Is the United States Bankrupt? - Laurence Kotlikoff

[FRED]

Is the United States Bankrupt? (PDF) (http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf)

by Laurence J. Kotlikoff

July/August 2006 (Federal Reserve Bank of St. Louis Review)

Many would scoff at this notion. They’d point out that the country has never defaulted on its debt; that its debt-to-GDP (gross domestic product) ratio is substantially lower than that of Japan and other developed countries; that its long-term nominal interest rates are historically low; that the dollar is the world’s reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries. Others would argue that the official debt reflects nomenclature, not fiscal fundamentals; that the sum total of official and unofficial liabilities is massive; that federal discretionary spending and medical expenditures are exploding; that the United States has a history of defaulting on its official debt via inflation; that the government has cut taxes well below the bone; that countries holding U.S. bonds can sell them in a nanosecond; that the financial markets have a long and impressive record of mispricing securities; and that financial implosion is just around the corner.

This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future. The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.

Federal Reserve Bank of St. Louis Review, July/August 2006, 88(4), pp. 235-49.

Laurence J. Kotlikoff is a professor of economics at Boston University and a research associate at the National Bureau of Economic Research. © 2006, The Federal Reserve Bank of St. Louis.

[Corporate Plebe]

Was this posted as some sort of test for iTulip readers?

A federal retail sales tax would be the final castration of the United States citizen. The End of Citizenship.

Is it the end of the great American experiement when bankers, once again, dictate the Taxation and the Social Contracts between government and the People?

If we don't succumb to these recommendations, what will happen? What has been done in the past to other nation-states (customers)? In the past banks have withdrawn the "liquidity card" -- that iTulip is betting will be played -- and opted for Depression.

If we don't agree to abolish corporate income tax will the individual citizen's access to money be restricted until we agree?

[metalman]

Was this posted as some sort of test for iTulip readers?

A federal retail sales tax would be the final castration of the United States citizen. The End of Citizenship.

Is it the end of the great American experiement when bankers, once again, dictate the Taxation and the Social Contracts between government and the People?

If we don't succumb to these recommendations, what will happen? What has been done in the past to other nation-states (customers)? In the past banks have withdrawn the "liquidity card" -- that iTulip is betting will be played -- and opted for Depression.

If we don't agree to abolish corporate income tax will the individual citizen's access to money be restricted until we agree?

the majority of itulip visitors (81%) prefer a consumption tax over an income tax.

http://www.itulip.com/cgi-bin/vote.cgi?view=1146683446

[Corporate Plebe]

No, that means 215 out of 264 who answered the poll favor such a tax structure, not 81% of the 6 million-plus visitors.

The author called for the abolishment of all income tax, including corporate income tax. Why such a radical proposition instead of modelling a univerasal health care system after other Western nation-states -- taking the healthcare burden off of corporations?

[Jim Nickerson]

Was this posted as some sort of test for iTulip readers?

A federal retail sales tax would be the final castration of the United States citizen. The End of Citizenship.



Corporate Phebe,

It strikes me you are a bit lathered by a suggestion that would insure taxation of everyone, even tourists I presume, so that no one escapes through politically created loop-holes or just overt dishonesty. Such would eliminate, I hope, tax attoneys and a lot of accountants, now that would not be bad.

Barring something changing, unknowlingly newborn these days may well be in effect castrated and oophorectomized when they mature enough to realize the black financial hole left to them by their forebearers. They may be rendered impotent by what comes to be their own appreciation of a society so fouled that only ignorant savages would choose to bring another child into its morass.

Actually I was very impressed by Mr. Kotlikoff's seriousness to face the problems we have created and to suggest possible answers. I do not care whether Mr. Kotlikoff is a banker or a terrorist. It is the value or lack of value of his ideas that are important.

I believe there is no easy way out of the fiscal storm that presently envelops this country. But too many Americans are totally wed this day to the notion of doing only what is pleasureable and avoiding anything resembling seriously hard work or restraint in seeking the "easy life."

