Yearly Archives: 2011

Incentives and Taxes

Bill O’Reilly is disingenuous when he says high taxes might compel him to quit his lucrative job. Although there is a level where taxes can have that effect (why engage in challenging work if taxes limit your income to that of someone flipping burgers), we are nowhere near it. However, taxes and regulation do result in a net decline in businesses and jobs albeit by a different mechanism than “quitting”. The mechanism is attrition. Businesses fail due to normal changing market demands, bad luck, poor leadership or other reasons. New businesses take their place, however as taxes and regulations increase, the rate of business replacement declines. Why? Some business ideas are high risk and some are low risk and both types may have a high or low reward. A graphical metaphor works best here (Figure 1).

Imagine a square, the left side indicates increasing reward (bottom to top) and the bottom indicates increasing risk (left to right). As taxes and regulations increase it makes those endeavors in the lower right corner (high risk-low reward) less appealing because of reward diminishment (taxes and regulation costs consume the reward). As taxes and regulation climb we continue to move across the square from lower right to upper left along a diagonal front: everything to the right of the diagonal will not be attempted, everything to the left will be attempted. As taxes and regulations continue their march upward that diagonal shifts further and further to the left until the only thing remaining is extremely low risk-high reward ideas.

Why should taxes and regulations yield such a result? Let’s say you need an income of $50,000/year to live on and you start a business with a 2:1 return on invested capital. That means if you invest $25k you’ll reap a profit of $50k. If you are taxed at 50% then you will be left with only $25k. So you would steer clear of investing in such a business since the reward is insufficient for your needs. You would only invest in a business that had a much higher return on capital, at least 4:1. The aggregate net result is that a lot of otherwise profitable businesses simply don’t get started or funded because their potential for gain after taxes simply isn’t worth the risk relative to other ways the money could be spent. And if no potential projects exist with a sufficiently low risk and high reward then investors simply sit on their cash until one does come along.

Some hold the condescending view that if a business can’t turn a profit after taxes then it just shouldn’t exist. The presumption is that if people aren’t willing to pay a price with large embedded taxes and regulatory costs then they have no right to such a good or service. The fatal flaw in this reasoning is an assumption that it is impossible for there to exist a level of taxation or regulatory burden that is unjustifiable. This mindset leads to business destruction. When a business is caught between government mandated costs and the unwillingness of the public to pay prices that reflect those costs then that business is squeezed out of existence.

If ten businesses fail each year and only seven new ones start there will be a net decline in businesses. Absent high taxes and regulations there would have be another five that would have opened. We don’t see what wasn’t created so there is no obvious cause and effect at first glance. Analyzing the problem from an economic incentives framework quickly reveals the source of the problem. Regulations and taxes are like a flood – they drown everything in its path. To restore prosperity we must allow good ideas to flourish by removing the artificial shackles that incentivize only low risk-high reward ventures.

Worldwide Police State

The Dec 16, 2011 passage of the National Defense Authorization Act (NDAA) was a dark day in American history. In short it (a) expands the “battlefield” of the “war on terror” to the entire planet and (b) it permits the indefinite detention of a suspect (including US citizens) without any appeal rights. Although this Act has been authorized annually for the last 48 years, this is the first year that it has codified questionable implicit powers. The implicit nature of those powers has always been debatable but that’s not the issue. The issue is that the explicit powers granted basically gut the 4th , 7th and 8th Amendments for any covered person who is “determined to be a member of…a…force that acts in coordination with…al-Qaeda” (Sec 1032(2)(a)). There is a provision in Section 1031 exempting US citizens. But, as they say, the devil is in the details. Only citizens “arrested in the United States” are exempt. If you’re travelling, then all bets are off. Furthermore, that exemption does not apply to Section 1032. Section 1032 “requires” indefinite detainment only for non-US citizens. US citizens meeting the definition of “covered person” for the purposes of Section 1032 may be detained “without trial until the end of the hostilities” in the sole and arbitrary discretion of the Executive branch.

