Posts Tagged ‘Taxation’

 

Rob Sama Grand Plan – Tax Rectification Act/Amendment

Monday, September 3rd, 2012

Rob Sama Grand PlanSo it’s been a while since we’ve added to the Grand Plan here on the samaBlog. And I’ve had this notion ruminating in my head since the Obamacare decision came down. But I haven’t had the spare cycles to devote to writing this until now. So excuse me if this seems a few months late.

So the Roberts Obamacare decision comes down to this: the power to tax as expressed in the 16th amendment to the Constitution is unlimited, and any objective that cannot be met by using any of the enumerated powers can be coerced of the citizenry by means of the tax code. So while the commerce clause doesn’t give congress the right to compel people to buy insurance, the tax code in effect does.

It goes without saying that this interpretation of Congress’ power to tax, an interpretation which contradicts Supreme Court rulings from the time of the 16th amendment’s adoption, grants effectively unlimited powers to Congress to compel or outlaw whatever behavior it so chooses, so long as it is clothed in the power to tax. Anybody with half a brain can see how such a power is incompatible with the idea of a free society, and can and likely will lead to abuse in the future. And so we ought to propose the tax rectification Amendment, which would read more or less as follows:

The power to tax is limited to raising revenues to enable the federal government execute the enumerated powers given it by this constitution. Congress may not, under any circumstances, require abusive or excessive taxation, or taxes which are which encourage changes in the behavior of the citizenry.

I am not a Constitutional scholar, and I would be open to better wording from someone who has been trained in the art of such things, but you get the drift.

The problem with such an amendment, of course, is that it would not just invalidate Obamacare. It would lay waste to much of the tax code as it currently exists. I am in favor of such destruction, but it seems to me that many in congress are not, especially on the Democrats’ side of the aisle, given their proclivity towards Obamacare (and telling people what to do generally). And so should the Tax Rectification Amendment be rejected, we shall motivate those who differ from us by exercising our newfound powers under the Roberts decision, and enact the Tax Rectification Act. The Tax Rectification Act, of course, is just a series of punitive taxes against hot button cultural items that are adored by the SWPL crowd. I came up with a few ideas off the top of my head. Surely by the time the new congress takes power, we can come up with a mile-long list that will infuriate the left. But here’s my start for now:

  • 100% tax on organic produce
  • $1,000,000 annual excise tax on food trucks
  • $1,000,000 annual excise tax on any restaurant or food establishment that does not serve meat
  • $2,000,000 annual excise tax on any restaurant or food establishment that does not serve animal products of any kind
  • $1,000,000 annual excise tax on every institution that performs abortions. Couple with a $10,000 excise tax on every abortion performed
  • 500% sales tax on any sticker, flag or other item sold with a rainbow on it
  • $10,000,000 excise tax on every motion picture produced in the United States
  • $1,000 excise tax on bicycle helmets
  • $500/lb excise tax on the production and sale of tofu
  • $100 excise tax on every bumper sticker produced
  • $1,000,000 annual excise tax on medical marijuana dispensaries

I could go on, you get the drift.

But you object, and exclaim, “But Rob, I despise Obamacare as much as you. But I enjoy some or many of these things on this list too. I watch movies, and eat at food trucks, and ride a bicycle..” To which I say: you’re missing the point. The point is not to actually put all these things out of existence, but rather to tell those on the other side that we are willing and able to use this new fangled power in crazy ass ways to destroy the things that you hold most dear. And that the longer you wait on ratifying the Tax Rectification Amendment, the more likely you will reap irreparable damage to those you hold dearest. So Join with us and pass the amendment. Yes you lose Obamacare, but you also gain the assurance that we won’t tax the accouterments of the SWPL lifestyle just out of spite. Indeed, it is designed to give those on the other side a newfound appreciation of why limited government is a good thing. And such an appreciation will only have good consequences over the long term.

