I heard that about half of Harvard’s budget is covered by an annuity. I wonder if this would work as a replacement for taxation. Granted, we’d have at least a decade of high taxes and slim budgeting in order to pay off the debt and build up enough saving to have a decent annuity. Could this work? Has any country or state tried this?
A number of countries have sovereign wealth funds whose goal is supposedly to do just this. IMO, the US seems resistant to the idea of this type of government ownership of private enterprise on philosophical grounds.
I have a friend from Peru who was telling me about that one day. She was complaining about American taxes so I asked her how the government raised money in Peru.
One of the things they have down there is FIC. Foreign Investment Capital. Apparently it pays good enough the government can pay out the profits to it’s citizens. I don’t know how equal the shares are though…
Some states and government agencies do something akin to this. For example, Alaska has the Permanent Fund which manages oil revenue for future government outlays and Alaskan direct payments.
Various state educational institutions usually also have their own endowment funds, which help fund university operations.
And many state and local governments do have some kind of investment arm. And a number of states and local governments have pension funds which invest in the private sector.
So, the US does do something similar, but it’s on an ad-hoc basis, and it’s generally not enough to generate enough revenue to cover all of the government operations everywhere.
Alberta has the Alberta Heritage Fund or whatever they call it, mostly profits from oil. Alberta has no provincial sales tax.
I think the numbers here may make this impossible. The amount of money that it would take to generate the US tax revenue each year assuming only a modes rate of return and a low inflation rate would be enormous. Investing that much money would be very difficult.
I think this step would stop the plan from working. You might be able to get support for overcharging the populace like this to pay off the country’s debt, but I guarantee that that support would evaporate once the debt was paid off, even if the marginal reward stayed the same.
pay off the debt? the debt is here to stay… sorry.
i don’t believe that the government should have expanded fiscal resources. it’s an institution for regulation. what would the government do with extra money gained from investment ventures? hand out free money? come on… if everybody got money, it’d be as if nobody got money. basic macro principles.
the basic problem with the current american tax system is that it doesn’t strict enough budgetary boundaries for the government. want to engage in two long, and expensive wars? sure. go ahead. want to cut a 750 billion dollar check for bailouts? it’s an ethical dilemma and not a fiscal one. theoretically worry-free spending allows for congress and the president to make decisions based on a moral and ethical standpoint instead of being hampered by budgetary constraints, but in reality it just allows the government to nullify a quantification of risk and consider more irresponsible solutions while ignoring monetary cost.
i don’t have a problem with taxation since it funds many necessary programs, but i do have a problem with the way it’s carried out. a country our size, and with our current ideals of a “free market economy” has no business funding itself with an annuity (which, in some respects is what the bailout is?)
The math does not bear this out. Not unless everyone gets money in proportion to the sum of how much they already had & how much post-tax income they were to make this year with no general payout–or something.
ok. i understand what you’re saying, but that’s a mathematical view of the immediate equivalence of money proportional to the amount of money received through this annuity. The economic response addresses the consequences of handing out that money. if you introduce an increase in the supply of cash to the money market you drive down interest rates, which discourages short term investment and encourages short term consumption. A rise in consumption leads to a rise in demand of goods, which consequently drives up the price of goods, which in the end, though difficult to say if it will exactly negate the effects of handing out money, it surely won’t be the full effect of people just getting extra money. And of course, with economics being a pseudoscience, you can extrapolate it further by saying in the even longer run a drop in consumption will necessitate stimulus and you either drop the interest rate or print even more money, which is just fueling the inflation. dropping interest rates is viewed as a short term fix and adding money is a long term fix. Thus money is almost always inflating and rarely deflating.
also, to clean up the argument i presented before:
1 - US Debt is enormous, but if you stop and think about it, is not much different than its constituents having car payments, mortgages, student loans, etc. looming overhead. If you look at how much you technically “owe” versus how much you make in a year, it might seem a little staggering also. However, the difference is that we want to pay off our debts before we die and the US. government hopefully has a considerable longer shelf life than we do. So yes, a balanced budget would be fantastic, but the fear perpetuated by the notion our government at the mercy of chinese loan sharks is unfounded.
2 - Again, you want an institution that creates, actuates, and upholds the laws of a land to have a vested interest in the success of certain corporations under its juristiction? I suppose that would be less blatant than allowing corporations to just stuff money down the throats of senators, but is it really that different? How much would the government stand to earn if they opened up wildlife refuges to drilling or having no emissions standards, safety standards, monopoly standards, on ALL products? It certainly would clear up a lot of issues wouldn’t it?
3 - taxation is a necessity. it’s the membership fee of being a part of club america. we use this money to do a lot of good, like educating kids, feeding the poor, mailing letters. Why wouldn’t you want to do that?
I’m not opposed to freeing up the markets in this country but if you do it through an annuity… that would just be disasterous.
Bingo.
The US budget is somewhere around $3 trillion. If investments could be found to produce a reliable 6% return, you’d need a $50 trillion capital fund to produce that income stream. Plus, to get there, you’d have to pay off the existing $11-12 trillion in US debt.
So if the U.S. and world economies stay about where they are for a sufficient time, the steps would be:
- Take a nation with a $15 trillion economy.
- Over time, have it raise $62 trillion, over and above current expenses of ~$3 trillion a year.
- Find $50 trillion worth of secure investments with a 6% return.
Not gonna happen.
Yeah, the numbers wouldn’t work, but even if they did work, the moment we have anything resembling a surplus in government, the populace starts demanding “their” money back.
Alas, we are an instant gratification society. Investing for today so you can have more tomorrow is not something many of us like to do.
I’m not worried about that aspect of it. It just seems like a waste of my taxes to always be paying interest.
This.
Under an annuity, the government would lend money to some institutions & programs, & then demand a cut of revenues from those institutions & programs in exchange for the initial expenditure. This cut would be determined by contract, & vulnerable to realignments of the market. No compensation would accrue to the government for investment in infrastructure & general stability, nor for stimulus prgrams; the government would be expected to do these things by custom, but its revenues would be independent of policy.
Under taxation, the government invests in the infrastructure & stability of the country entire, & then demands a cut of revenues from such institutions & programs that have profited most from the social order so fostered. This system is adaptable to changes in market composition, & if based on general taxes of wealth & income is not dependent on the success of one industry. The society benefits from governmental investment in infrastructure & general stability, & the government gets it cut for providing that. The government is expected to do certain things by custom, but its revenues & ability to increase them is (in theory) partially dependent on popular acceptance of its policies, not on some old contract.
We, the country, are the investment–not some annuity. We pay a share to the government as those owing monies to the annuity’s holders would. One plus to taxation is that the government is able to modify that in response to changing conditions. Another is that payments are not borne by one industry disproportionately.
Agreed.
Related; what about a hybrid system? Use the annuities from investment to pay off the deficit? We already have a trillion dollar investment in banks. Why not convert that to shares? Heck there’s other stimulus and bailout packages planned. Why not just do company handouts with stock purchases? Then when things recover we could use the profits from sales and dividends to pay off the deficit.
Meanwhile we supplement the national budget with taxes to cover what investment doesn’t produce enough to pay. In this recession taxes would have to cover most things including debt payments, but as things recovered dividends and stock would eventually cover debt interest payments. Then interest plus some of the principle.
As the principle is payed off the interest payments would be less so that’d be more for the principle combined with growth and it’d snow ball from there.
Till we were in the black.