A Flat Tax in 2000?

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From gold eagle


Jude Wanniski

We are all aware, I suppose, of the gigantic problems the world will face when January 1, 2000 arrives. Computers around the world that are not programmed to deal with four digits, only two, will revert to a default year, or jump back to 1900. No matter what is done between now and then, serious problems will occur almost everywhere on earth because so much of the economic universe is automatically programmed to respond to the calendar. Early estimates that it will take $600 billion to fix the worst of the problem are expanding, $4.7 billion just for the federal government. Early estimates are that there will be at least $1 trillion in lawsuits in the United States alone. The piranha trial lawyers are already filing lawsuits against companies that sold two-digit computers way back when, if they refuse to replace them or fix them. We assume that at the very least there will be no accidental launches of nuclear warheads to celebrate the new millennium with fireworks, but it is hard to assume much else.

Sen. Robert Bennett, the Utah Republican, who chairs the Y2K hearings of the technology subcommittee of Senate Banking, is about to chair a Y2K Select Committee at the behest of Senate Majority Leader Trent Lott. He will have his hands full responding to the myriad appeals from the grass-roots business community that sees itself getting wiped out by that $1 trillion in lawsuits. Here, as just one example, was William Maley, Sr., chairman of the Connecticut Hospital Association, at the subcommittee field hearings February 17 in Wallingford, Connecticut:

First, Congress should assist the FDA, by appropriating necessary resources, in its actions to ensure that manufacturers of medical devices investigate and correct Year 2000 related problems, and disclose Year 2000 compliance information in a timely fashion. Second, Congress should consider enacting some form of legislative immunity from liability for health care providers that have taken reasonable steps to obtain information on the Year 2000 compliance status of medical devices and equipment. Finally, we believe that federal legislation mandating periodic interim payments under the Medicare program (based on past payment levels) should be implemented to ensure adequate cash flow for providers should carrier and fiscal intermediary payment systems fail to adequately function due to the date change.

You can read through prepared testimony from seven different field hearings covering different regions and industries, at http://www.senate.gov/~banking/hearings.htm. My advice is that in addition to focusing attention on the $1 trillion in private lawsuits, Congress also take note of the gigantic problems governments everywhere will have because of Y2K, and the easiest way to alleviate them: A simple flat tax system and a dollar/gold standard.

We already know the Internal Revenue Service is overloaded under the best of conditions. Now Congress is passing legislation requiring IRS agents to be polite. There are 7 million words in the federal tax code and tens of millions of tax returns being assessed electronically. There are individual taxpayers whose returns run into thousands of pages. We know almost surely there will be a breakdown that will throw the government's finances into chaos and disrupt the household and commercial network that does business with the government. It makes perfect sense for the President and GOP leadership to agree on a simple postcard system of the kind House Majority Leader Dick Armey has proposed, just to get the country past 2000. Once everyone finds out how nice it is, the electorate would have a hard time giving it up. The same is true, by the way, for every system of individual and business taxation in other countries. The arguments about not doing a simplified system would normally prevent one from being drafted, but the sheer horror Y2K presents to government bureaucrats and political intransigents might be sufficient to do the only thing that will stand a chance of working.

The gold standard is another fix that eliminates much of the chaos that would otherwise occur in 2000 when the clock strikes 12 midnight. The only reason the business world can exist in its present form of floating exchange rates are the computers that are capable of juggling myriad rates of exchange and currency contracts. The currency markets seem sufficiently self-contained to be able to manage the chaos, or so I am told.

The 150 different currency units in the world have a separate existence in international contracts at the corporate level. Octopus Inc., the giant multinational, does business in all 150 currencies, and while Octopus may have spent $100 million getting ready for 2000, the transactors at the other end have not. If the United States were to fix the dollar to gold, say at the end of this year, by the time the clock strikes a year later, every one of the 150 currencies could be plugged into it.

As we all know, the Europeans are about to give birth to the Euro, at the very worst possible time, because the chaos of the Euro on top of the chaos of Y2K is chaos squared. By fixing the dollar to gold and fixing the Euro to gold, we arrive at exactly the place Robert Mundell suggested in his WSJournal op-ed last week. Not only is chaos averted on major aspects of Y2K, it also solves the Euro problem. This immediately liberates tens of thousands of technicians who are currently part of the limited pool of technicians able to write code for the computers. It is as if the army of experts now divided in order to fight two alien monsters from outer space suddenly find one monster has decided to go back to sleep in cyberspace. The united army can now deal with the remaining monster.

