Taxes paid vs benefits received

The Heritage Foundation has an interesting 2015 article on, The Redistributive State: The Allocation of Government Benefits, Services, and Taxes in the United States. In it, I saw this interesting chart comparing taxes paid versus benefits received, based on income. I’ll refer to this next time someone mentions that the wealthy aren’t paying their fair share:

Politics, Society and Corruption

Hardly a day passes here in Spain that we don’t hear news of yet another case of political corruption. Whether it’s the left-leaning PSOE or the right-leaning PP, representatives from both the country’s main political parties are regularly caught in unimaginable schemes of corruption.

Continue reading Politics, Society and Corruption

Considering health care costs as taxation

The US tax revenue as a percentage of GDP is about 35%. In this article, Phil Greenspun points out that Obamacare, which forces citizens to purchase health insurance, isn’t materially different than European governments forcing citizens to pay extra tax to covers the cost of state-provided health care.

So if you consider Obamacare as a tax, the US tax revenue as a percentage of GDP increases to over 50%, such that the US would be more government-dominated than Sweden, Germany, Greece, or the U.K., and roughly in the same ballpark as France and Denmark.

And that would imply that the private sector of the US (that part of GPD not generated by government) is quite small, which in theory should act to impede growth—making the US a less attractive place to invest.

Does Erik Vorhees understand things better than Milton Friedman?

Speaking with people of different religious beliefs, I’ve always found it curious to hear a common viewpoint, that goes something along the lines of:

It’s quite obvious that all gods in which people around the world believe, and have believed, are false. In fact, it defies logic and common sense that people have actually believed in them. On the other hand, it should be intellectually obvious that the god I believe in, who happens to be the god relevant to the place and time in which I was born, actually does exist.

It seems so strange that these people never seem to question in themselves whether they just might suffer from the same blind-spot they find obvious in those who believe in gods other than their own. And it seems intellectually arrogant.

I thought of this analogously today when I read a comment by Bitcoin-proponent Erik Vorhees, about Milton Friedman:

As the most popular champion of free markets, it’s always surprised (and dismayed) me that Friedman seemed to have little issue with central planning when it came to money itself. He would abhor central planning in basically every good, except the good of money, which is arguably the most important.

Having studied Milton Friedman and his work for many years I’m left with the belief that he was a truly special and brilliant man. I consider him in the same class as people like Richard Feynman.

While I acknowledge the importance of independent and critical thinking, if I found myself in disagreement with these people on a particular issue, my first instinct would be to deeply question my own research, my own understanding, my own logic and assumptions and even my own intellectual limits long before I’d conclude myself as “being dismayed”.

Eye-opening observations about American poverty statistics

Eye opening comments on American poverty statistics from Philip Greenspun

How many American households suffer in poverty? It might be twice as many as you think. If a man and a woman live in the same crummy apartment with their two biological children, a layperson would walk by and count one poor household. The expert economists at the Census Bureau, however, upon finding that the man and woman are not married, count two households. The father is one household. The mother and the children are a second household. Both are “living in poverty”. What if the man and woman each had a low-wage job and they were to get married? Now the two “poor” households would become one “not in poverty” household.

Why good intentions can fail as a starting point for organizing society

In discussions about society and economics, proponents of collectivism often respond to free-market capitalists with incredulity. How could you possibly put profit above the needs of human beings?

That is a tragic misunderstanding. And in a domain so important but so closely tied to emotion, it often derails constructive conversation and progress.

The sad truth is that putting the needs of others first, ultimately fails as a societal model. Intentions don’t matter; what actually works — or more precisely, what produces the best results among imperfect alternatives — is what matters.

As it happens, organizing society around the innate human tendency to act in ones own best interest will achieve, through the invisible hand of the impersonal price system, the best sustainable results for the poor and needy. Not perfect results; but the best possible results.

Good intentions

It naturally starts as the most noble of ideas. There are those in our society who are in need due to no fault of their own, and we as a society should collectively help them.

How do we collectively help those in need? We don’t tend to do it directly; rather, we attempt to do it indirectly through government. We allow the government to tax a portion of our income, in order to use that money to — in addition to the basic functions of government — help those in need.

But government is comprised of people; human beings. And that’s the fundamental problem.

Who goes to work in government? Government jobs are stable, by and large free from accountability and the pressures of competition. At mid and high levels, government jobs offer power and opportunities for corruption.

I’ve lived in four countries and visited many more, and my experience in this regard is fully consistent. Although there are exceptions, government everywhere, in general, attracts people for whom such job qualities appeal. In general, these are not qualities consistent with achievement in private enterprise, where only the most competent, efficient, productive, competitive and effective entities survive.

The result is no surprise — incompetence, inefficiency and ineffectiveness. For every dollar collected in taxes to help the needy, only a fraction arrives at its intended destination. Furthermore, the situation grows worse with increasing size of government, and government always tends to grow. Over time, less and less of each tax dollar ends up actually achieving the initial aim of society — helping the needy.

Today we see massive inefficiencies, incompetence, and corruption in government, and growth in government spending as a percentage of GDP on a scale in the United States (as in Europe) that is clearly unsustainable. And it extends beyond welfare; just look at the America medical and education systems.

What are the effects on those being helped?

The existence of welfare creates situations in which those with the capability to escape their needful situation choose to remain. And, worse, it creates situations in which those outside actually prefer to enter welfare, rather than to fend for themselves. (Here in Spain, I often speak with unemployed who are in no hurry to find a job, and have seen all manner of ingenuity and innovation in fraudulently accessing government welfare and benefits programs.)

Over time, the proportion of the ever-growing total population eligible for government help who are actually in need, declines.