 
 

Corporate Income Taxes

Wednesday, March 30th, 2011

So there’s been a lot of talk about the corporate income tax lately, first on 60 Minutes and now in USA Today. If you’ve been wondering why I haven’t been blogging nearly so much as of late, it’s because I’ve feel like I’ve said everything. 18 months ago, I released the Rob Sama Grand Plan plank on taxation. In it, I explain why we ought to eliminate the corporate income tax entirely, and treat capital gains as ordinary income, with a deferral for any gain that is immediately re-invested. It’s interesting to see the world begin to come around to my point of view.

 
 

The samaBlog: One Year Ahead of Stanford University Professors

Thursday, May 6th, 2010

Rob Sama, April 2009:

The corporate income tax code isn’t just insidious because of its corrupting effect upon congress. It’s insidious because it constitutes a double tax on earnings (capital gains being the other tax) and it discourages capital accumulation. A business that is retaining earnings to reinvest in its operations should be encouraged to do so.

But our current tax regime encourages businesses to spend money on any and all expense items possible (meaning not physical plants), including interest payments. In other words, the corporate income tax encourages businesses to finance their operations with debt instead of equity. This may be good for the banking industry, but it isn’t particularly good for business. And we can see the effects of an economy built on debt instead of equity today, namely that in a downturn the debt cannot be rolled over and businesses fail.

Best to eliminate the corporate income tax, and tax distributions made from dividends.

Stanford University professor in the WSJ today:

President Obama has put tax reform on the agenda, but surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America’s global competitiveness, and raise future wages.[...]

This complex array of taxes on corporate income produces a series of biases and distortions. The most important is the bias against capital formation, decreasing the overall level of investment and therefore future labor productivity and wages. Also important are the biases among types of investments, depending on the speed of tax vs. true economic depreciation, against corporate (vs. noncorporate) investment, and in favor of highly leveraged assets and industries. These biases assure that overall capital formation runs steeply uphill, while some investments run more, some less uphill. It would be comical if the deleterious consequences weren’t so severe.

I’m one year ahead of what gets published in the WSJ. Don’t you forget it.

 
 

Rob Sama Grand Plan – Financial Regulation

Friday, September 11th, 2009

Rob Sama Grand PlanWe have heard a common refrain from the left since the economic crisis hit. The refrain goes that the crisis was due to there being no financial regulation during the Republican years. It was as if a switch had been turned off at some point in the last 8 years, and now it’s time to turn it back on. As if we had a brief experiment with no-holds barred Laissez-Faire Capitalism, and it didn’t work, and now it’s time to return to a more sage time of managed markets.

When asked to specify which regulations, exactly, were repealed, the usual fallback is that the ban on bank ownership of brokerages and insurance companies had been repealed by the Gramm-Leach-Bliley Act. But of course, this doesn’t make an ounce of sense, as cross ownership between banks, brokerages and insurance companies was clearly not the cause of our current economic turmoil (as Phil Gramm himself refuted). Government intervention into the housing markets was, which was the subject of my last post in the Grand Plan.

But that is not to say that the current regulatory regime that we have in place is fine as is. We do need to make changes. But the operative question is: what do we hope that these changes will achieve? To answer that question, we will dispense with the mantra, “Regulation good, markets bad” from the left and the imagined, “Markets good, any regulation at all bad” mantra from the right, and instead set out to determine what it is that we want from our financial regulations, and then set out to make some modifications to our current system to better achieve those ends.

So what are those ends that we ought to be seeking out? Let me name the important ones that come to mind:

  • Transparency: Investors ought to be able to know what it is they are buying. Basic financial information should not be obscured, and meaningful disclosure should be required.
  • Liquidity: The ability to buy and sell financial instruments on the open market should not be hindered more than necessary.
  • Price Discovery: In a sense price discovery is the culmination of the above two principles. Investors ought to be able to determine a value for a good or service quickly. In addition, investors ought to be able to quickly compare relative prices across comparable offerings.
  • Protection From Fraud: Investors ought to be protected from fraud, to the extent that they can be without being protected from their own stupidity (in other words, some people are so stupid as to seek out fraud, and they cannot be protected by any amount of regulation). I should emphasize here the distinction between this and any attempts to alleviate a buyer from asymmetrical information. Asymmetrical information is the difference in knowledge about a product between the seller and the buyer, namely the one party (typically the seller) always knows more. While transparency can alleviate that problem, it will never fully eliminate it, and eliminating it is not a realistic goal. Fraud, on the other hand, is when the seller uses deception to sell a product, which is an entirely different thing.
  • Enable Competition: Competition is what creates redundancy in the financial system. A financial services industry dominated by a few giants creates systemic risk in the event of failure.
  • Reward Wealth Creation/Punish Wealth Destruction: This seems obvious, but it isn’t always obvious. Basically, you want to reward good economic activity, and punish bad economic activity, and not the reverse. Business is not a charitable enterprise.
  • Align Interests: Interests among financial parties ought to be aligned. An investor ought not worry that the manager of his money has different goals than he has, thereby taking inappropriate risks.

