

What's the Point? Why Bother Working, Saving When Uncle Sam Takes 95 Percent?



By Fergus Hodgson Dear Fellow Investor, Recently, when I reported that Americans were renouncing citizenship like never before, one commenter called me a "tiny plutocrat." If he only knew the weight of taxation on U.S. citizens and the crushing disincentive on productivity and capital formation.



Casual observers forget that marginal rates of taxation include forgone government transfers such as Social Security. Then there are second helpings of taxation such as the death tax and inflation, which eat away at dollar-denominated assets and income streams.



A lengthy new research paper (PDF) from Laurence Kotlikoff of Boston University makes the point painfully clear, and he notes that those hit hardest are often on the cusp of retirement. The current regime in the United States invites them to both not work and get out of Dodge, if they can. Decreasing Labor Force US labor-force participation has in recent years hovered at a historically low 62-63 percent, and as of this year a record 95 million adults are neither working nor looking for work.



An aging population can account for this to some degree, but if people are living much longer, why are they not working so much longer too?



Kotlikoff's paper, coauthored with Alan Auerbach of the University of California, Berkeley, has the answer. They use detailed analysis, combining federal and state taxes with forgone benefits, and find marginal rates as high as 95 percent. People are not uniformly rational, but when you take (steal) 95 percent of the fruits of their labor, they are going to cease working pronto.



They applied their software tool, the Fiscal Analyzer, to individuals 50-79 years old, and they included all the major federal and state fiscal systems. Each of these, they write, appears to have been "established with no regard to its impact on overall work incentives.… [a] hodgepodge design."



Individuals approaching retirement are vulnerable because federal and state governments are in fiscal crises. The trend of evermore lavish retirement benefits, such as Medicare, cannot continue.



As Kotlikoff warns, "Boomers must look to their own devices to rescue their retirements, namely working harder and longer." Government workers in many states should expect to scale down their retirement benefits as well, since unfunded liabilities have grown so large that they may never come in; ask the Puerto Ricans.



Yet, just as the pinch is arriving, overlapping taxes are making the return pitifully small. We are not even talking about the über rich. The rates are scattered, depending on location and past earnings, but nearly one fifth of elderly in even the poorest quintile face marginal net tax rates above 60 percent. Taxation Issues

Double taxation is a further problem, and the death tax is notoriously divisive as a pure class redistribution away from the wealthy. One tax that is regressive, though, is the inflation tax, since it takes from pensioners and individuals on fixed incomes.



This confiscatory nature of the U.S. tax system makes avoidance and planning so critical — a reason to admire Donald Trump's tax handling. One need not pay direct taxes on income earned, and there are various paths to deductions. However, the cost of planning itself is a de facto tax.



Further, if you are already locked into a fixed income with only limited employment prospects in your elderly years, a move to a lower-cost location may be in your interest. My favorite options for making your dollar go further are Granada, Nicaragua, and Medellín, Colombia, where there are already established expat communities. (I plan to assess Costa Rica later this year.) Opting Out of the Dollar

At Gold Newsletter we also emphasize that you can at least avoid the inflation tax by getting out of dollar-denominated assets. That was a pivotal reason for the push for gold legalization in the 1970s. The key is to place your assets in parts of the economy that are not vulnerable to currency devaluations and fluctuations. Of course, that goes beyond merely gold, and our upcoming New Orleans Investment Conference will examine other precious-metals and natural-resource options. There is still time to register for next week’s New Orleans Investment Conference by clicking here. Fergus Hodgson is Gold Newsletter’s Roving Editor.