Unfinished business & stock prices

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On another thread, Little Nipper asked if churches should be taxed. The distractions of real life kept me from a timely answer. Since bumping around these fora, I have espoused essentially the same philosophy of taxation. I favor a flat tax on personal income, on corporate profits and on capital gains. I do not think the tax code should creates "classes," some exempt from taxation. To the extent a church makes a modest profit, it will pay a modest tax. A Church of the Greens like the Sierra Club will be treated in the same manner.

Creating a level playing field, i.e. the same rate of taxation for income, profits and capital gains, will reduce the incentive to structure activities to minimize taxes. Inevitably, acting to minimize taxes is a less efficient economic action than acting to maximize gain.

Of course, this presupposes the elimination of all tax deductions. I think taxes exist to create revenue, not to influence behavior. If the government wants to subsidize children, write a check. If the government wants to subsidize home ownership, write a check. Help the poor? Write a check. Make the expenditure explict rather than the covert subsidization of tax policy.

Implementation of this system would cause the mass dislocation of many tax accountants and attorneys. In time, these workers would be retrained and reabsorbed into the economy... hopefully in more productive labor. The simplification of the tax system would allow a reallocation of resources towards enforcement. While I think voluntary compliance would increase under a simpler system, there will always be tax nuts (like Kofe) who will try to dodge. The penalties for cheating (individual or corporate) should be swift and painful.

The flat tax should be combined with a national sales tax. The inevitable dodgers (and our foreign guests) can then contribute to the commonweal. A fair flat tax and a national income tax would provide an efficient structure for generating revenue.

On a slightly related note, stock prices have tumbled. My prediction of a recession (and correction) was premature, but ultimately fulfilled. As the old saying goes, "Buy on the cannon, sell on the trumpets." It is a great market for buyers. Some overpriced equities have finally fallen to reasonable valuations (and prices). While I dare not offer financial advice, I'm taking advantage of the soft market. Best of luck, fellow bargain hunters.

-- Ken Decker (kcdecker@att.net), July 23, 2002


"implementation of this system would cause the mass dislocation of many tax accountants and attorneys."

Not to mention polticians, IRS civil servants (many of whom are minority), the employees and stockholders of H&R Block (and similar "tax preparers"), "non profit" orgs and demagogs/pundits of all stripes.

If the goal of taxes is truly to maximize revenue, we are obliged to return to the logic of Arthur Laffer (ie, when tax rates are too high, tax revenue decreases; when tax rates are too low, tax revenue also decreases). IOW, there is an optimum tax rate to maximize revenue. But what is this optimum and is it a constant?

Alas, I am a cynic. IMO, the primary goal of taxes is not to generate income. It is to keep the power-brokers in power, even if that means revenues are decreased.

Don't tax you, don't tax me. Tax the fellow behind the tree

-- (lars@indy.net), July 23, 2002.

There are many institutions that benefit from the current Byzantine tax system, so a revolutionary change is doubtful.

The goal of a government may be to maximize revenue. The goal of a well-designed tax system should be to minimize distortion in the marketplace and collect necessary revenues as efficiently as possible. As a side note, I do not consider Laffer a serious economist. He made simply applied a well known economic principle (diminishing returns) to taxation.

Taxation itself is simply a process of taking money from the private sector and giving it to the public sector. Any process can be coopted by the powerful and used to maintain power. One might argue the powerful have done the same with the legislative process, the legal system, etc.

Most folks acknowledge the need for some public expenditures, e.g. defense. The argument then becomes how we, as an economy, fund these expenditures. I prefer a system that is simple, fair, easily implemented, easily monitored and with minimal costs.

-- Ken Decker (kcdecker@att.net), July 23, 2002.

So how do you there from here?

I agree, there are too many vested-interests that prefer it the way it is. In fact, in the longer run, the tendency will be to make taxes ever more convoluted. All in the name of "fairness" of course.

A small prediction: eventually the IRS will "offer" to prepare our taxes for us, free. They will use hugely complicated official tax -code algorithms that are subjected to perpetual tweaking by politicians ever eager to find new ways to buy votes. I'm surprised it hasn't happened already.

I don't know if Laffer was/is a good economist (is anyone?) but I think the Laffer Curve was a good insight

-- (lars@indy.net), July 23, 2002.