I’m going to break this down into two categories: regulations that effect industry and those that effect markets. In other words, those that effect companies who stock (may or may not) trade on Wall Street, and then again on those who do the trading on Wall Street.

Industry Regulations:

Repeal Sarbanes-Oxley
Sarbanes Oxley was passed by congress in response the Enron scandal, which cost investors billions of dollars. In order to understand just how silly Sarbanes-Oxley is, we first need to understand what happened at Enron.

Enron engaged in a number of highly risky strategies, strategies which had not paid off well for the company. Accordingly, Enron’s upper management engaged in a number of accounting shenanigans to hide what they had done, hoping that later they would be able to, in effect, pay back the losses incurred with future year profits.

Now what Enron management had done was already illegal. What’s more is that Enron’s auditor, Arthur Anderson, caught the accounting fraud. What happened next is rather unbelievable; Aurthur Anderson colluded with Enron management to let the fraud pass for a year, with the expectation that the company would recover in the next year, and then the fraud of the previous year wouldn’t matter. At a minimum, management would have bought themselves a year to fix things, but absolutely, positively they’d need to come clean in the subsequent year.

Of course, this is not at all what auditors are supposed to do.

There are a number of reasons why Arthur Andersen went along with the crackpot Enron plan, but we’ll get to those in a bit. First, let’s look at what the government passed in response to this discovered fraud: Sarbanes-Oxley.

Sarbanes-Oxley does a number of things, including making the CEO sign off on the financial statements as the CFO and the auditor currently do. But the main thing that it does is make a company certify that its internal controls are in order. That means that appropriate approvals are given at every level of an organization for any action to be taken, that all accounts are reconciled, etc. Basically, it’s a bottom’s up approach to ensuring that the assets are protected and that the numbers are right, stopping small missteps and errors at the lower levels of an organization from accumulating into material misstatements.

Do you see the problem here? In response to collusion by executive management with external auditors, the US government (by a vote of 99-0 in the Senate and 423-3 in the House) voted to create a stranglethorn of rules designed to catch accumulated small errors at the lower levels of an organization and did little to prevent a recurrance of what really happened at Enron. This is beyond stupid (as nearly anything that the Senate does by a vote of 99-0 is). Let us enumerate the ways:

  1. Congress reached for a grab-bag wish-list of items that the accounting industry had long lobbied for , and just passed them without thinking. The accounting industry wanted these rules because a) it would create lots of work for them to get everybody certified and b) once certified, it would become nominally easier to perform the same financial audits that they had previously performed (and would presumably continue to perform at the same cost).
  2. The accounting industry was in large part to blame for this mess, and should not have been rewarded with passage of their wish-list!
  3. In response to fraud at the top of an organization, congress passed a law designed to stop it at the bottom. Congress in effect closed the wrong barn door! It really doesn’t get any more stupid than that.

There is a final point that needs to be pointed out with respect to Enron, one that must be completely understood: You can NEVER stop collusion between a criminal and an enforcement agency until well after the crime has been committed. I’m going to repeat that in italics just so it really sinks in:

You can NEVER stop collusion between a criminal and an enforcement agency until well after the crime has been committed.

Consider an FBI agent who decides to collude with the local head of the mob, thus enabling a 30 year crime spree. It’s happened. And while the politician’s instinct is to grandstand and say “We’re going to make sure this never happens again” they can’t actually follow through on such a promise, any more than they could claim to prevent all crime. The best you can do is promise to get to the bottom of it when it occurs, and prosecute fully when it happens.