 

People willing to trade their freedom for temporary security deserve neither and will lose both. Benjamin Franklin

 

One problem is that the definition of “covered persons” is open to interpretation. What is a “force”? Perhaps it is an anti-war political movement? Perhaps speech in support of closing military bases and ceasing hostilities in foreign lands could be considered as acting in coordination with al-Qaeda? If you think that’s a stretch think again. History shows that those who believe in the mantra of “the ends justify the means” are willing to justify the most horrific crimes. One recent example of twisted interpretations: would you consider someone that minted silver coins and sold them as being a domestic terrorist? As absurd as that sounds the US government does, as exemplified in the case of Bernard von NotHaus earlier this year. An attorney for the government stated that “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country.” If minting coins is terrorism then there is no limit to what the government can arbitrarily slap that label on. And if you don’t think you have anything to worry about because you’re not a terrorist then think again. What would happen if you were mistakenly arrested under the authority of this act and indefinitely detained? Even though you are innocent you have no right to a hearing to prove your innocence. A secret “determination” of your guilt is grounds enough to lock you up. Mistakes happen. This act only works in a world where government is clairvoyant and infallible. And here are a few things that can get you on the potential terrorist watch list: more than 7 days of food in your house, buying flashlights, paying in cash at hotels, texting privately in public, own precious metals or owning guns and ammo (all are public FBI/DOJ/DHS info).

This act starts the slippery slope toward a total police state. Don’t like something, simple, just call it “terrorism” and then lock up offenders without trial for the rest of their lives. And I do mean “the rest of their lives” because the “war on terror” will never end. Real terrorism can never end because it is simply a symptom of our species’ propensity toward violence. You might as well declare war on aggression, jealousy or selfish behavior.

But perhaps what is most frightening is how overwhelmingly it passed (93-7 Senate and 283-135 House). It’s nice to see that Democrats and Republicans can agree on one thing: trampling our rights. As Benjamin Franklin said, “People willing to trade their freedom for temporary security deserve neither and will lose both.”

 

The War on…Happy Meals?

The city of San Francisco enacted a law that went into effect on November 30, 2011. It bans any chain restaurant (i.e McDonalds) from providing a toy with a meal that the overlords of that city decree does not meet an arbitrary nutrition standard. Clearly McDonalds is attempting to ensnare unsuspecting children with toys that are as irresistible as the One Ring was to Gollum. Parents’ and children’s brains are completely incapacitated by these toys and they are unable to exercise any free will and thus have no choice but to purchase a Happy Meal. Yes, I’m being sarcastic. I’m not even going to delve into the most obvious discussion here, i.e. that this is a prime example of nanny-statism at its worst, that government can interfere in transactions between a willing buyer and a willing seller because condescending politicians believe it is morally acceptable to substitute their preferences for that of the citizens.

 

Clearly McDonalds is attempting to ensnare unsuspecting children with toys that are as irresistible as the One Ring was to Gollum.

 

Although McDonalds has skirted the ban by charging 10¢ for the toy the underlying issue here has been overlooked in the media. They weren’t trying to stop McDonalds from providing a toy. They set standards for fat and sugar content, which if met, would permit a toy. So the authors of the law, like the unsuspecting chess player who overlooks his own vulnerability while attacking, thought it would force McDonalds to change the content of the meal. They failed. The toy remains a meal incentive to not only the children but also the parents as well, who are now guilt tripped into buying the meal since the toy money goes to charity. Touché McDonalds!

Obviously the instigators of this law don’t have children, because as any parent will tell you, children will not eat what they don’t like. Period. No kid is going to eat a happy meal populated with apple slices, carrots and yogurt no matter how many toys it comes with. If the promoters of this law got their way, here’s what would happen: the child takes the toy, nibbles on one thing and then throw the rest of the meal out. This outcome mirrors the primary problem with the school lunch program. Let me explain. If school lunches meet federal nutrition guidelines then the meal is partially paid for (subsidized) by the government. So a $5 meal becomes a $2 meal. Great. The only problem is that kids throw away the stuff they don’t like. So what could stop them from throwing out food? Simple, just let the kids pick what they want. Problem is, if they do that then the meal no longer meets federal guidelines, so it can’t be subsidized. Now the meal is $5 with LESS food. It’s cheaper to buy the whole thing, eat what you want and throw away the rest then to just buy and eat what you want. But like a stubborn 3 year old, government stamps its foot down and insists we continue on the same failed course because it is “best”. When will they ever learn that you can’t alter human behavior by mandate?