Until now, as far as I can tell, all the thought that has gone into Y2K has been mechanical. If only Bill Gates stayed awake nights, the problem could be solved with some fancy software. Alas, Bill Gates advises that even if he could find the perfect software, he will be unable to provide the requisite hardware and deal with the data variables. If we all put our head to thinking about changing and simplifying POLICY, at every level of government and private business, the impossible chaos may begin to look manageable. If you are really worried about The End of the World as we know it, you can find the state of doomsday at http://www.yardeni.com/cyber.html, which is where Ed Yardeni of Morgan Grenfell hangs out his predictions of economic depression. I will say of Yardeni that he is broadcasting for ideas on how to solve the looming problems. The answers will most likely be found in all sorts of places. One of my favorite sayings from the wildcatters is: Oil is found in abundance when a great many people are looking for it in the most unlikely places. So, too, with Y2K.

Jude Wanniski

Originally written on March 31, 1998

-- Andy (2000EOD@prodigy.net), May 15, 1999


National sales tax...Hang the present system in any form,,

-- lurker (peeking@at.forum), May 15, 1999.


The cries for a flat tax comes from people without too much reasoning capability. I have yet to hear one explanation about a flat tax that changes anything about the current system, except the rates.

WHOOPIE! Big frekin deal.

-- Uncle D (unkeed@yahoo.com), May 15, 1999.

Can someone tell me if there is any significant difference between the national sales tax and value added tax. They both look like variations on a theme to me.

-- Puddintame (achillesg@hotmail.com), May 15, 1999.

Somebody, HELP! If we go to the gold standard will that make the price of gold coins go way down? How about silver dollars?

-- Betty Alice (Barn266@aol.com), May 15, 1999.

I don't understand a gold standard very well. If a dollar is pegged to a certain amount of gold, and the gold supply is essentially fixed (mining output is quite small), then the dollar supply will be similarly fixed. If the economy is to grow substantially faster than the gold supply (which has been happening for some time now), isn't this policy deflationary? And is this a Good Thing?

-- Flint (flintc@mindspring.com), May 15, 1999.

VAT is based on the difference between the value of the finished product and the raw materials or less-fully finished product each time it passes hands (at least I think this is the way it works) Whereas the sales tax is based on a per centage of the final retail price.

In both cases, the consumer ends up paying a higher price for goods purchased.

IMHO getting away from the income tax is mandatory if we want US economy to keep functioning. Income tax discourages saving money for investment and makes it harder for people to start new businesses.

I've talked to my US Senator's office about this, and they say they're working on trying to bring this about. Here's a problem they have to deal with, though. If we go to a nat'l sales tax, people who are in or near retirement are going to be taxed twice: they were taxed once when they earned the money. Now they'll be taxed again when they spend it (this wouldn't be true, of course, for retirement plans funded with fully deductible contributions). Seems as though that problem could be solved by issuing credit vouchers or some such thing.

The regressive nature of the sales tax could be dealt with by exempting certain basic food and medical items, and up to a certain amount for rent.

My fear is that the sales tax will be in addition to the income tax. I can envision Congress voting to institute a nat'l sales tax at the same time that the income tax is changed to, say, a flat rate of 5% of any earning over $100,000 or something like that. And then gradually raising the income tax rate and lowering the amount of income subject to it. Like what happened last time around. The present income tax started out at a very low %age of income over a high amount (I don't recall the exact figures, but the tax didn't effect very many people when it was first enacted)


-- Gal Gardner (altamira@ecpi.com), May 15, 1999.


I agree, that's exactly what would happen. Most states now have both a sales tax and an income tax. The Feds are salivating over this possibility. If you believe, as I do, that the 16th Amendment is a fraud, neither an income tax, nor a flat tax, nor a national sales tax is permissible under the Constitution. Also, I prefer to think of the euphemistic "flat" tax more correctly as a "plateau" tax.

-- Nathan (nospam@all.com), May 15, 1999.