So the problems with Sarbanes Oxley are that it is inordinately expensive to comply with, it does nothing to stop another Enron, and it rewards the accounting industry that enabled Enron to happen in the first place. Oh yeah, one more thing: its costs are so onerous that it has basically stopped all IPO’s in the United States. So Sarbanes Oxley has to go. Just repeal it. There’s a much better way.

Insurance Instead Of Assurance

The audit industry often refers to what they do as “assurance”. Namely, they validate what companies claim is there and what their activities have been (from a financial perspective). Audit partners are personally liable for their errors, and pay hefty insurance premiums as a result. In fact, the audit industry is the 2nd most sued industry in the country after doctors.

But the whole idea of providing “assurance’” is farcical. It is vague and absurd. Asking anyone to put their personal assets on the line for such a thing is silly, and in the case of most public companies, the assets of an accounting firm’s partners aren’t going to cover the damage from a misstatement anyhow.

Finally, nobody’s interests are aligned in the current setup. The audit partner’s concerns are with keeping the client and keeping costs down. Thus he underpays his field staff, and often gives in whenever he and his client disagree over the results of an interpretation of the accounting rules. The staff, for the most part, just want to do their three years to get certified so they can get out, and they’re not particularly motivated to do their best work because they’re overworked and underpaid. And management has no incentive to get things right because there’s little punishment for getting things wrong.

So here’s what ought to happen: public companies get insurance, and ditch the assurance. Insurance would cover a specific max set of damages, as determined by shareholder vote, with a deductible paid for by management in the event of a material misstatement requiring damages to be paid. Finally, insurance premiums would be based on the quality of the books maintained by management, thus insuring that quality controls are kept, but only in a cost beneficial way.

So consider what this does. Under the Grand Plan, companies will buy insurance as required by their shareholders to cover potential misstatements in the financial statements. This limits trial lawyers from suing for unlimited damages and probably puts them out of business. Insurance companies keep cash on hand to pay out damages should they occur, but management is personally on the hook for a portion of those damages as well (say 10%), incentivizing them to keep the books clean. And finally, one can do a real cost-benefit analysis of when it makes sense to implement new systems controls in vs paying a higher premium in your insurance policy, unlike the current system (under Sarbanes Oxley) in which you must maintain perfect controls no matter what the cost.

I am ambivalent as to whether or not existing insurance companies entered this new business thus hiring the current audit firms to just check regulatory compliance, or whether the current audit firms transformed themselves into insurance companies. But the current system is too costly with too many mis-aligned incentives to remain.

An alternative way to mitigate against collusion between auditors and management that is simpler and likely easier to pass is to require all public companies to change audit firms every 5 years, and perhaps having auditors chosen for publicly traded companies by the exchange, rather than by management. This won’t stop any such collusion within said 5 year time frame, but it would force more auditors to look at a company’s books skeptically when audit firms are changed. Audit firms already do this internally, rotating partners on major accounts every 5 years, but they’re motivated to cover for each other as they are all connected in the same partnership. Rotating actual firms will force questionable accounting practices to light, and do far more to mitigate against what caused Enron to happen than anything in the existing Sarbanes-Oxley law does now.

Fix Financial Reporting

Financial statement reporting and the rules that govern them have completely gone off the rails. In the years that I’ve been working (I graduated from college in 1993 for reference), financial statements have gone from being something that management and investors read, used and looked forward to receiving to something that everyone ignores. Nobody uses them for a few reasons:

