Mission Accomplished: The Tax System and the Progression to Poverty
It’s funny how two people can see the same event and draw two different conclusions.
Last weekend the US space shuttle Endeavour completed its final mission. But rather than hurtling through space at 29,300km/h, it was travelling at less than one kilometre per hour.
That’s because it was going through the Los Angeles suburbs to the California Science Center.
As the BBC reported on the journey:
‘The shuttle passed down many streets that were in flames two decades ago during the Rodney King riots.
‘“Having a shuttle come through this area of high poverty, it can only be a good thing,” Said bookshop worker Damian Pipkins.’
That’s one spin on it. The other view you could take is that NASA is thumbing its nose at LA’s poor. ‘Look at what we spent all that money on, while you’re living like dogs!‘
After all, according to Space.com:
‘The analysis reveals that, as of the end of 2010, the space agency had spent more than $192 billion on the fleet since its inception in 1971, researchers said. That suggests that by the end of this year, which includes three more shuttle missions, NASA will have spent $196.5 billion on its storied space shuttle program.’
Now, I’m not saying the government should have spent the money on welfare rather than a space program. After all, like Australia, the US already spends a big chunk of taxpayer money on welfare as it is.
The point is, through the tax system the government gets its hands on a lot of money…too much. And it can’t possibly allocate it in the most appropriate way.
That leads to people living in poverty (despite the government spending billions on welfare), while the government spends $200 billion on shooting men and women into space.
And yet, despite their record of misspending, the mainstream still believes that the cure to the current economic mess is for the government to get and spend even more money.
That’s certainly the view of the International Monetary Fund (IMF)…
According to the Financial Times:
‘[IMF managing director] Ms Lagarde also urged countries more generally to refrain from new austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth.’
Meanwhile, the head of the UK’s Financial Services Authority, Lord Turner, thinks the Bank of England didn’t give UK banks a big enough bailout in 2008 and 2009.
The Guardian newspaper reports this comment from Lord Turner, speaking at a conference in Tokyo:
‘Looking back, and with the benefit of what we know now, I would have recommended UK banks have a higher level of capital and a boost to the counter-cyclical buffers they needed for the coming recession.’
And of course in the modern-day bizarro world, the bankers are now talking from the same script as the left-wing groups. According to the Guardian:
‘Neal Lawson, director of left-wing pressure group Compass, said, “the cuts were never going to work, but these calculations show the effect is bigger than anyone judged. The economy isn’t suffering from government borrowing but a severe lack of demand that only the government can fix.”’
What happened to the fight between the 1% and the 99%?
It looks as though it’s now 100% in favour of the government doing more, not less. Only it isn’t. It’s really the 53.4% and the 1% living off the taxes paid by everyone else (everyone knows the super-rich don’t really pay tax).
As a Centre for Policy Studies report shows:
‘However, the past 30 years has seen an increasing proportion of the population of total households becoming overall net recipients of the state. This has been particularly marked in the past ten years: in 2010/11, 53.4 per cent of total households received more in benefits than they paid in taxes — compared to 43.1 per cent in 1979 and 43.8 per cent in 2000/01. Around three million more households were net recipients of the state in 2010/11 than just ten years earlier.’
The following table lays out exactly how the numbers stack up:
These numbers highlight the disincentive for lower income workers to earn more. The average person earning £ 11,764 can almost double their income thanks to taxpayer funded benefits.
There’s a clear disincentive to seek extra work. Let’s say the average person who earns £ 11,764 only works 20 hours per week. They could double their hours to earn about £ 22,482.
Trouble is, thanks to the benefit system, doubling their work only results in a 26% increase in total income after benefits to £ 27,071 from £ 21,419.
So, what does this all have to do with Australia? I’ll get to that in a moment.
But before I do, you may have seen the comment from US presidential candidate Mitt Romney. He said that 47% of Americans don’t pay taxes, and therefore he didn’t need to worry about winning their votes.
Well, what you may not know is that the Aussie tax system isn’t much different. Here 45% of Aussies don’t pay tax…
The ‘Progressively’ Worse Nature of Taxes
Now, I’m not having a crack at people for not paying tax. I say good luck to them. I’d rather that no-one paid tax. The issue I have is that the only way many Aussies get away with paying no tax is because you’re paying for it.
Three weeks ago the Australian Financial Review (AFR) printed the following graphic:
The AFR makes a point that ‘one third of non-payers are retirees aged 65 and over.‘
That’s fine, I get that. But look at the chart; on average 29.9% of adults between the age of 25 and 59 don’t pay tax. For every 100 people, 70 people are paying for the services of the other 30.
