Friday, March 18, 2011

Oh Boy, Tax Time!

Taxes and Savings in America

April 15 is bearing down on us like a bad dream.  Tax season makes the Unrepentant Capitalist very grumpy and his children go into hiding until the 16th.

Americans have been hearing for years that we spend too much and save too little.  According to statistics compiled by the Bureau of Economic Analysis, the long term savings rate in the US is about 2% of disposable income.  Although our savings rate has jumped to 5% in the last couple of years with everyone in belt tightening mode, a savings rate of 2% or even 5% is very low relative to most other countries.  In a lot of the up and coming economies (China for example) the savings rate is much higher than in the US.   As a country that has a lot of debt, wouldn’t we feel a little bit better if we financed more of this debt ourselves instead of owing huge sums to other countries?
It’s important to understand the Chinese are not necessarily fanatical savers.  Their high savings rate has a lot to do with the fact that it’s not easy for consumers to borrow money in China.  As car loans, mortgages, and other forms of consumer finance are fairly new, most Chinese have to save up and pay cash if they want to buy a car or a house or some other big ticket item.  This collective behavior makes the Chinese savings rate much higher than ours.  As their consumer financial services develop and grow their savings rate will surely drop.

There are numerous factors behind our low savings rate.  We love to spend and we love our plastic.  There’s a PhD to be earned figuring out how many forests we knock down every year to print all those Visa card offers we get in the mail.  Another important driver behind our high debt and low savings rate is our tax code.  Not only is it horribly complex*, but our tax code doesn't encourage savings and investment, as gains on either are taxed.  Instead of taxing income, savings, and investment, we should be taxing consumption and spending.  The tax code also encourages debt by allowing businesses and home borrowers to deduct the interest they pay each year from that year's taxable income.  The Unrepentant Capitalist believes effort spent trying to overhaul the current income based tax system is wasted.  We should completely scrap the current income based tax and adopt a national sales tax.  There are lots of philosophical and tactical details to work through in implementing a national sales tax—do you exempt necessities like food, should businesses have to pay sales taxes on inputs and raw materials, how do you transition from our current system to a national sales tax, how do you administer such a system?—but a tax code that encourages those things we want more of (income, savings, and investment) and discourages those things we want to curb (debt and consumption) is a big improvement.

I say we scrap the income tax and make April 15 just another day.

*It’s not just the Unrepentant Capitalist that says our tax code is complex.  In a recent country by country study, the World Bank ranked the US 61st in terms of ease of paying taxes.  At 61, the US ranked just below Rwanda and just above St. Vincent and the Grenadines.  Rwanda? Seriously? 


  1. Very interesting column. You say that "Instead of taxing income, savings, and investment, we should be taxing consumption and spending." I hate to say it, but our spending is already taxed!!! Unlikely anything will cause a redesign of the tax system unless election finance reform takes place and possibly term limits. Otherwise I think we are stuck with what we have. On the good news front, I believe tax day is 4/18 this year rather than the 15th - giving the unrepentant capitalist and extra three days to be grumpy.

  2. From the 'wife of':
    I keep telling you to use the accountant but I think you like to be grumpy and send the kids into hiding.

  3. I just did a first pass on this year's taxes, and we owe a bit less than last year....The UC is not as grumpy as normal, and I did spot Simone scurrying from pantry to her bedroom with some Cheese-its under her arm.