Government should not subsidize meals for those that can afford it. The program has slowly morphed from alleviating starvation among poor students, to subsidized food for all students, to nutrition nannies that incentivize wasting food. The argument that we must subsidize all meals is that if we didn’t then poor students might be ridiculed by their peers (the same logic was also used to force TARP money onto banks that didn’t need it). So in order to protect against possible hurt feelings we as a country subsidize all meals to the tune of $16 billion/year. The least we can do is alter the program so as not to incentivize discarding thousands of tons of food every day across this country. Provide healthy options and let the kids pick what they want. To continue doing otherwise is blowing against the wind.

 

Be thankful for…Capitalism

In May 1607 the first American settlers from England arrived in North America and established a colony at Jamestown, Virginia. It was a veritable Eden: rich, fertile soil, abundant fish, game (deer and turkey),fruits, and nuts. By November 1607, 66 of the 104 colonists were dead (due mostly to starvation). In 1609 the Virginia Company attempted to “reboot” the colony with another 500 settlers. Within 6 months 440 of them were dead, again due to starvation.* How was this possible? How could so many perish among such abundant natural resources? Were they unprepared? How could the same things happen two years apart? The answer lies in the words of an eyewitness, who stated that the famine was the result of a “want of providence, industry and government, and not the barenenesse and defect of the Countrie, as is generally supposed.” Translated into modern English: it was the result of a lack of work ethic, effort and self-discipline and not due to any problem with the environment.But how is this possible? Surely the Virginia Company (the entity contracted by the British aristocracy to establish the colony) would not recruit a bunch of lazy slobs to run their very costly endeavor in the New World? No, the fault did not lie with the settlers per se but rather with the Virginia Company itself. The settlers were (willing) indentured servants. They agreed that if the Virginia Company would pay their way to the New World (a not inconsiderable sum at that time) then they would labor for the benefit of the Virginia Company for the next 7 years. The fatal error the company made was in heeding the words of Plato (who advocated collective ownership of land). They decided that all land and production therefrom would be held in common, the colonists would take from that stock what they needed and the remainder would be for the company. The company feared that if each colonist owned his land he would farm just enough for himself.

The failure of this collective ownership arrangement was a result of human nature,which leads to the “free rider” problem. Humans are inherently lazy. When given a choice between more work and less work to accomplish the same goal we will choose less work (why use a hammer if you can use an air-nailer?) In a communal system it is easy to hide indolence behind the work of others. For example, if 10 men produce 100 bushels of corn per month (total of 1000 bushels) and fromthat they are allotted 1% of the total output for themselves each month (10bushels), then if one man slacks off and only produces 50 bushels then what he gets back is not cut in half, rather it is only cut by 5% as he gets 1% of 950 bushels or 9.5 bushels. Once everyone realizes they can “free ride” on the work of the more industrious (as some might increase output in a noble but futile effort to make up for the slackers) total output will decline. Or stated differently, if something is Everyone’s responsibility, then Nobody will do it.

How was the starvation problem finally solved? In 1611 Sir Thomas Dale was sent to serve as the “high marshal” of the colony. Herecognized the problem and instituted a system in which each man was given 3acres of land that he would own and farm.* All that was asked in return for ownership of the acreage was a lump sum tax for the colony of 2.5 barrels of corn (note, it was not a percentage of his output but rather a lump sum headtax!) The colony immediately began to flourish. Now rather than an incentive to decrease output and slack, each man had an incentive to produce as much as possible because he could keep the excess. He could now use the excess to trade with the Indians for furs and other goods. Trade also had the side benefit of helping to maintain peaceful relations with the Indians (why risk life and limb in warfare to get something when you can just trade for it).

