12 April 2006

Economics, savings, taxation and trouble ahead

In a departure from this blog's main topics, I needed to get this off my chest...

Late last year I read a paper written by Kevin Lansing, Senior Economist at the Federal Reserve Bank of San Francisco regarding the negative implications of American’s savings and spending habits on the economy. I could not agree more with Mr. Lansing (admittedly lacking anything close to his credentials.) I, in fact am a prime example of poor spending and savings habits in my personal life. I will, however, take full advantage of a lack of gross earnings that result from being in graduate school for the last three years as my excuse.

Mr. Lansing makes some seriously credible recommendations in his reports that include a governmental shift away from an increasing federal deficit. I could not agree more. When did the Republican regime become the arbiters of non-tax and still spend?

His second recommendation is one of a shift in (I assume federal) taxation from earnings to spending. This would presumably increase our tendencies to spend and increase savings - though I am not convinced this is a logical decision but one of spontaneous emotional gratification needs. Most Americans tend to be lazy savers. The use of home equity and whole life insurance policies are about as far as most of us go. For the majority of us, neither of these even come close to providing an above average rate of return on investment, much less an optimal return - but they are easy no brainer lemming like efforts. With a shift in the housing economy that seems inevitable, returns in these investments will be reduced to that of the equity in your new car purchase. Like sand through your fingers, a dwindling asset.

After a bit of mulling over Mr. Lansing’s second recommendation, my biggest concerns are focused here - on the shift to a spending tax. I have this vision of a new more robust barter economy. Call it grey market or black market, the undocumented trade of goods and services will rise (minimally) in direct correlation to this taxation shift. Personally, I don’t have much of a problem with this, but given further thought as to the implications… it struck me as a very dangerous proposition. The revenue service is already looking to gain access to Pay Pal data. Imagine what they will need to track growing barter and trade trends.

I am still a proponent of a radically simplified taxations system (with apologies to all of my accountant friends). Maybe the flat escalating tax system is the way to go. The more you prosper, the more you contribute. I think I could be OK with that no matter how many millions I was earning. Is that the alarm clock I hear?