Were I you, unless I were less than 5 years old, I would not worry too much about anything Mr. Kotlikoff suggested as happening. It will not as long as American politics continue on its current course.

[Corporate Plebe]

Hi Jim,

1st off let me thank you all at iTulip for the great site and opportunity to engage the community via this forum. I became familiar with iTulip.com by reading Eric Janszen's articles posted on the Always On forum.

Jim, your points are valid and I don't wish to take issue with you.
Yes, I was a bit lathered about the sweeping reform of the tax structure the author proposed -- replacing income tax, both personal and corporate, with a federal 33% retail sales on final goods and services. In that regard, the paper seems really about proposing this fundamental tax change, not whether or not the US is bankrupt or should let China directly invest.

Here's what my gut heard from Mr. Kotlikoff:

The federal government should no longer tax wealth -- period -- it should tax retail goods and services at 33%. Why? Because the US is in debt.

When my household is in debt, I usually have to make adjustments to the way I spend...change priorities, spend on what we need vs. what we want. I hear none of that coming from Kotlikoff's solutions, let alone our own government. So if we don't get any fiscal responsibility in the way the governement both barrows money and spends money, why should we embrace a new paradigm in the way our government collects money? Why do 81% of those polled here at iTulip embrace it? Why should we assume such a change will even be brought about democratically? And if it does happen democratically, which type of citizen will have the most influence over the process -- the human or the corporation? Who has the most to gain of the two?

[Jim Nickerson]

Here's what my gut heard from Mr. Kotlikoff:

The federal government should no longer tax wealth -- period -- it should tax retail goods and services at 33%. Why? Because the US is in debt.

When my household is in debt, I usually have to make adjustments to the way I spend...change priorities, spend on what we need vs. what we want. I hear none of that coming from Kotlikoff's solutions, let alone our own government. So if we don't get any fiscal responsibility in the way the governement both borrows money and spends money, why should we embrace a new paradigm in the way our government collects money? Why do 81% of those polled here at iTulip embrace it? Why should we assume such a change will even be brought about democratically? And if it does happen democratically, which type of citizen will have the most influence over the process -- the human or the corporation? Who has the most to gain of the two?

c.p.,

I believe if one steps back and looks at this, one must deduce that anything Kotlikoff suggested is not going to happen until some event(s) force, dictate, mandate an absolute change in the way politicians have done business for all the time that has led up to our being where we are now.

You are correct, it would be greater insanity to do anything that would give government more money now to fritter away. Also at some point, the notion of political contributions equating to free speech is going to have to be stricken from the laws of the land, until and if that occurs money will continue to have the greatest influence, or second, or equal to the influence of the presumed morality of the majority that elects officials. Nothing now is near dire enough to force changes in how the politics of this country operate.

Ultimately if something approaching true fairness in taxation is to occur in the US, it will be a consumption tax, I believe that will happen here, but I have no idea for a time frame. Health care as we know it must be ended--even if bad for some compared to what they enjoy now, it will be better for 45-48million who seriously lack rountine health care now. The present social security system and medicare and medicaid will fail financially.

When thing get so bad and collapse or disappear, then rationales as Kotlikoff put forth will get serious attention, but only when it is forced to happen.

[Corporate Plebe]

You are correct, it would be greater insanity to do anything that would give government more money now to fritter away.

You mean like let them barrow money? Has it ever been in the interest of the lenders -- in cooperation with corporate or commercial (self) interests -- to change the United State's tax code like this? It seems like it would be very hard to avoid this allegation, whether it's true or not, because the lenders are themselves corporate and commercial.

[EJ]

United States of America Files for Bankruptcy Protection (http://www.itulip.com/bankrupt.htm)

[jk]

United States of America Files for Bankruptcy Protection (http://www.itulip.com/bankrupt.htm)

i recommend gavekal's book, "our brave new world," for a thoughtful presentation of the bullish view. yes, our liabilities might be about $65trillion in present value, but gavekal would argue you have to compare debts to total u.s. assets, not gdp. total assets are, if i recall correctly, something over $50trillion. i would add that with sufficient inflation, properly applied and miscalculated, the assets will rise in value while the debt shrinks. no problem!