Interestingly, annual gold production is about the same as the annual global growth rate. If the global growth rate rises, more gold production is brought on line as the value of gold tends to rise in an expanding economy using a gold standard. Over time, a gold standard is slightly deflationary. This is a good thing, as, over the long run, one's retained wealth holds its value, plus some.

The central banks cannot entertain a gold standard because a gold standard has no use for the banks, at least not the reckless, shell-game, wealth-extracting banks we have now. Bank exist because they can fractionalize their deposits, which weakens any gold standard with every increment in the debt/deposit ratio. I suppose some reasonable amount of fractionalization would be possible under gold, say 2 or 3 to one, with absolute convertibility on demand. However, the central banks would be unable to make the obscene profits and exert the unbelievable amount of control over government that they currently do under such a standard, so it will never happen, short of utter collapse of the current system.

The current system could be sustained, I suppose, if the central banks could limit or appear to limit inflation to such an extent that inflation is not apparent over the length of an average lifetime, but then the central banks wouldn't be very profitable in either money or influence. We might as well be on a gold standard, in that case.

At this time, I see five possibilities:

1. The current system is voluntarily discarded for some sort of non-fiat, fixed monetary standard, gold maybe.

2. The current system collapses (for mathematically, it must) and is replaced with some sort of non-fiat, fixed monetary standard.

3. Human lives are purposely shortened in order to limit ones perception of a continual debasement of the monetary system. (Sort of sounds like a lame sci-fi plot!)

4. Economic statistics are constantly altered and formulas are continually revised via directed government control in order to mask the worst effects of the debasement of the currency.

5. The general population is forced into a form of government-enforced, central-bank-directed slavery, leaving the average worker with little or no recourse to the debasement of the currency.

Right now, were moving to a combination of 4 and 5.

-- Nathan (nospam@all.com), May 15, 1999.


I fear I'm so ignorant in this area that your replies make little sense to me - I lack the context for understanding. I need to get this stuff in little steps.

So OK, if banking is so obscenely profitable, why doesn't it attract a wave of startups the way, say, huge profits in shoes would? My understanding was that anything that generates huge profits will attract many suppliers, who will drive prices down by competing. Does this not apply to banks at all? Over the last decade, I've watched a few street corners where Joe's bank became Sam's bank became Jim's bank became Swenson's Ice Cream. What happened to those small banks? Did they decide they were rich enough and retire?

-- Flint (flintc@mindspring.com), May 15, 1999.


The supply of banks is strictly limited, granted only by state or federal charter, I believe. Try and start Flint First National and see how far you get.

The local and regional banks are profitable enough, if they don't get really reckless in their lending habits. You'd have to be a moron to lose money lending 10 or 20 dollars for every dollar on deposit. And even if they do manage to lose money, many retail banks and their customers will be bailed out per government mandate via FDIC insured accounts. However, the real dough goes to the owners of a country's central bank, e.g., the USA's Federal Reserve. How much dough is difficult to say, as the Federal Reserve has never "allowed" itself to be audited by anyone.

-- Nathan (nospam@all.com), May 16, 1999.

Nathan- Like Flint, I don't know much about this stuff either, and I really appreciate the "Banking for Dummies" posts. Let me ask you further: Even though banks use fiat money, and create a lot of electronic money out of thin air as it were, apparently they still have to use gold to some extent? I have heard that central banks have to pay each other with gold bullion to "settle"?? Can you illuminate us on how gold figures into the CURRENT (soon to collapse, IMHO) banking system? Thanks!

-- King of Spain (madrid@aol.com), May 16, 1999.


I don't think that the central banks use gold to settle with each other, these days. The BIS (Bank for International Settlements in Basle, Switzerland) clears transactions across central banks, and they probably translate everything into dollars, yen, or Euros and then square the books.

Yet, the history of banking and gold are inextricably linked. Banks originally were warehouses for physical gold belonging to the local merchant class. These warehouses soon learned that they could "lend" all the gold on the premises and then some and thereby earn interest on the gold trusting merchants had warehoused for safekeeping. Rather than having to transport the gold with every change of ownership, groups of banks began issuing "certificates (paper money) that would represent the gold deposited. And these certificates began to be widely recognized as a reliable proxy for the actual gold because the certificate holder could show up at the gold warehouse and claim gold equal to the amount printed on the certificate.