This conversion from a communal property system with rampant starvation to a private property (capitalist) system with abundance was not a fluke. The same thing happened again at Plymouth, Massachusetts in 1620. After three years of starvation and death the governor of the colony, William Bradford, finally realized the problem and ordered that they “should set corn every man for his own particular, and in that regard trust to themselves…”* In other words, private plots of land were established for each family to farm themselves.
Why does this notion of communal property keep appearing throughout history? Why does it intuitively seem like it should just “work”?Perhaps because we are already familiar with the one and only place it can work: the family. A family is the ideal setting for a communal system because it is (a) small and (b) members are bound to each other by love. There is no incentive to free ride because (a) you’ll be caught and (b) you’ll harm those you love. The fatal error is in assuming that what works in a small group can work in a large group. This can never be due to an alteration of the incentive structure as the group size and character changes. No one will ever love their neighbor to the same degree as they love their own family.

* “How Capitalism Saved America”,DiLorenzo, Thomas J., 2004, Chapter 3.

FOLLOW UP: I received two Letters to the editor in the Morgan County Citizen, here and here, and my response is below:

In response to Bill Scholly (Dec 7, 14): Bill, would that I could opine on your version of events, but alas I cannot, as you have provided no citation source. Is the reader simply to believe your version is infallible and therefore requires no substantiation? I provided only one source (DiLorenzo) due to length limits on editorial articles. There are several other sources that I have added to my blog version of the article that substantiate the version I presented. However I find it curious that rather than question the specifics of the events, you instead chose to attempt to discredit the source by way of name-calling (“delusional”) and innuendo (the “hang with” comment). But I’m afraid you have us all at a disadvantage. Without knowing your source it is impossible for anyone to question you. How convenient.

OTHER REFERENCES

Tom Bethell, TheNoblest Triumph: Property and Prosperity Through (New York: St.Martins’ Press, 1998).

Warren M. Billings, ed., “George Percy’s Accountof the Voyage to Virginia and the Colony’s First Days,” in The Old Dominion in the Seventeenth Century: A Documentary History of Virginia,1606-1689 (Chapel Hill: University of North Carolina Press, 1975), 22-26.
Philip A Bruce, Economic History of Virginia in the Seventeenth Century (New York:Macmillan, 1907).
Gary M. Walton and Hugh Rockoff, History of the American Economy, 9thed. (New York: Dryden Press, 1998), 30.
Mathew Page Andrews, Virginia, The Old Dominion, vol 1 (Richmond, VA: Dietz Press,1949), 59.
William Bradford, Of Plymouth Plantation, 1620-1647, with an introduction by SamuelEliot Morison (New York: Knopf, 2002), 116.
Samule Eliot Morison, The Story of the “Old Colony” of New Plymouth (New York: Knopf,1960).
Larry Scweikart, The Entrepreneurial Adventure: A History of Business in the UnitedStates (New York: Harcourt Brace, 2000), 37.
Jeremy Atack and Peter Passell, A New Economic View of American History,2nd ed. (New York: Norton, 1994), 50

Legalize Stupidity

If you were offered raisins, crickets or pebbles would you prefer that they were chocolate covered or plain? They would seem palatable at first if coated with chocolate, but after a few bites you would know their true nature. Everyone prefers to see things in their unadulterated form if there is risk of ingesting something distasteful. Oddly though this natural preference is artificially negated when we interact with groups of individuals. Some groups (businesses and social organizations) are legislatively required to pretend to be something they are not. In less abstract terms I’m referring to anti-discrimination laws. Before I go further let me dispel any misunderstandings – I am not in any way endorsing or promoting bigoted behavior. It is socially and morally reprehensible… but that does not mean it should be legally reprehensible. Some might say immoral behavior should be outlawed. I disagree; it is not the place of the state to impose morality on society (unless you’d like to live in a theocracy like Iran). If you want someone to adopt your morality, lead by example, not by force.