[Christoph von Gamm]

A retail sales tax is common in many places in Europe or even in the rich places such as Dubai. Dubai for example has a ca. 20% retail sales tax on EVERYTHING, even real estate or oil. But virtually no income taxes and also no taxes on fortunes accumulated (such as a housing tax).

Imagine the result of a retail sales tax on minaral oil products (i.e gas or diesel), such as in the UK, i.e. of 2$ per gallon. Probably SUVs become much less popular and driving the car for every single opportunity might not be the alternative any longer.

For example, Germany has a nice system of badging taxes: "Solidarity add-on" on income tax for the east Germans, that even the east Germans pay, cigarette tax not for the health but to "fight terrorism", fuel tax to "rund retirement" and an extra ecology fuel tax to fund ecological projects, an extra on the V.A.T (sales tax) of 3% (from 16% to 19% of all sales) to "fund unemployment"... and so on.

Whatever you call it - the government needs the money.... and tries to sell it as elector-compatible as possible...

If a government is as bankrupt as the US, there are not that many alternatives than raising taxes and cutting spending. On spendings cuts, besides social security and education, the largest block is military - besides of course interest payments... so your choice then will be to reconsider the US military activities around the world - are they worth the investment - cutting social security - (Medicaid, Medicare, welfare) and getting a storm of protests from retirees that put all representatives out of their post - or ceasing to repay debts (the latter is detrimental to getting new debts, try this at home...)

So - either new taxes, or more debts until the interest payments are higher than the net new debts. With interest rates going up, this spiral already has started...

So an advice from good old Europe - maybe your next car might be a bit more engery efficient...

[metalman]

i recommend gavekal's book, "our brave new world," for a thoughtful presentation of the bullish view. yes, our liabilities might be about $65trillion in present value, but gavekal would argue you have to compare debts to total u.s. assets, not gdp. total assets are, if i recall correctly, something over $50trillion. i would add that with sufficient inflation, properly applied and miscalculated, the assets will rise in value while the debt shrinks. no problem!

gotta read the fine print on the bottom of EJ's 2001 faux USA bankruptcy filing...

"Of course, the U.S.A. is not going to go bankrupt. The point of this piece is to make the inevitable alternative obvious. The U.S. will repay its debts, backed with the full credit of the government. Debts will be paid in full... with itty, bitty little dollars."

[metalman]

A retail sales tax is common in many places in Europe or even in the rich places such as Dubai. Dubai for example has a ca. 20% retail sales tax on EVERYTHING, even real estate or oil. But virtually no income taxes and also no taxes on fortunes accumulated (such as a housing tax).

Imagine the result of a retail sales tax on minaral oil products (i.e gas or diesel), such as in the UK, i.e. of 2$ per gallon. Probably SUVs become much less popular and driving the car for every single opportunity might not be the alternative any longer.

For example, Germany has a nice system of badging taxes: "Solidarity add-on" on income tax for the east Germans, that even the east Germans pay, cigarette tax not for the health but to "fight terrorism", fuel tax to "rund retirement" and an extra ecology fuel tax to fund ecological projects, an extra on the V.A.T (sales tax) of 3% (from 16% to 19% of all sales) to "fund unemployment"... and so on.

Whatever you call it - the government needs the money.... and tries to sell it as elector-compatible as possible...

If a government is as bankrupt as the US, there are not that many alternatives than raising taxes and cutting spending. On spendings cuts, besides social security and education, the largest block is military - besides of course interest payments... so your choice then will be to reconsider the US military activities around the world - are they worth the investment - cutting social security - (Medicaid, Medicare, welfare) and getting a storm of protests from retirees that put all representatives out of their post - or ceasing to repay debts (the latter is detrimental to getting new debts, try this at home...)

So - either new taxes, or more debts until the interest payments are higher than the net new debts. With interest rates going up, this spiral already has started...

So an advice from good old Europe - maybe your next car might be a bit more engery efficient...

higher taxes on gasoline has a net tax benefit... less need to tax income to pay for wars for oil.