However, from the start, the banks were in the habit of lending more "deposits" than they actual had in their possession by simply printing more certificates in an amount that exceeded their actual physical gold deposits may times over. The only problem with this arrangement is that word would occasionally get out that a certain bank had "fractionalized" its deposits to such a point that only a few depositors would ever see the safe return of their gold, and so the "bank run" also became a fixture of early banking.

Basically, banking amounts to a certain privileged group (the bankers) getting something (interest) for nothing (deposits lent that were never there in the first place). For a few centuries, this worked sort of OK, but the banks kept running in the a (gold) brick wall every time they really wanted to go on a lending spree. The banks always ran the risk of ruin form having lent too much gold. They also could not create gold out of thin air, so at some certain point, they could not dare make further loans, even though many willing borrows were clamoring for their deposits.

So, it came to pass, that gold was to be demonetized and thus end the crimp to their business. This was accomplished by obtaining a charter from a host country, by whatever means, that allowed the bank to say what money was. The full force of the government of the host country stood by to enforce whatever the banks definition of what money was. Now the banks could lend with impunity, with no restriction on how much money was created. As long as there were willing borrowers, or willing borrowers could be fashioned, the borrowers could be serviced without constraint. The banks could now freely lay claim to actual current and future physical assets and production by merely granting credits in a closed system that they themselves fabricated.

Now this monetary system has some interesting characteristics:

1) All money is borrowed into existence. No new money exists unless it is first borrowed by someone, some group, or some government.

2) Only the principal is lent into existence. All the interest must be earned from other principal amounts lent to other parties. In essence, all borrowers are competing with each other in order to earn money for interest payments from the existing pool of principal dollars. If this pool of principal dollars is expanding, i.e., there are many willing borrowers, then the money supply is expanding and earning interest dollars is relatively easy. If the pool of principal dollars is stagnant or contracting, i.e., the banks either wont lend or the borrowers wont borrow, then the money supply is said to be stagnant or contracting and earning interest dollars may become exceedingly difficult, leading to a decline in business profits, unemployment, and loan defaults.

3) The system must continually create borrowing demand, lest it stagnate and collapse from lack of money creation, and there is a definite upward limit to borrowing demand. Either all willing borrowers are exhausted or lending becomes so free as to create a multitude of future loan defaults, or both. The tendency towards extended over-expansion followed by long periods of collapse are inherent in the system.

4) Over long periods, the system is inherently inflationary, since and level of economic expansion routinely requires a money creation rate that is some multiple of the desired underlying physical growth rate.

5) Governments can freely borrow unlimited amounts of money for whatever purpose from the resident central bank and then service the cost of these loans via a voluntary tax system.

6) Depressions can be caused by either the central bank refusing to lend money (a la The Great Depression, at least initially), a disappearance of willing borrowers, or both.

7) If necessary, loan demand can be manufactured by creating scenarios where money needs to be borrowed, i.e., willing borrowers can be fashioned, in order to create sustained loan demand. For example, by instigating a destructive war, loan demand can be fashioned, both for armaments and personnel, and for the rebuilding the devastated land following the war.

8) The central bank has an unrightful and unbelievable control over its host country, permitting manipulation of the laws of the host to such an extent that rule of law is in jeopardy and the self-determination of its people all but lost.

Where does a banks gold fit in all this? The banks use gold in two ways that I can discern:

1) As a tool to manipulate inflationary expectations.

2) As a fallback position in order to provide the public a sense of stability in the banking system itself in the event of runaway inflation or the specter of deflation.

For all their anti-gold noises, the banks are bluffing. The system theyve created is for too self-destabilizing for the banks to ever completely abandon gold.

For those interested, here's a highly critical, introductory piece describing what the USA's own central bank, the Federal Reserve, is, what it does, and how it got that way: The Federal Reserve System: A Fatal Parasite on the American Body Politic

-- Nathan (nospam@all.com), May 16, 1999.

Nathan- A wonderfully lucid treatise!!! A royal thank you, sir!!!!!

-- King of Spain (madrid@aol.com), May 17, 1999.

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