  1. Complexity: Accounting rules have gotten to be inordinately complex, with footnotes stretching as far as the eye can see. Complexity benefits people who work in the audit industry, who need to assure one’s compliance with said complexity and therefore profit from it, but it benefits no one else. Excessive complexity by definition detracts from transparency as well, and therefore serves the interests of neither management nor investors.
  2. Cash Isn’t King: Cash is king to those who make business decisions, but accruals are king to the FASB and those who enforce accounting regulations. This means that the financial statements continue to get cluttered up with non-cash related numbers that management and investors need to adjust to get at what’s really going on.
  3. Spaghetti Code: American accounting rules are set by the FASB which, in an attempt to stop any and all forms of accounting manipulations possible, has set up a spaghetti code set of specific rules that become increasingly impossible to comply with. Unlike in Europe, where principles are set forth that are to be complied with using professional judgment, in the United States, every possible scenario is expected to be regulated. Thankfully, the United States is moving over to international accounting standards in the coming years, which should help to alleviate this problem.
  4. Relevancy: The FASB is made up of academics from the audit industry, and as academics, they are counting angels on pin heads while ignoring real needs in the marketplace. The principle financial measure that investors (and management) look for in managing a company is what’s called “Free Cash Flow”. Yet there is nowhere in a set of financial statements where one can find a pure Free Cash Flow number, nor is there a standard method of calculating Free Cash Flow stated anywhere in the accounting regulations.

There is a simple solution here. First off, minimize accounting rules that don’t relate to cash items. That goes for anything involving amortization or depreciation, or other oddities such as stock option compensation expense. Second, put a statement of Free Cash Flows in the financial statements, and make sound rules around how to pull one together. Don’t make investors fish through the Statement of Cash Flows and the footnotes to try to pull Free Cash Flows Together. And third, dismantle the FASB and adopt the European approach to using broad principles for accounting standards, drawing o both academics and those with expertise in industry to continue to maintain the accounting rules. Thankfully, it looks like this last part may be coming to pass already.

Corporate Board Reform

Corporate boards, in public companies at any rate, are far too often the friends and family of the chairman, even when the company isn’t majority family owned or closely held outside the trading shares. This is problematic in that these cronies of the company president rubber stamp everything he does, and do not do an adequate job of supervising the activities of management.

There is a simple solution here. First, force disclosure of any ties board members have or have had with each other or with management previously, e.g. “Mr. Smith was a coworker of the chairman at Company X from 1997-2002.” Second, force board members to invest a significant amount of their personal net work into the stock of the company they are overseeing, like 5%. This will align their interests with those of shareholders. And finally, do not let them divest their holdings until say 3 years after they leave the board. This ensures that what they are doing is in the long term interests of shareholders, and is not a short term stunt to suck value out of the company.

Yes, these requirements will make it more difficult to find board members, but that should exactly be the point. Board members shouldn’t serve on the boards of multiple companies where they can’t possibly devote enough energy to overseeing what’s going on. And it will require more individuals to be board members, rather than every CEO serving on other company’s boards in act of reciprocal cronyism.

I want to emphasize that these rules are unnecessary in privately held companies, where shareholders already can influence company management more directly.

Market Regulations:

Re-engineer the SEC

After the whole Bernie Madoff Ponzi scheme broke, I happened to catch an interview with Judge Judy on the television (Larry King I believe). She characterized the SEC’s failure as one of “failing to followup on leads.” Judge Judy is an intelligent woman, yet her characterization was fantastically wrong. It’s a characterization I’ve seen elsewhere too, so it needs to be addressed.

There was no “lead” that he SEC failed to follow up on. It is not like a murder investigation, where some piece of evidence was forgotten in the house and thus the police failed to crack the case. In this instance, the SEC literally didn’t know that a murder had occurred. Madoff hadn’t failed to file paperwork, or done so in a manner that would have or should have raised any red flags. Rather, what happened was that Markopolos, a quant trader who tried to reverse-engineer Madoff’s trading strategy, mathematically proved that Madoff was a fraud and informed the SEC, yet the SEC failed to act. The question is why?

Markopolos proved that Madoff was a fraud mathematically. It wasn’t as if he has some sort of documentary evidence that Madoff was cheating his customers. He didn’t. Rather, he proved using statistics that Madoff’s fund couldn’t be anything other than a Ponzi scheme. So why didn’t the SEC act on it?

Because the SEC is staffed with lawyers rather than mathematicians.

What this meant was that Markopolos was speaking Greek to the SEC (no pun intended), and they couldn’t understand what he was telling them.