Our laws treat groups of individuals differently than they treat the individual even though there is no logical basis to do so. For example, if an individual does not allow certain types of people into their home or does not purchase goods from them they are free to engage in such behavior. But if we substitute the word “individual” with “group” and “purchase” with “sell” it suddenly becomes a criminal action. This is arbitrary and illogical. Why is it ok if one person does it but not ok if two people do it? I’m not advocating that we impose anti-discrimination laws on the individual though; rather we should repeal anti-discrimination laws. That does not mean I’m “pro” discrimination. Rather, I’m pro transparency. For example, if you are seeking employment and the government has forced the discriminatory employers to behave as though they are non-discriminatory then how are you going to discriminate yourself between the good and the bad employers? I often read about court cases where people fall into this trap. Only after many years of employment do they finally realize the employer is actually bigoted and they either have to quit or file a lawsuit. Even if they win why would they want to keep working for an employer that they know is bigoted? As an employee I’d much rather know what kind of company I might be working for in advance so I can avoid the jerks and work for an employer that will treat me right. A good employer will flourish in a system where they can attract the productive employees that the shortsighted discriminatory firms are ignoring. In such a system the discriminatory firms will atrophy and die. Why? Because they have restricted themselves to a narrow talent pool that ignores potentially more productive employees. Productive discriminated employees will go to the non-discriminatory firms and help them outcompete the discriminatory firms. Additionally, the public would cease to patronize such discriminatory firms were their true nature known. In other words, the market spontaneously regulates such bad behavior by punishing those groups stupid enough to hold such unacceptable positions.

The knee jerk reaction against the idea of eliminating anti-discrimination laws is based on the faulty premise of believing government is our savior by citing the civil rights laws of the 1960s. Government simply fixed the very problem it had created. Discriminatory Jim Crow laws were upheld and enforced by government fiat. However after nearly 50 years the most serious wrongs have long since been righted. There is no longer a reason to outlaw stupidity. Please, let us see who the stupid people are so we may ourselves discriminate and avoid them entirely.

Tax Fairness (Part 3): Answers to questions on the Equal Tax

The Equal Tax (a head tax system) treats all citizens equally. It is the homeowners association model – everyone pays the same fee regardless of their income level. Those that believe in wealth redistribution won’t like it but then again thieves don’t like security systems. So, without further ado:

Arguments against the Equal Tax – Answered

1) How would you collect the tax? Government becomes just another service paid for monthly, like a cell phone bill. You could choose to pay it all at once or have it drafted monthly or weekly. Your employer no longer acts as the middleman for the IRS. Retailers no longer act as middleman for the local sales tax authority. You are responsible for yourself and you alone bear the consequences of not paying just as you would any other bill you do not pay. All restrictions on immigration would be repealed. Prospective immigrants would simply pass a criminal background check and then be issued an ID# for Equal Tax accounting (an increase in the population would naturally drive the tax down as the required budget is divided by a growing population).

2) What about those that sneak in and don’t pay the tax? Without immigration restrictions there is no incentive to sneak in. The incentive to sneak in was due to an artificially long time frame for entry. Remove the wait time and you remove the reason to “cut” in line. Immigrants will gladly sign up to get their ID# so they can reside here legally. To catch the few that would try to cheat the tax system we would employ the honor system found in many subway systems. In these systems there are no turnstiles, anyone can go through whether they have a ticket or not. This works because the fine for not having a ticket is extremely steep…virtually no one risks it (would you risk a $1,000 fine to avoid a $1 ticket?) High risk and low reward incentivizes compliance.

3) It’s not “fair” because the wealthy would pay little relative to their income! In no other arena of goods or service purchasing are we asked what our income is before we are given a price. The price of a gallon of milk doesn’t change depending on who is buying it. So why should the cost of government services change depending on who’s buying it? Paying based on income is subsidization. Subsidization is theft. Last time I checked, theft is considered unfair.

4) The per capita cost would be too high because the wealthy would no longer be subsidizing it! Exactly! It would force a reduction of our bloated government. If government were cut down to its core functions (defense, justice, contract enforcement) it would be affordable for everyone (considering that all income, property and sales taxes would be abolished). The tax would be driven downward as voters demanded ever more efficient government.

5) And what of the poor, this would surely harm them the most? Not at all. It would drive up their wages by an amount at least equivalent to the additional tax (and employers could easily afford that as they aren’t paying income and payroll taxes). Why would it drive up wages? Consider: if you are the sole wage earner for a family of four and make $15k/year and your tax bill just went up by $10k, you’d be a fool to work for anything less than $25k/year – NOBODY would work for less thus wages would necessarily go up (market based minimum wage). Likewise costs of goods would drop as the tremendous tax burden built into every good and service is eliminated. Everyone would be much better off in terms of purchasing power.

