The national debt is money loaned to a central or local government in form of state bonds or even direct bank loan. It's either taken in the country's own currency (that the country can print infinitely) or in foreign currency. These debts increased largely in the last economic crisis in practically all countries, as they spent lot of money to save the banks and workplaces, and because their tax incomes decreased due to decreased corporate profits and wages/employment.
Such debts have risks. The country can default in case of bad economy, but the IMF use to save them. They can refuse to pay in cases of system change (as the new government consider the old one criminals and say that the debt was taken by them, not the country). In case of own-currency debt there is a risk that the government just print money, pay you formally, but this money worth much less (in other currencies or gold).
The national debt is usually measured as % of the GDP. The reasoning is obvious, the country can repay it from the value it creates. After all, the government taxes the selling of the products/services, and the profits and wages of the companies and workers who create it. With the same tax system, the country with 2x more GDP gets 2x more tax, so can pay 2x more debt.
However I think these debts are much riskier than analysts think and can cause several nation's defaults, probably including some of the currently very strong countries. To see this risk, we have to emphasize that the country is in debt, not its citizens. For example my country's debt is 78.3% of its GDP, 20400 billion HUF. That's 103.5 billion USD on the current exchange rate. Since the population is 10 million, the debt/person is 10350 USD. However you cannot charge me for this amount (in the case the country would default), as I'm not liable for this debt.
Some countries have valuable natural resources that they can privatize to get money. But the income source of most countries is taxation of the workforce in form of income tax, the local companies in profit tax and everyone in the country in VAT. The problem is that the population is not legally bound to stay within its current country, nor can it be stopped from taking their private property (or sell them and take the money). If I would simply sell everything I have, convert the received HUF to EUR and walk out of the country, no one could stop me.
Why would I leave my country? For better wages maybe, or simply for lower tax. Since I'm bringing money with me, and also I'm a skilled worker, no country in its right mind would turn me away. As I'm no longer in my old country, I no longer pay any kind of tax there. They couldn't care less if they can replace me with an unemployed person. But if they can't, the GDP will drop and also the tax income of the country.
How can it make a country bankrupt? For the most skilled workers and also for all company owners the largest issue is tax. They move where the taxes are lower. So the countries with high tax can lose the best part of the population due to such "emigration". Please note that this does not mean political emigration as I can live and work at any place of the world without giving up my current citizenship or gaining the citizenship of the country where I live.
Since the national debt must be paid from tax, high debt countries must have higher taxes. This can easily start a vicious circle where the most productive people leave the country, decreasing its tax income, forcing it to elevate tax rate, making the next most productive people to leave, decreasing tax income even more. Soon the country reaches the point when its GDP is in freefall and can no longer pay its debt.
Only social reasons keep a person in a higher tax rate country. However, due to the internet, larger and larger part of one's social circle is virtual, accessible everywhere. For example you would not even notice if I'd move to Australia. The countries consider their population a natural resource though it's not. It can walk away. Or rather, the most productive part can, leaving you with only welfare leech, pensioners and low-skill workers.
To make this happen as fast as possible, the common people demand both high government services (Medicare, Medicaid, strong army, help to high-loan homeowners) and low taxes, few regulations. This nonsense can only happen with larger deficit, more national debt.
I believe that several countries will get the debt-crisis in 1-2 decades, collapsing under the debts that they can't pay because the people who could pay it left because they had to pay it.
Such debts have risks. The country can default in case of bad economy, but the IMF use to save them. They can refuse to pay in cases of system change (as the new government consider the old one criminals and say that the debt was taken by them, not the country). In case of own-currency debt there is a risk that the government just print money, pay you formally, but this money worth much less (in other currencies or gold).
The national debt is usually measured as % of the GDP. The reasoning is obvious, the country can repay it from the value it creates. After all, the government taxes the selling of the products/services, and the profits and wages of the companies and workers who create it. With the same tax system, the country with 2x more GDP gets 2x more tax, so can pay 2x more debt.
However I think these debts are much riskier than analysts think and can cause several nation's defaults, probably including some of the currently very strong countries. To see this risk, we have to emphasize that the country is in debt, not its citizens. For example my country's debt is 78.3% of its GDP, 20400 billion HUF. That's 103.5 billion USD on the current exchange rate. Since the population is 10 million, the debt/person is 10350 USD. However you cannot charge me for this amount (in the case the country would default), as I'm not liable for this debt.