In fact, the whole way the SEC is set up is wrong. Currently, the SEC is staffed with lawyers who aspire to work for the Wall Street firms they regulate. That alone is a recipe for disaster. But as we can see from the Madoff example, regulatory compliance isn’t the issue. Most firms, even ones perpetuating fraud, comply with reporting regulations.

In fact, regulatory compliance is best performed by existing audit firms (hired by insurance companies or the exchange, as earlier discussed). Privatizing this function makes a world of sense, as insuring compliance isn’t that difficult a job in the first place. In fact, the way it’s currently performed feels more like a government make-work program than an effective regulatory method.

Consider any website that hosts user-contributed content, like flickr or YouTube. Each of these sites are basically user policed. When someone uploads something inappropriate, pornography or copyrighted material, users flag it for review, and management eventually reviews and determines if the content needs to be removed. That’s the way it should work. But imagine if everything needed to be approved before it went up? That would require a legion of reviewers and would be cumbersome for the preponderance of uploaders, who are trying to play by the rules. It would like the Apple app store, or our current SEC.

Reporting compliance should be outsourced to each company’s audit firm (assurance or insurance). There is no need for the SEC to review any company’s filings before they are made public. Instead, there should be a flagging system for financial report users to request intervention on problematic filings. Flags would be prioritized based on the credibility of the flagger and the size of the problem. A mutual fund manager saying something appears fraudulent would take precedence over a blogger who found a typo. Doing this would enable the SEC to cut back on its legal staff and bulk up on what it needs, an actuarial and mathematical staff.

We need to hire a specific math group at the SEC, staffed by people with real industry experience. In fact, it’s what ought to be the bulk of the SEC investigation group. What they need to do is scour the market for mathematical improbabilities and statistical anomalies. When a guy like Madoff is reporting impossible returns, they discover it and launch an investigation.

Currently, major Wall Street Firms employ math PhDs to write algorithms to scour the market for opportunities to exploit. I say we hire the same PhDs, at the same rates if necessary, to scour the market for fraud. There is no reason why it can’t be done. And it would be a far more productive use of our money that paying SEC lawyers to argue over phraseology in 10-Ks as they currently do now. That adds value for nobody.

Revise Insider Trading And Related Rules

The intent of insider trading prohibitions is to eliminate or at best reduce incidents of people benefiting from asymmetrical information. There are basically two different types of insider trading that goes on, each of which I will address separately: insider trading by those inside a publicly traded company, and from those who are outside said company.

When a manager buys stock in his own company in advance of good news being released, who does that harm? Arguably, the seller of the stock management bought would like to have known the good news that the manager knows, but so what? If he needs to sell he needs to sell. Management, on the other hand, is being properly incentivized to add value to the company. So long as they disclose who they are when engaging in the purchase, the market can make any inferences from the purchase that they will. One should not fear that this incentivizes management to lie, as there are already audit procedures in place to protect against that. No, allowing management to buy stock in advance of good news being released may not be fair, but you can never eliminate asymmetrical information. In fact in this instance, it is better to give management incentive to make good things happen for the company than it is to attempt to eliminate asymmetrical information from the market.

Selling stock is another matter completely. Selling stock in advance of bad news being released to the market gives management an advantage when they have mismanaged the company. That is bad for shareholders. Management should not be allowed to profit for mismanagement. Therefore, a simple statement made at the time of the sale stating the reasons for the sale is all that is required. If management sells stock in advance of an adverse event being announced without disclosing said event in management’s statement, then penalties would be applied. I am open as to the specifics regarding what qualifies as such an event, and how long from the sale date it is disclosed. This is different from current practices, in that management announces they are making the sale well in advance of doing so, and commits to making the sale regardless of what the market is doing at that time. There is no reason to deprive managers from cashing out when times are good should they need to do so for personal reasons.

I should also add that there are currently rules prohibiting management from selling out at the time of an IPO. That rule, in particular, is beyond stupid. Entrepreneurs who toiled to get their stock to an IPO should not be prevented from cashing out a portion of their stock at a liquidity event. Moreover, managers should be incentivized to get the highest price possible for the stock at an IPO to best fund the company and get the highest value for the remaining shareholders. By forbidding managers from selling out at the IPO, you remove that incentive for him to do those things. In fact, if anything, a manager should be forced to sell a portion of his stock at the time of an IPO, to properly align incentives.