6) What about those that are disabled or on fixed incomes? Private charities would step in to assist people truly in need of tax help just as they assist them with their other needs today. Charity donations would explode because of the dramatically lower tax burden. Those on fixed incomes would no longer owe income, property or sales taxes and as described in Question 5 the purchasing power of their dollars would go up – so they would be much better off.

The idea of a progressive tax system has been ingrained into our psyche since birth so I can understand why the Equal Tax might seem bizarre. But if you consider the logic behind it, it is undeniably the best tax system. It is fair. It is fraud proof. It incentivizes smaller government. What more can you ask for?

Tax Fairness (Part 2): Solved with the Equal Tax

Our tax systems (income, property, sales) share a common problem. They are applied in a discriminatory manner that harms some to the benefit of others. Rather than discrimination based on race or gender it is discrimination based on behavior or actions. Those that behave in a government desired manner pay less. Those that are good at hiding income or gaming the system pay less. Everyone else pays more. These systems are easily bypassed both purposefully and accidentally thus driving up tax rates in order to compensate for such losses. Lastly, they can transform the average citizen into an unwitting criminal if they happen to take a wrong step in the minefield of tax rules. In short they are an imperfect and unfair mess.

A fair tax system would have a universal/non-discriminatory target: those that benefit from core government services (defense, courts, contracts) by virtue of their residency: all permanent residents. It would have an inescapable calculation method: one’s tax bill would be based on a single universal metric and would not be a function of an individual’s behavior. What is this perfect tax system? I call it the “Equal Tax” which is otherwise known as a capitation or head tax. Each and every person would owe the same amount of tax.

What problems does the Equal Tax solve?

1) Fairness: The foundation of “fairness” is universality. Rules in a game are “fair” and  “uniform” because they apply to all players and they have an equal result. But sometimes a rule can be uniform yet still be unfair and it is this that we wish to avoid. For example if taxes were based on weight (i.e. pay $x/lb) this would be a uniform rule as it would apply to everyone but the result of such a rule would be obviously unfair. In the same way one might claim that an income tax or property tax is “uniform” because it is methodologically applied in the same way to each person, however the outcome is clearly unfair since some end up paying more following this “uniform” rule. The Equal Tax solves this issue because both the method and the result are uniform. It applies to every man, woman and child residing in the US (obviously parents would pay for their minor child’s obligation). The measure (i.e. amount) of this tax will be driven to the lowest level possible by altering the incentive structure that currently governs our tax system. Rather than attracting votes by promising local pork-barrel projects (i.e. leading to higher taxes) elected officials will attract votes by promising to decrease the tax burden. This inherent incentive of cost reduction will necessarily drive the genie of big government back in the bottle until government is reduced to its core essential functions.

2) Fraud: It is inescapable. There is no point in hiding income, no point in understating your home’s value, no point buying over the internet solely to avoid sales tax…your tax bill is the same as your neighbors and it isn’t going to change based on anything you do or don’t do. Payments won’t be 100% every year, but at least we’ll know exactly how much revenue is short rather than pie in the sky guesses.

3) Impossible to inadvertently violate tax laws. There are no complex rules to follow. You owe $x each year. Period. If you don’t pay it, you know you’re not paying it, so it can’t be accidental.

4) Engagement of all citizens in the political process keeps government in check. Congress will hear from every citizen “Why are we funding that program? It’s costly and I’m PAYING for it, get rid of it.” This would force government to provide only the essential functions that everyone agrees on. Our current system minimizes incentives for citizens to be involved in the political process because the vast majority don’t care because they pay little to no taxes. In short, the involvement of citizens would force government to remain affordable to even those with the lowest income thereby imposing real restraint on the growth of government.

How much would it cost? Assuming all Federal, State and Local governments adopted such a method and only core functions of government are funded it would cost roughly $2400/year/person (based on US Budget figure for 2010 (publicly available at Wikipedia) and public figures for local county and state budgets). I’m sure the idea of the Equal Tax has raised a lot of questions, some of them good and valid and some of them unthinking knee-jerk reactions. I answer those concerns here…

Tax Fairness (Part 1): What is it?

