As individual parents, we want our children to live better than we have lived and to take advantage of whatever we have built for ourselves. As voters, however, it seems that we have been stealing from our children, such a shameful act that very few parents would be willing to admit to wanting to do it, yet somehow collectively we are able to justify it. The Economist’s September 29, 2012 issue carries an article titled “Sponging Boomers” that describes how “each American born in 1945 can expect nearly $2.2m in lifetime net transfers from the state–more than any previous cohort.” (most of the data for the article comes from the International Monetary Fund)
Must we as today’s parents therefore leave our children a trust fund of a certain amount just so that they can break even on all of the transfer payments that they will be forced by the state to pay back to us?
Let’s consider a few ways in which we might let ourselves off the hook. If the population grows enough, especially through immigration, we can tell ourselves that it isn’t our own children from whom we are stealing but rather from immigrants and the children of immigrants. The U.S. population was just 140 million in 1945 (source), less than half of what it is today. The sponging boomer born in 1945 is arguably being paid back not by a single young person but by at least two.
Another way that we could let ourselves off the hook is by imagining that our own children will emigrate to a country where they won’t have to transfer a large percentage of their earnings to an older generation via taxes. For example, they might emigrate to Holland where pensions are fully funded in advance or to Australia or Singapore.
Finally we could argue that today’s child will somehow be able to kick the can down the road to his or her own children via (1) massive borrowing at today’s very low interest rates, (2) massive immigration of highly skilled workers who will grow both the population and the economy.
If we can’t let ourselves off the hook, roughly how much do we have to give each child in 2012 so that he or she can ultimately pay the taxes that will cover our Medicare, Social Security, and pensions (for those of us who are public employees)?
[This question is timely due to the pending expiration of estate tax exemptions. After 2012, “leaving money to children” will translate to “giving money to the federal government”.]
Phil, if you had dual-nationality children, who had the option at age 18 of keeping their US citizenship — and forever obligating them to pay taxes in the US, regardless of their location of residence — or to give it up, what would you recommend to them?
Matt: My first answer is that they should keep the U.S. citizenship. Nobody knows anything about the future is the mantra of my friends who run hedge funds (they get paid 20% despite not knowing anything!). The U.S. is more than 20% of the world economy so there is probably a roughly 20% chance that the U.S. will have the most job opportunity in the future. EU citizenship is the only comparable bet that one can make and the EU seems to be disintegrating.
The obligation to pay federal income tax at headline rates, even after expatriation, is not a huge factor for most people. The first $95,000 or so is exempt from income tax. Foreign taxes paid can be used to offset a U.S. tax obligation. So unless your kids are going to emigrate to a zero-tax destination and earn a huge amount, their federal income tax liability is not enormous.
The U.S. citizen who expatriates him or herself avoids paying a huge array of other taxes that will probably add up to more than federal income tax. These taxes include real estate tax (indirectly if renting), state income tax, state gas tax, state alcohol tax, consumption (sales) tax. Those state and local taxes are going to be even bigger than they are now if the states and local governments are ever to meet their pension and health care cost obligations. There are also federal excise taxes and there may very likely end up being a federal sales tax (VAT), plus import duties, federal gasoline tax, etc. Citizens get upset when they hear that the tax rates are over 50% so the U.S. federal, state, and local governments will have to bleed Americans to death by paper cuts. An American who has moved overseas will avoid most of these small incisions.
Phil,
Thanks for the reply.
A real kicked would be if the kids wanted to run non-US businesses. If an American owns more than 50% of a foreign company, that company is classified as a Controlled Foreign Corporation, and its income is classified as “Subpart F income”. In addition to the information reporting burden, Subpart-F income is taxable at the personal level, whether or not the source corporation has distributed the income as dividends.
So in short, if you own a foreign corporation, that corporation’s income is personally taxable to you, whether or not its distributed.
Matt: All true, but statistically what is the likelihood that your children will be entrepreneurs? It is not a common choice of career. In fact, the more people know about business the less likely they are to choose it! My friends who got MBAs report that hardly any of their classmates ever chose to start a company. The reward/risk ratio was much better in working for an established company. The business schools have to stretch hard to find examples of graduates who started companies (e.g., Yale b-school uses the Bright Horizons day care chain).
I think it is best to give your kids as much now as possible. If you can afford to give the children 5 million dollars right now do it! I think with Obama’s re election almost a certainty this exemption will end soon. If you don’t have an extra 5 million around my estate attorney told me you can give your kids a promissory note of up to 5 million dollars. You can define the terms of this note and stretch it out as long as you want.