While I think it's true that there are a lot of vested interests in the current tax system, it's misleading to say the purpose of government is to raise revenue (and everyone is better off when economic inefficiencies are avoided).

Instead, it is the goal of government to forward political policy. The tax system is one tool for doing that, and as a tool it has several critical advantages. For example, it allows politicians to pay financial costs without appearing to spend money. For example, it allows certain policies to be implemented which could never pass an explicit vote (which sending checks could not avoid). For example, it permits selected groups to be rewarded indirectly without the violent feedback explicit rewards would unavoidably lead to. For example, it buries literally thousands of details of social engineering into one huge, dull, unreadable, utterly necessary bill -- from which they are nearly impossible to ferret out, or extract from the overall bill, or even put a known pricetag on.

Taken together, these (and other) advantages should probably be regarded as irresistable. I suspect even Ken Decker's dream flat tax/national income tax, even if he wrote the bill himself and it became law without modification, would not last one Congressional session before it was well on its way to becoming a maze of custom rates, special exceptions, and the like. Worse, it would still be CALLED a flat tax.

-- Flint (flintc@mindspring.com), July 23, 2002.

Ken, be awfully careful in your bargain hunting. The news of fraud just keeps seeping out. Yesterday's news about Citigroup and J.P.Morgan was truly shocking.

-- Peter Errington (petere7@starpower.net), July 24, 2002.

Actually, Flint, I said the goal of a government may be to maximize revenue. Government is far to complex to reduce to any single goal, be it implementing political policy, protecting its own institutional existence or maximizing revenue.

I will argue that everyone (the whole, not each individual) is better off with a more efficient system of taxation. An inefficient tax system results in lower overall productivity. Unfortunately, policy is rarely made for the good of the whole, but for special interests.

I agree that there are numerous advantages to social engineering through taxation... at least from the perspective of government. I not cynical enough (yet) to think change is impossible... just highly unlikely. The only way to implement a really fair (and efficient) system would be through a Constitutional amendment. This would set the bar high enough to prevent some (but not all) of the erosion.

And Peter, the cycle of fraud and corporate malfeasance is as old as capitalism. A market boom like the late 90s creates an orgy of excess where speculation replaces solid corporate valuation. It is a pond that breeds scum.

We will enter a "reform" period, however, the cycle will turn not on the efforts of regulators. Market forces will provide serious disincentives to shoddy accounting or outright deception. The halycon days of the late 90s are being replaced by a more wary and cautious era. The scandals are still the exception, not the rule. The market is full of well-managed businesses with sound balance sheets. Finding the right ones is a profitable hobby.

-- Ken Decker (kcdecker@att.net), July 24, 2002.

Well, Ken, if we had just kept the regulations which served the country very well since the days of FDR, instead of deregulating as part of the Newt-onian revolution, we'd be in a lot better shape.

-- Peter Errington (petere7@starpower.net), July 24, 2002.

Sorry, Peter, but I disagree. The U.S. Supreme Court determined much of the New Deal legislation was unconstitutional (leading to FDR's ill-fated attempt to stack the Supreme Court). The "successful" 1930s business regulation centered on financial institutions. I cannot find any evidence the repeal of Glass-Steagal has anything to do with the current accounting scandals. Legislation like NIRA was overturned by the Court.

Regulatory climate seems to have little to do with the current problems. Adelphia Communications, a cable television company, was (and remains) heavily regulated. Today, members of the Rigas family (formerly the heads of Adelphia) were arrested. I fail to see where the massive regulation of the cable television industry prevented the well-documented problems at Adelphia.

I fail to see a pattern where the current accounting scandals are occurring in deregulated sectors of the economy. To me, the current problems seems related to a number of factors. The speculative bubble of the late 90s created an dangerous investment climate. Investors were throwing money (foolishly) at companies with no earnings. Executive compensation became increasingly linked to stock options. This created a huge incentive to inflate stock prices rather than grow a company over time. Large accounting firms became too cozy with companies. Finally, the problems are directly related to staggering ethical failures. The heads of major firms decided to act like criminals. You can blame Newt Gingrich, but he wasn't holding a gun to executives at Enron, Worldcom or Adelphia.

-- Ken Decker (kcdecker@att.net), July 24, 2002.

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