I wish someone would explain the objective criteria used to define “fair share” as it pertains to taxation. This term is used indiscriminately by those that assume everyone else’s internal fairness meter must be the same as theirs. Unfortunately “fair share” is not an objective standard, nor is it a subjective standard either because it’s not even a standard at all. It is merely subjective whim masquerading as some golden absolute. The peg of “fair share” moves to whatever arbitrary point will bring in enough revenue to pay for whatever government largesse the proponents are seeking to fund. It is a completely backwards approach to budgeting that always leads to debt and/or higher taxes. It is based on the faulty premise of spending driving revenue requirements vs the economically sound approach of fixed revenue driving permissible spending.

The various tax systems (income, sales, property) today are a cesspool of unfairness from which we will never find a “fair share” lurking beneath their depths. The income tax system is based on a foundation of fostering wealth redistribution and behavior modification using the carrot/stick model. For example, every time someone gets a deduction or credit on their taxes it is because they are engaging in behavior the government wishes to promote (“there boy, good boy, you’ve been a good doggy”) and those that don’t get those deductions or in fact pay extra surtaxes are engaging in behavior the governments finds objectionable (“bad dog, bad dog!”). Deductions and incentives are one form of tax unfairness as they benefit one group at the expense of another. The other more sinister form of tax unfairness is progressive income taxation. There is no rational basis upon which one can argue that as one obtains more income they have progressively less right to keep that income.  Few today realize that the idea of a progressive income tax is one of the primary tenets of communism*, its sole purpose being to destroy all wealth so as to more rapidly bring about the utopian order of the perfectly “fair’ communist society where all are “equal”. Oh, and yes, I did say “rational basis” for an argument. I don’t include the irrational ones like the argument that society has a right to tax the wealthy more because the only reason they are wealthy is because they have had at their disposal all the wonderful manna that has fallen from government run heaven (e.g. roads, public education, court system, etc). So, if all these things are what made wealthy people wealthy, then why isn’t everyone wealthy? These things are available to everyone, right? Or more to the point, based on this twisted logic one could argue that any tax rate imposed on the wealthy is fair. The argument doesn’t tie the value of these government services to some specific tax % therefore this argument can be employed for any tax %. Reductio ad absurdum.

When it comes to taxation the question of fairness must be broken down into two components: (1) the method and (2) the measure. To be considered fair the method must be (a) universal and (b) inescapable. A universal method is non-discriminatory and applies to every single citizen or non-citizen resident. Every. Single. One. An inescapable system is sufficiently transparent that it is not possible to hide one’s tax obligation. There is one tax system that would be universal and inescapable (hint: it’s not a sales/consumption/VAT tax). But, you’ll just have to wait until next week for the exciting conclusion when I reveal the identity of this new system and how it dovetails perfectly with the second component of tax fairness: measure.

* Manifesto of the Communist Party, Marx K., Engels F., 1848, Chapter 2.

 

A Wasted Protest

The “Occupy <insert city name here>” protestors are certainly an eclectic bunch. From what I can gather they blame “the wealthy” and “corporate greed” (whatever that means) for a myriad of the problems this country faces, not the least of which is that they don’t have a job. Give me a break. If they have time to travel across the country and camp out in a park for weeks on end, then they have time to find a job. The protestors have one slender thread of a justifiable grievance: the “too big to fail” crony capitalist policies of our political system. The problem is that they should be protesting the government that bailed out big businesses (the financial and auto sectors). Those businesses made risky investments because they knew Uncle Sam would back them up if things went south. Ask yourself, if you could go into a casino and gamble as much as you wanted knowing that any losses would be repaid to you, would you really restrain yourself from not simply gambling as much and as fast as you could?

This protest is a wasted opportunity to raise national awareness of what really ails this country: big government. The protestors are simply too ignorant of basic economics (“let’s just get rid of all money” said one) and the nature of free-market capitalism (as distinguished from crony-capitalism) to advance any kind of legitimate, useful agenda. For example, some constructive demands would be:

1) end the Fed and the ability of the government to print money: this brings an end to the “business cycle” which is an artificial result of government money manipulation

2) end all government subsidies: this would lower taxes by eliminating corporate welfare

3) repeal all government regulation of business: this would put all the lobbyists out of work and would then create a boom in new businesses and new jobs (as regulations are the tool that big business uses to raise the barrier to entry by new competitors)

4) repeal all business taxes: a lack of income tax would create a huge increase in rate of return on invested capital thereby attracting thousands of US and foreign companies to the US which would in turn create millions of new jobs.

