only the income that's above $1 million is taxed at that rate. Your first $47,000 in income is going to be taxed at the rate of 0 percent to 10 percent.
And that doesn't even factor in deductions. So even if your income is a million bucks a year, it doesn't mean that your combined state and federal tax rate is 40%.
This is true, yet often when it is brought up as you have done it is a straw man. The OP has in his mind that taxes collected are excessive. If you show him that rates are progressive, he won't decide that enough money is being collected after all. He is only using the tax rate as a rhetorical point -- he points elsewhere for proof that too much is collected.
Edit: should clarify I prepare taxes among other things. I'm NOT saying the brackets aren't progressive, just that this guy isn't saying, "gee, if only we progressed up to 35% things would be fine."
Most people in the middle and upper middle class complain that their taxes are too high in hopes that benevolent, democratically elected lawmakers will lower them. But it's a fact that Americans enjoy an effective tax rate that is quite low by both international and historical standards.
Of course, we're about to learn the consequences of that as we slowly decimate our educational system and national infrastructure, but that's probably a separate discussion.
Total tax burden includes sales tax that you pay on what you spend, property tax, gas tax, payroll taxes, taxes on utility bills, dog license fees, etc. I don't think 40% is completely far fetched.
Not sure how exactly one would calculate this, though, other than looking at taxes as percentage of GDP and maybe trying to fit yourself in there somehow based on your tax bracket as a ratio to other people. But with an average total tax burden of 26.9% (http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenu...), 40% for someone in an upper bracket doesn't sound so crazy.
Lumping all fees and duties together is not what people normally assume. Usually, just the income tax is compared, as it is present in most economies of the world.
Here in Norway an income tax bracket of 50% for a well-off middle class family is fairly normal. On top of that, sales tax is 25%, gas is mostly made of taxes (about 2.5 times what you'd pay in the US) etc.
Still somehow there's less bitching about taxes (or gas price) per capita than you hear from overseas :)
I hear a lot of bitching about food and gas prices for example here in Finland. Also very few people DON'T have a problem with some sort of bureaucrat, for example idiotic and incoherent health inspectors, bureaucrats deciding who gets subsidized etc.
The best way to deal with bureaucrats here is to catch them making a mistake and then using that to make them sign the papers. (Usually this involves following their orders until there is some kind of incoherence in them, and thus is costly if those orders involve eg. building/renovating something that is fine as is).
For some reason the favorite explanation nowdays is that the EU is in fault here, even though this crap has been going on before the EU existed.
He is probably forgetting to subtract what he contributes to 401k and medical and dental plans. If I simply look at what gets deposited in my bank, and what my salary is, it comes out close to the 40% number.
As a Singaporean, all I can say is that once you become more aware of how the incumbent government generates most of its revenue, you will be rendered speechless. Americans often exaggerate and say that their nation is turning into a corporate state - come to Singapore, and you will realize that the state is administered exactly like a corporation.
You really don't need a car to live in Singapore. Most of the time, driving will take you longer than getting on the metro. Remember that Singapore is an extremely small country and you can easily commute to anywhere on the island with a pushbike (even in the rain, most offices have showers).
Renting or buying property is the expensive part of living in Singapore. However, it is quite inexpensive to get a live-in maid/nanny.
That being said, it's also a little unfair to use it as a standard reference point, given that it's a small city-state which also happens to be the best-placed trading port in the world. Singapore is an outlier - when you can take the cream off an inordinate amount of trade pouring past, you don't need as much income tax.
I actually think the problem with perceptions of taxes in the US is not that we are taxed too much, but rather that many people feel they are taxed too much relative to the value they get from paying the taxes. If everyone had free, universal healthcare, I'd guess people would feel better about paying their taxes. The fact that a large portion goes to funding a largely unseen war machine doesn't help.
The other issue, of course, is that many people don't seem to realize that they benefit from the taxes they pay - a classic example being the tax credit for owning a home.