Some countries have valuable natural resources that they can privatize to get money. But the income source of most countries is taxation of the workforce in form of income tax, the local companies in profit tax and everyone in the country in VAT. The problem is that the population is not legally bound to stay within its current country, nor can it be stopped from taking their private property (or sell them and take the money). If I would simply sell everything I have, convert the received HUF to EUR and walk out of the country, no one could stop me.
Why would I leave my country? For better wages maybe, or simply for lower tax. Since I'm bringing money with me, and also I'm a skilled worker, no country in its right mind would turn me away. As I'm no longer in my old country, I no longer pay any kind of tax there. They couldn't care less if they can replace me with an unemployed person. But if they can't, the GDP will drop and also the tax income of the country.
How can it make a country bankrupt? For the most skilled workers and also for all company owners the largest issue is tax. They move where the taxes are lower. So the countries with high tax can lose the best part of the population due to such "emigration". Please note that this does not mean political emigration as I can live and work at any place of the world without giving up my current citizenship or gaining the citizenship of the country where I live.
Since the national debt must be paid from tax, high debt countries must have higher taxes. This can easily start a vicious circle where the most productive people leave the country, decreasing its tax income, forcing it to elevate tax rate, making the next most productive people to leave, decreasing tax income even more. Soon the country reaches the point when its GDP is in freefall and can no longer pay its debt.
Only social reasons keep a person in a higher tax rate country. However, due to the internet, larger and larger part of one's social circle is virtual, accessible everywhere. For example you would not even notice if I'd move to Australia. The countries consider their population a natural resource though it's not. It can walk away. Or rather, the most productive part can, leaving you with only welfare leech, pensioners and low-skill workers.
To make this happen as fast as possible, the common people demand both high government services (Medicare, Medicaid, strong army, help to high-loan homeowners) and low taxes, few regulations. This nonsense can only happen with larger deficit, more national debt.
I believe that several countries will get the debt-crisis in 1-2 decades, collapsing under the debts that they can't pay because the people who could pay it left because they had to pay it.
22 comments:
Just to clarify, unlike some countries, citizens of the US do not escape US income taxes by leaving the country. There is an allowance for locally paid taxes, but living outside the US is not a tax saving strategy. Of course, you can attempt to hide income from the IRS, but you can try that at home too.
You should read what Paul Krugman says on labor mobility. Basically its the difference between the US and the EU. Its much easier to move within the US and the federal government balances to some extent a downturn in a particular state.
I'm not sure if there are a lot of historical precedents for the high earners all abandoning a country and leaving it to its fate (Zimbabwe is one but that was not so much due to taxes as other reasons).
The other factor that could lead to default is that once a country's debt looks shaky each time it issues new bonds to cover the old ones it will have to pay a higher risk premium raising the fraction of its GDP going on interest payments. It is certainly conceivable for that problem to grow exponentially once it begins.
So nice of you to put welfare leeches and pensioners in the same line, in the current system (where working people pay for the pensioners) they are both similar.
If governments would start saving the money that working people pay to social security, everyone would have a pension according to their income they had while working (also working longer = more saved) and it would no longer mean pension = welcome to the poor house (if you don't have a home of your own)
I live in the country with the second highest taxes in the world (The Swedes apear to pay more than us Belgians) and I too am considering to leave it (3400 euro Gross = 1800 euro net income = a maximum pension of 1096 euro net tyvm) but I guess I'm a social since I don't want to live too far from my family.
You are so right here. In my country rich people get taxes up to 60% of their income, and they want to make it even higher. This had lead to rich people go living somewhere else. Can't say that's stupid. I think the gouverment doesn't realize it's killing the country this way.
However, if the euro, witch is used in my country, becomes worthless then whole Europe is in danger. So I guess either Europe goes down with all it's countries or Europe saves any country that uses the euro, to save Europe itsself.
Nice to see that it's the same thing in other countries, but to be honest, I'd jump around in joy to have a net 1800 Euro income.
I currently earn about 1100 Gross, I believe I'm not underpaid, and a skilled worker.
Taking that in account I'm happy with what I got. I'm not saying I wouldn't move if I had the opportunity.
