Category Archives: Taxes

Outside-the-box Economics

The US, Japan, and other countries have converging economic policies which are not optimally stimulating growth within their national economies. The following is an attempt to eliminate inefficiencies and improve incentives: a discussion point, not a recommendation.

Eliminate all taxes, and print the money that the government needs to handle it’s budget. Tax would be implied by the inflation of the currency. The US government’s annual budget of $1.864 Trillion in 2001 represents a small portion of the total US assets and capital. I don’t know the total number–I’m not sure if anyone does–however, GDP in the US is $9.8 Trillion. With a total US currency capital base of only twice GDP, the marginal increase in money supply would be about 10%. M3 (The broadest indicator of money supply, including bank deposits and money-market mutual funds) rose by almost 14%, year-on-year, to the end of October, 2001, meaning that the US gov’t annual budget would add another 42% to the increase in M3. Meanwhile inflation is about 3%. If we increase the inflation rate by the same factor, we get 4.25% inflation. And no taxes.

The stimulation of the economy would be furious for a few reasons: 1) Elimination of taxes increases disposable income by 50% (assuming 33% average tax, which is probably low), 2) an increase in inflationary expectations creates an increase in spending, and 3) enormous increases in efficiency.

In terms of efficiency, the entire IRS and tax calculation and collection processes would be unnecessary. In addition, the legal complication surrounding estate taxes, loopholes, alternative minimum taxes (AMT), purchase basis tracking, tax avoidance, foreign tax safe-havens, audits, etc. would become unnecessary.

Sales taxes, including targeted taxes to discourage some goods or behaviors could (and should) still be used.

Currently, there is no tax on wealth. Instead, taxes are paid for income, sales, and other movements of capital. The current mechanism creates an inefficiency in a huge range of transactions. Inflation, on the other hand, is an effective tax on wealth, and in doing so, eliminates the inefficiency on transactions while discouraging hoarding and encouraging investment and spending.

The base of wealth is so much higher than the base of incomes that taxing wealth can bring in the same revenues with a much lower tax rate. Closing all the loopholes and eliminating inefficiencies should also boost tax revenues substantially.

The U.S. Government should implement an Investment Company, Financed by a Federal Corporate Income Tax

Technology has changed market dynamics, and new economies of scale are making it increasingly hard for small businesses to compete.  National and international communications and transportation have increased the global nature of businesses, so scale and international optimization of supply chains make enormous advantage for the largest businesses. Another important example is the nearly infinite ratio of fixed to marginal costs in information businesses that leads to increasing pressure toward consolidation.  Meanwhile, the value of public companies shifting from 40% intangible assets in 1996 to 75% in 2000. These forces push toward anticompetitive oligopolies, and are newly strengthened because of the new communications and transportation infrastructures.

Unfortunately, when you combine the globalizing economy with massive consolidation pressures, the natural equilibrium is a monopoly.  A monopoly can act in its own best interest and harm consumers.  America has a long history of working to ensure consumer markets remain competitive.

If you want to reduce the burden on the Federal Trade Commission lawyers, then we should implement a structural incentive that acts to offset any negative changes in the economic dynamics.   Specifically, we could create a new incentive for competitive markets.

This can be achieved with a progressive federal corporate income tax that finances an investment company and, in turn, finances companies that can improve competitive pricing or innovate.   The progressive tax could begin at a high profit level so that competition would be encouraged. Not a very popular suggestion among stockholders in the largest corporations, I suspect, but the benefit in the long run would be very great.

Necessity is the mother of invention, and monopolists can sustain their position with far less innovation than occurs in competitive markets. We will see advancements in communications, transportation, environmental protections, health care, entertainment, safety, and even life span. These innovations will occur inevitably, but it is our decision as a society how we structure ourselves to best approach this evolution.

Note – The Government-financed investment company should probably be independent in a similar model to the federal reserve.

Note – The competitive application for the funds of the Government-financed investment company avoids the incentive problems associated with socialist policies.

Note – The investment company would consist of many competing portfolios, managed by accountable teams, and with regular culling of underperformers.

Note – This would be a particularly effective economic stimulus mechanism because it supports high velocity of money in productive markets and more directly drives employment.

Note – The enormous potential financial gain from the investment company would be reinvested and used to reduce corporate, individual, and other tax rates.  It has the potential to create a self-financing government.

Note – The investments of the investment company would be direct – new equity or debt capital – not the purchase of existing securities.



The Future of Productivity and Culture

Productivity will continue to increase – and at an increasing rate. This trend inevitably leads us to the average person only working a small amount to support their basic needs. While this will be true on average, in reality we will most likely see a few individuals working very productively and supporting the needs of growing groups of underemployed people.

Social safety nets will become easier to support (assuming that the standard of social safety does not increase faster than the improvements in productivity). Vast portions of the population will stop working. Cultural differences will become pronounced as individuals and groups ‘specialize’ in non-work activities. Quality and breadth of entertainment, interpersonal interaction, and self-expression will greatly improve.

There will be a growing conflict between the highly productive individuals and companies and the large numbers of people who are underemployed. Managing this conflict will be a major political task.

Human Responsibility

The Human Rights movements of the 20th century will evolve into the Human Responsibility movements of the 21st. Just as the moral masses rose to fight battles of freedom, representation, protection, and equality, new moral questions of responsibility will arise as paramount. We will be forced to confront and socially decide upon subjective and highly contested issues in the use of technologies, preservation of environments, and rules of trade and labor. Harold T. Shapiro *64 is an early hero in this movement, speaking to thousands:

In the 21st Century, scientists and engineers will continue to inform us regarding what we can do with our ever-expanding knowledge base, but it is our shared responsibility to decide what we should do. And deciding what we should do is the greatest responsibility we all bear as we move forward together.

It will be a moral call to arms. Factions will grow in much the same ways that they have around abortion questions. Large numbers of issues will arise, and be grouped by medical, moral, philosophical, religious, technical, and other similarities. Specialized factions will fight for ultimate personal freedom to act, at least upon themselves, without restraint. While others will fight for the protection of others, even to the great restraint of personal freedoms. And there will be a majority in between.

Communities will form, and governments will be organized around the constituents’ answers to these questions. Those countries that embrace the most freedoms, particularly for businesses, will have financial advantages over those that embrace the most protections of others. This imbalance will allow particular countries to benefit for decades at the detriment of the whole, as their own incentives are not aligned with the benefit of the whole, but instead with their own short term economic benefit.