P. Mirlton: Thanks for that intriguing idea. What about money put into College 529 savings accounts? If it has been kept to the $13,000 per kid per year limit, does that count against the $5 million number?
I should add that I wrote about a method for giving money to children that works as an income match and therefore won’t demotivate them from work. It is a subsection within http://philip.greenspun.com/materialism/early-retirement/
Phil,
A quick note bout this “stealing from our chlldren” thing.
First of all, it it true that Joe Average will get more out of Social Security than he put in, i.e. the youngsters will net net support him in old age. On the other hand, not to feel guilty: they will be much more productive than he was, so they won’t be putting in more effort than he invested. And they will be more productive mostly because they wil be working with a larger capital base, both public in the form of education and infrastructure, and private in the form of their employers’ capital, than Joe had to work with. And Joe Average is who provided that capital base that makes the kids productive enough to support us — so no mooching going on there.
Second, there’s a large pile of bullshit, largely flung by Republicans, but innocently believed by all too many of all kinds, about how the national debt represents a transfer from our children to use. “Borrowin from the future” is one form of this nonsense.
Now it is a fundamental fact that goods and services cannot travel backwards in time. No debt can give us now any thing or service produced by “future generations’ or others we should weep over. Debts, and particularly the national debt, are all about who pays whom. Thus they are of concern if we are worried about who is getting what at the end of a long trail of paper.
America borrowing from China is certainly an interesting power move, though not one hat concerns me much, even though I consider myself a lover of America, though not American. (Two of my children are American, so my feelings are not merely Jeffersonian idealism…)
To the extent that national borrowing ends up with poor folks paying interest to rich folks, however, it seems to me a very bad thing. Time to balance the budget — on paper-shuffler MItt Romney’s back, through taxation if possible — and by a capital levy or inflation if not. Their class war: I hope they hear the sound of tumbrels rolling.
-dlj.
You’re forgetting that each passing year brings a host of new tech, wealth, that the previous didn’t. This is accelerating, robocars and robot assistants and the like.
It’s true that the scumbag government employees collecting fat checks should be dealt with, but to write off all debt, is naive. Debt to pay for science research should be greatly increased, even if it goes to cheaper overseas researchers.
Would is a better scenario, to die surrounded in a huge mansion, or to live to see another day (another 100 years), even if living out of a shack.
dude: You’ve raised a good point. If one believes in the Singularity then it shouldn’t matter how much debt we take on today because it can be paid back by machine labor as soon as the Singularity arrives and infinite wealth is created on a daily basis.
The only problem with the idea of using debt to fund scientific research to bring the Singularity closer is that Nixon started the War on Cancer and a river of government research money flowing. That was 41 years ago and yet cancer remains about as serious a problem as ever (see http://en.wikipedia.org/wiki/War_on_Cancer ).
We also have a political problem with allocating borrowed money to science. We’ve used borrowed money to pay teachers, pay retired 50-years, build roads, pay doctors and hospitals, wage war, etc. For whatever reason, voters and politicians don’t seem as excited about the idea of using borrowed money to pay for research or even anything high-tech (e.g., a universal wireless data network for the U.S.).
phig: Yeah, i mostly agree with you. However, i think any time you put research money in the hands of bio researchers you fail. They don’t get the idea of automation or algorithmic thinking, if they put it in engineer hands (the type of people who did the moon landing) it might have had much more success.
Also, resolving the public money to govployees dilemma might be fixed by putting out the scientist-vs-govployee slogan instead of the current millionaire-vs-goveployee.
@dude: Then next time, when my next door neighbor ask me to barrow $5,000 so he can build a brand new deck [1] to improve the quality of _his life_ and the value of _his_ house, I should jump on it? No, I won’t lend him _my_ money, I will use _my_ money to build _my own_ deck for _my own_ benefit.
And while we are talking about my deck — just like my other neighbors have been so kind to me for the past, oh so many years — will you also lend me $5,000 so I can take my family on vacation this coming winter? Btw, I still haven’t paid them back for my past vacation loans, but I’m working on it.
[1] Replace “deck” to any new tech, wealth, that the previous generation didn’t have.
George: but you can’t replace deck with science/tech. Science/tech is cumulative knowledge. Any spending done today is available to later ones for free (cost of information is free).
The correct argument in your framework is – borrow money so the neigbour and me both get a deck. I’m pretty sure the neighbour would agree (if deck is life saving drug or quantum computer etc).