Milton Friedman was one of history’s most intelligent and respected social and economic thinkers. A life-time of research led him to conclude that although the intentions of a collectivist societal model are good and noble, such a model can’t and doesn’t work in practice in the long run.

A fundamental flaw, therefore, in designing a social model is to begin with good intentions.

Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficial. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.
—Justice Louis Brandeis

What’s the alternative?

The alternative is free-market capitalism. In his ground-breaking work, “The Wealth of Nations”, Scottish economist Adam Smith discovered that the impersonal system of prices in a free market acts as an invisible hand, organizing very complex and distributed systems of efficient production, resulting in a situation in which the individual, acting in his own interest, actually works towards the larger benefits of society; objectives which were of no intent of his own.

According to the research of Milton Friedman, history clearly demonstrates that wherever you find reasonable conditions for the poor, you will find something resembling a free-market society. And wherever you find the worst disparity and conditions for the poor, you will find a model of central societal planning.

It’s a counter-intuitive idea, for sure, and leads to hundreds of reasonable questions and concerns. I would urge anyone interested in this topic to watch Milton Friedman’s “Free to Choose” series, now available on YouTube.

The Four-Percent Rule

In Money for Something, we talk about viewing wealth in terms of the income it can generate — i.e. in terms of the four percent rule.

Based on a number of studies to determine a reasonable “draw-down” rate for retirees, there’s a rule of thumb which states that if you withdraw no more than four percent of your sensibly-invested savings per year, you’ll likely never run out of money.

So, if you could live on $40,000 per year, then you’d be financially free once you’d saved and invested an amount of one million dollars — regardless how old you are.

Interestingly, this rule of thumb can also be used in reverse.

The other day I was speaking with a retired couple who, from their employer-provided individual retirement plans (to which they contributed during their working careers), receive about $6,000 per month, for as long as they live. Talking to them, it was interesting to hear the husband ponder what he’d do, if he were “a millionaire”.

Well, in a sense, he is!

Based on the four-percent rule, how much would you need to have saved to generate an income of $6,000 per month? — $1,800,000!

Understanding how to view wealth is just one of several important aspects of money management. For a complete and easy-to-read introduction, be sure to pick up a copy of Money for Something today.

The Wealth of Statesmen

I ran across an info-graphic visually demonstrating how much less Mitt Romney pays in taxes, as a percentage of his income, implying that’s because he’s part of the 1%, the “Super-Wealthy”. The info-graphic is very deceptive. Can you figure out why? Think about it before skipping to the discussion below the image.

The reason this chart is deceptive is because the income of Romney is different than the income of the simple millionaire. A tax rate of 30% would imply that the millionaire earned normal income. We already know that the majority of Romney’s income comes from capital gains. Capital gains are taxed differently than normal income, and always have been.

The graphic is comparing apples and oranges, but would try to lead us to believe that the reason Romney pays less is “because he’s part of the 1%”.

In most developed countries, investment income (capital gains, dividends and interest) are taxed differently than regular income. Although there remains healthy debate on the topic, most economist agree that the lower investment income is taxed, the better off is the society. Many economists argue that investment income shouldn’t be taxed at all, thereby maximizing the incentive for people to make capital investment. (And keep in mind, that American companies — the ones providing these capital returns — pay among the highest corporate tax rates in the world on the normal income they make.)

The image comparatively suggests that it’d be better if Romney paid 30% on his capital income, just like the millionaire does on his normal income. Would you like to see what a country looks like that levies 27% tax on investment income? Spain, where the unemployment rate among the youth in the area where I live has reached 50%.

Of course, that’s an overly simplistic statement, too; Spain’s situation is by no means exclusively due to their capital gains tax. But it would be instructive for people supporting an increase on investment income taxation in America to look around the world and through history, to see what countries look like that levy high rates on such income.

As a final note, I hate seeing this kind of simplistic and misleading political advertising. I also observe that it’s the prominent strategy employed by both liberals and conservatives alike. That such advertising is effective is a reflection of how uninformed we are, and how little time we invest nowadays to even try to understand issues.

Is there a better alternative to taxing the upper class?

It seems that each day we get to read comments from political leaders — whether Obama in the US, or Zapatero in Spain — arguing for increased taxes on those who have earned or saved more, with justification that it’s “fair”; that this segment of society should do more to help those in need.

Moral issues aside, the problem is that the reality is far less straightforward than one segment of society helping another.

The reality, as we all know, would be that one segment of society gives more money to government, who will then spend that additional revenue on social programs intended to help the needy, along with a lot of other programs completely unrelated to helping the needy (including their own salaries and pensions.)

And regarding those programs intended to help the needy, I think we can all agree that the efficiency with which government processes its revenue sucks, and gets worse as government gets bigger. And today, government has never been bigger.

As Milton Friedman often stated, the intentions of socialism are noble and good. But the unfortunate reality is that they never work in practice.

I would suspect that the majority of social spending here in Spain ends up in the hands of corrupt politicians, corrupt businessmen and corrupt individuals who learn to play the system. I see this every single day. And the nature of that corruption is just as relevant in the US and every other government in the world, as far as I can tell.

Who knows what percentage of a dollar or euro in tax revenue actually ends up helping somebody. I wouldn’t be surprised if it’s less than 10 cents.

So, if one segment of society is going to be coerced into helping another, let’s do it this way: Let them find their own way to provide that help, and then submit receipt of that help to the government, thereby cutting out the inefficient/ineffective middleman.

The unfortunate consequences of protective social laws in Spain

According to Milton Friedman, the problem with socialism isn’t its intentions; the notions of government helping those in need, and protecting the disadvantaged are honorable. The problem is that when implemented, public funds inevitably end up in the wrong hands, and far more people exploit protection than benefit from it.

Continue reading The unfortunate consequences of protective social laws in Spain