But you won’t hear any of the protestors calling for such reforms. Their solution to “income inequality” is not to raise those on the bottom up (by promoting an environment conducive to job creation) but rather to cut those at the top down (by promoting punitive taxation under the mantra of redistribution following a misguided appeal to “fairness.”) Income inequality is a natural consequence of being human. It is the same as inequality in a foot race. In fact the statistical distribution in both a race and income is identical: a handful are wealthier or faster than everyone else, a large portion are average and a handful are very slow or poor. Government mandated redistribution of wealth is no different than forcing the fast runners to carry sandbags on their back, so as to remove their “unfair” advantage over slower runners. Capitalism is like the foot race; those that come in first do not gain their speed by sapping the speed of the slower runners.

To insist that income must be equal for all or have a very narrow distribution is to tilt at the windmill of biology: we all have equal natural rights but we are not created with equal abilities. Those with skills in high demand or low supply (doctors, lawyers, actors, sports stars, etc) will always earn much more than those with skills in low demand or high supply. That’s life, get used to it. The solution the protestors should be seeking is to improve their skill set rather than promoting government-sanctioned solutions that use threat of violence (taxation) in order to “right” their perception of a “wrong.”

 

Decriminalize Immigration

The idea of “illegal” immigration is a silly notion. It’s akin to an “illegal” vacation. Immigration is simply the act of moving from Location A to Location B. Why should permission be required to exercise this right? Up until 1882 (with passage of the non-euphemistically named “Chinese Exclusion Act”) anyone was permitted entry. Immigration laws were tightened further until 1921 when the Temporary Quota Act set “national quotas” and permanently criminalized immigration. And thus a legal harmless act was made “illegal” by arbitrary government fiat.

The RIGHT to immigrate (or emigrate) is distinct from the PRIVLEGE of citizenship. The basic idea is “you’re welcome to come and work and live here and support yourself but don’t expect handouts from the government… if you want a handout then you must become a citizen.” If immigration were properly viewed in this manner it would solve the issue of an overburdened social safety system. If only citizens can utilize the social institutions then you remove all incentives for those with parasitic intentions from immigrating. We would, however, have to change the antiquated citizenship laws that confer citizenship to those born on US soil. Citizenship should be a privilege reserved for those that meet the established criteria or the children of a US citizen.

The most common justification for restricting immigration is that they ‘steal’ jobs from Americans. Hogwash. They are doing the jobs that nobody wants. And when nobody does them, they don’t get done. For example, my family has been buying peaches from a fruit stand on Hwy 441 for several years and we have gotten to know the owners quite well. This past spring Governor Deal signed into law Bill 87 (which enacts severe penalties and mandates in order to curb illegal immigration). So this was the first growing season after that bill passed and recently one of the owners, Amy Bishop, remarked to us that the lack of immigrants had severely affected their business. There are simply not enough pickers. Food is rotting in the fields. The peach harvest was greatly diminished in both quality and quantity. She stated “I’ve thrown away more peaches this year then in 15 years, we lost, at our cost, over a 6 week span over $2000 just on peaches” (due to low quality from lack of tending and higher prices due to diminished supply).

“I’ve thrown away more peaches this year then in 15 years, we lost, at our cost, over a 6 week span over $2000 just on peaches”

With high unemployment you’d think the growers would have people lining up to work. Apparently not. When unemployment compensation can last 2 years it disincentivizes the unemployed to find work when such work might only equal or barely exceed what they already collect for doing nothing at all. Some say the wages for such “menial” jobs are too low to attract Americans to work them. Funny, the immigrants seem to get by just fine. Nevertheless, if the pay is “too low”, then I don’t understand the argument that jobs are being stolen? Stolen from the people that don’t want them?

Many immigrants fill a niche in our economy, the niche of the menial jobs that the native born don’t want. This has been true since this country was founded. The first generation is willing to do the hard work so that their children won’t have to. Removing the immigrants simply leaves those jobs undone, driving up prices. If we don’t want immigrants “mooching” off our big social safety net we need to either make the net smaller or require proof of citizenship for those wishing to partake in a government handout.