I doubt that high tax rates have much of an impact on overall labor mobility at least in the U.S. But they do seem to have a direct effect on the nation's national debt and overall economic performance. From 1917 until 1980 the income tax rate for the top earners was kept consistently high by the U.S. government starting at 67% in 1917 and reaching 91% during the 1950s under President Eisenhower which also corresponds to the period that the U.S. was the predominant economic power (see: http://www.ntu.org/main/page.php?PageID=19)
The only time it was lowered for the very top wage earners — down to 25% — was during the period of the 1920s prior to the Great Depression. Interestingly enough, after 1980 when the top tax bracket was lowered again down to 50% by President Reagan and then by the first President Bush down to 28% we saw a tripling of the national debt within just 10 years and the economic recessions of the 1980s.
President Clinton was able to rebalance the budget through raising taxes on top wage earners to 39%. Getting the national government's financial house in order reduced government borrowing, allowing more credit to be available to private business and giving the U.S. a huge 8-year economic expansion up until 2000.
Notice a pattern here for the U.S.?
If the U.S. simply returned to the tax rates of 1980 established under Reagan, we could get our financial house back in order. But politicians consider it political suicide in the U.S. to try and tax the wealthiest of the population. Gevlon is right about the real problem here in the U.S. — we want all these services but can't seem to get it through our heads that we have to pay for them.
okay...but move where?
only oil/gas nations and china (which is just about the sole funder of the US debt) dont seem to have a budget problem, but with fossile resources fading that will probably leave china
and i'd kinda hate to live in china i think....
Actually it's not national debt that defines where to go, but tax rate in your income segment. Moving to a similar country with a bit less tax can work because of the circle it starts:
* more high-earner people in the country
* more income for the government for the same tax rate
* fast debt repayment
* lower taxes
* more high-earner people moving in
I find this an interesting post. I work in IT, and my skills are in high demand. Having lived in Sydney, London and Edinburgh I am sick of living in moderate tax countries that provide poor services.
Last year I spent a year working in Germany, and have friends living in Germany and Holland. I plan to move to Germany later this year. Yes the taxes will be higher, but transport, education, health etc actually work there.
Well, there are morer reasons why people don't eimgrate to countries witih better tax rates.
1. Social aspects, like family, friends etc.
2. Financial aspects (selling your house, buying a new one)
3. Language problems!
4. All the work with the paperwork, you may not understand all the paperwork in the new country
5. And the traditional 'Fear of the strange'
but i'd immagine that also starts the cycle of wellfare leechers, as unless mentioned country adopts a very strict immigration and wellfare policy their just gona end up attracting more luck-seekers
adopting such a policy in europe is pretty difficult to with the mostly left-wing politics we have atm
I live in a country with one of the heaviest taxation in the world (Italy), even minimal wage workers get a 50+% tax rate on their salaries before they get the money.
There's no tax evasion for millions of workers simply because that money is taken from you before you get it (but gross incomes are quite high and must be paid from the employers).
The funny thing in italy is that many rich people (say doctors and any professionist) find easier to just don't declare their earnings and the risk to get caught is reasonably low. and when you get caught you can even negotiate how much you have to pay.
Artisans and small industries which are the backbone of the italian economy, have in tax evasion their only chance of survival since the tax rates are just insane and the work costs are one of the highest in europe. We're to the point that if you really start paying every tax you're going to get out of business soon.
The richest people simply avoid being taxed by investing their money in the stock, obligations and other long lasting investements which have a very very low tax rate compared to most countries (and they even have been lowered recently). If you're rich you can simply "trap" your money in low risk investments and enjoy happily your tax free incomes.. in an healthy economy you shouldn't be encouraged to stockpile your money and live on it's "interests".
This country is basically fucked with its insane corruption rates (billions of euros simply vanish every year), the scientific research is almost non existant, we have one of the most elder population in europe, salaries are eaten by taxes (real income for workers are the third-second lowest in europe) and the mafias (yes we have three major organizations well spread all over the country) are the biggest industry in this nation.
I'm honestly concerned by our huge nation debt that for this year will reach a staggering 120% of gdp, yeah 20% higher than what the whole country produced in a year.
So your assertion is that all that matters, literally, is your take-home pay. That it is "social" to live somewhere for good weather, or low crime rates, or good education for your children. Or, for that matter, to even LIVE near your children.
It's one thing to tag certain "social" tendancies in-game, but it's quite another to chastize real-life lifestyles.
and where would you go? Most countries are in the same boat. That is why there is a world wide crisis.
I laugh at the people that think foreign currency is more stable or gold is more stable. Maybe in the short term. If your fears come to pass then everyone in the world will be poor no one will be rich.
@Nerdrager
Realize also that the GDP figure includes government spending. That means that the very deficit spending that contributes to debt also contributes to GDP.