Again, there are some obvious inclusions in the non-payers, such as the parents who stay at home to look after children.
But the important thing to note is that this chart doesn’t record net payers of tax. It doesn’t take into account those who receive more in benefits than they pay in tax.
If you factor that in the position will be closer to that in the UK, where more than half the households are net receivers of tax rather than net payers.
That’s the so-called progressive tax system for you.
The problem with progressive tax systems is they expand like cancers. And once implemented, they’re almost impossible to turn back.
Why? Because a progressive tax system lets the government take money from one group and give it to another. For those who get the tax benefit it’s like getting a free gift…money for nothing.
And the more people get money for nothing, the more they want money for nothing. And that means those not getting free money start clamouring for free money too.
So in order to stay in power, governments have to create more ways to give away cash to favoured people…especially those the government thinks will vote to keep the government in power.
You saw that with John Howard’s government, and you’ve seen it with Kevin Rudd and Julia Gillard’s government too.
But as the government buys more and more votes by giving away money, it diminishes the pool of taxpayers it can take the money from.
That means the government has to take more money from fewer people so it can keep the free money flowing. Inevitably it increases the tax burden on a shrinking number of people.
If you want an insight into what eventually happens, just check out Greece, Spain, France, Venezuela, Cuba, and Zimbabwe. And soon enough you can add the UK, USA and Australia to the list.
At some point the money runs out. The government just can’t take any more wages from workers’ incomes. So it has to find another way. And the Aussie government has found it — superannuation…
Retirement Savings Raid
I get a lot of rubbish in my email inbox. But I get a lot of useful stuff too. Surprisingly, one of the most interesting emails I received this week was from the Aussie government, or rather, from the Treasury.
Here’s the email:
Last Friday I posted a short article to the Pursuit of Happiness website (look out for these articles. I post them on Tuesday, Thursday and Friday, the days when I don’t send you an email).
In the article I mentioned how the mainstream press was finally waking up to the government’s plan to raid your retirement savings.
This is something I’ve written about for three years. And so far everything I predicted would happen has happened. Of course, this is just the beginning. The government still has much further to go with its retirement raid.
But the next stage has just arrived. Here’s what the Treasury says about its new regulations for self-managed superannuation funds (SMSF):
‘The SMSF auditor registration regulations will implement the Government’s reforms relating to auditors of SMSFs as part of Stronger Super. The Regulations will specify various requirements that must be satisfied by all auditors of SMSFs as well as the transitional arrangements that will apply to existing, highly experienced and competent approved auditors.’
The reason for the regulation is obvious. Today there are around 500,000 SMSFs in Australia. These account for over 30% of all super assets.
Importantly for the government, that’s over $300 billion the government can’t use to fund its spending programs. Sure, it can get hold of some of it through the tax system, but that’s still only about 15% of the annual contributions and profits.
So the government needs other ideas. One of those ideas is to increase regulations on the SMSF sector. And as with any heavily regulated industry, the more the red tape, the less incentive there is to take part in it.
And that means less competition. But that’s good news for the retail or union-controlled industry funds…the real 1%ers and the lobbyists who always want the government to do more and spend more rather than less.
This is just more evidence (as if it was needed) that your income and retirement savings are under constant attack from the government, trade unions and vested interests.
They’ll stop at nothing until the progressive tax system filters through to the retirement system. ‘Saved a million over your lifetime? Thanks, we’re from the government, we’ll take that.‘
So, what can you do to counter that? Well, the important thing to note is that I don’t believe the government will act overnight. Progressive tax systems and progressive politics take time.
Remember, the current tax system has evolved over 100 years. So the progressive erosion of your retirement savings will take time too.
That’s why I don’t want to scare you off saving for your retirement. I want you to squirrel some of your wages away for a rainy day. The reason I bring up the issue of retirement theft is to make sure you’re fully prepared now.
Because if you wait until after the government has ‘progressively’ taken your income and retirement savings, it will be too late.
In next Monday’s issue of Pursuit of Happiness I’ll take you through some simple ideas of how you can start saving today in order to plan for your retirement.
If you’re an experienced investor, you probably already know some of the tricks I’ll show you. But even so, it’s always good to get a refresher when it comes to saving for retirement.
Bottom line: the warnings about the future are clear to see, both here and overseas. If you want to make sure the government doesn’t ‘progressively’ lead you towards poverty by taxing away your entire savings, you need to make sure your retirement savings and goals are on track.
Look out for next Monday’s Pursuit of Happiness for more details.
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