Recently an Australian politician stated that their responsible spending raised the GDP. He's a sodding idiot as irresponsible spending would have still raised the GDP.
In America, we had GDP increase. What many people failed to realize was that the GDP growth in America was entirely due to government spending. The GDP figures for the private sector still shrunk. So many people heralded the growth in GDP as a sign of the economy getting better. They were surprised and couldn't understand why jobless rates continued to rise.
As soon as the "bailout" passed over here in the USA some started complaining about the debt that will have to be paid back.
I just say if they screw it up bad enough Canada isn't that far away.
For years people have retired by moving to another country. Either for better health insurence or because their savings will last them longer elsewhere than it would in the USA.
If my understanding is correct, the US right now can only pay the interest to the national debt. National debt remained the same for ages now. This is something sad, that can cause inflation or other great depressions.
What scares me is that my country started following the same trend: loans from IMF that we might not be able to pay back. And that money isn't going anywhere because of the rampant corruption in our gov't. So at some point, we might end up all in debt, with enough profit to only be able to pay the interest. Basically at the mercy of... higher forces.
Now, a little guy like me can't do much but recycle and not buy stuff i don't really need, but the future does look grim. Too much money are flying around, and what, 90% of it is in electronic form, and the other is just legal tender that can be turned into toilet paper in an instant by the men behind the curtain, heh.
Hey, but at least in these times of crisis, the game industry is doing well, cause what else you can do when you can't visit Paris ? Visit Silvermoon !
Great post, btw.
Accumulating debt is a government decision that is intended to provide more overall benefit than what the country loses due to interest on debt. Higher governmental expenditures are made with the aim of causing growth, or preventing catastrophic failure in economic systems. Other countries, such as China, choose to have high foreign currency reserves which might be an attempt to decrease risk.
But the relationship is not always clear. The 1997 Asian financial crisis was unexpected compared to growth leading up to it, and according to the book θΆ ιζ could be seen as the result of what practically amounted to financial terrorism on an unstable system.
Money in the United States, in the form of Federal Reserve-issued dollars, is debt. There is no "paying off the national debt": to pay off the "amount owed" would take more dollars than are in existence -- or indeed ever can exist, due to the structure of the system itself. When new dollars are created out of thin air by the Fed, they are transferred onto the books of the US Treasury as an interest-bearing loan -- so $X million of new dollars comes with y% debt pre-attached in the form of interest.
The entire modern central banking arrangement is nothing new and still a scam. The sad part is the US Treasury, per the US Constitution, was given the authority to issue non-debt laden currency -- but Congress gave that up in a tinfoil-hat-inspiring Dec 23rd 1913 late night bait-and-switch vote to pass the Federal Reserve Act.
That handing over of the reigns to the "money powers" is what really started ye ol' United States off down the road to being the giant belligerent empire that it is today.
This can be seen at the local and regional levels as well, not just national. I live in the state of California, which has four major types of industry: Shipping, Manufacturing, Agriculture and Management. High labor costs has driven a lot of manufacturing out of the state. During (and to some extent, before) World War II the greater Long Beach area was home to a major aerospace (and later aeronautic) industry, so much so that the communities (and later cities) of Lakewood, Bellflower, Cerritos and others in the area were built because of those industries.
Today there is one aircraft being built in Long Beach - the Boeing C-17, supporting about 10,000 jobs in the area. The suburbs of Long Beach no longer house aerospace/aeronautic employees, but the area still houses it's retirees as well as many well-off ($60+K/yr) middle class folks.
I live in Nevada, max state income tax 0%, and the influx of former residents of California, max 13%, was quite large. While people are mobile, jobs are much more mobile. If you need to open a new office or factory or call center, why not open it in a place where $50k a year is a decent income, rather than a third of what you need to own a mediocre house.
"As I'm no longer in my old country, I no longer pay any kind of tax there. "
As the first commenter pointed out, very few countries will stop taxing you after leaving. Usually you will end up paying two sets of taxes, unless Hungary has a bilateral tax agreement with the country you are moving to.
In terms of choosing a country to move to, most western European countries have the highest tax rates (in the OECD), especially Scandinavian countries. Alternatively, Ireland (a legal tax haven), Australia and the US have some of the lowest tax rates in the OECD. The main reason for the US and Australia having comparatively lower tax rates (approx 22% capitalised, compared to 45% for Norway for example) is the self-funded tertiary education available in these countries, as opposed to the state-funded universities elsewhere.
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