Again, ostensibly the reason for forbidding managers from selling stock at the time of an IPO is to prevent fraudulent IPOs. But current audit practices prevent that more than adequately. The current setup, however, encourages shenanigans. I’ll quote myself from May 2003:

So what does this have to do with IPO’s? It has to do with an SEC rule called a ‘lockup’ period. What that means is that for 180 days after an IPO (and some other types of transactions too, like a sale of a company), the management of the company cannot trade their shares on the stock market. In other words, on IPO day, all the shareholders get rich except for the founders and management that got them to the point of IPO.

So think about it. Management, working with investment bankers, spends all this energy determining what the right time is for an IPO, but then cannot benefit from the work themselves. Instead, they must wait for 6 months, when the market may be entirely different than what it is at the time of the IPO. This is manifestly unfair. The ostensible reason for it is to discourage management from taking public companies that have no longevity (boy, that sure worked well in the 90?s, huh?). What in fact happens, is something much different. Imagine this conversation between the CEO of a company about to go public and his banker:

CEO: This is awful. I’ve worked so hard for this long and now I have to wait six months before I can cash out some of my stock too. It’s unfair. Who knows what the market will look like then?

Banker: I hear you. I hear it all the time. I may be able to help?

CEO: Help, but how?

Banker: Well, see, just lower your offering price on the IPO a bit, say 15%? don’t worry, the SEC will just think we’re being conservative? Then, allow me to allocate all the initial shares offered to the public. I have five other companies who are doing the same thing. So while you can’t sell your own stock for 6 months, I’ll give you the opportunity to sell someone else’s stock at a discounted value by allocating their shares to you, to get in on their IPO so to speak. All you have to do is lower your stock price just a bit, so that the rest of us can benefit from the ‘pop’ you’ll receive on the day you go public.

CEO: It’s a deal!

See what just happened? The banker acts as a broker between the managers of different companies, facilitating the transaction that would not have happened were it not for the SEC regulations. Just like getting a bonus for washing the fire trucks. Furthermore, the process has become more muddied, less transparent, and has damaged the ordinary shareholder far more than it would had without the regulation. Now, the average shareholder doesn’t know how much stock management decided to cash out from at IPO time, and is having his stock sold at less than market value with no discernable benefit to him. Furthermore, every time one of these ‘pops’ occurs, the average investor gets jubilant. He develops a psychology whereby he believes that if he can just buy in early enough he can’t lose. So now stocks aren’t just popping 15% or so on IPO day. They’re popping 600% or more. And the banker needs more and more IPOs to feed his pipeline, while companies are more than willing to go public even when they’re not ready, because they know they can cash out right away without anyone really knowing. So the bankers (like Quattrone) benefit while the average Joe gets screwed. Way to go SEC.

So let’s wrap by seeing what would happen in a world without lockups. Management is no longer incentivized to price company stock artificially low, thus no more pops on IPO day. And with no more pops, there’s no more extreme exuberance either. And shareholders can see for themselves if management is dumping company stock, which speaks volumes about what management really thinks of their company. No more under the table freebies from bankers either, as their motive for giving them disappears.

Damn I’m good.

I should point out that the above exchange is already illegal, but that’s not to say it doesn’t happen or didn’t happen rather commonly during the Dot Com boom.

So let’s turn to the other side of the equation, when traders engage in insider trading. again, there are two versions of this, buying or selling on confidential company information, and doing so based on confidential trading strategies. The first should be illegal. If information from inside the company is to be released, it should be released to everyone. There is no incentive to good manage well by allowing cronies of senior management trade on insider information.

The second piece isn’t insider trading specifically, but involves disclosure rules about accumulating more than 5% of a company, and when you have to announce your intentions to buy out a company. Parties should be allowed to collude to accumulate stock without announcing themselves. This is no different than how Walt Disney bought all the land that eventually became Walt Disney World. But rules designed to stop this kind of collusion only serve to entrench incompetent management. Same for poison pill type laws. Stopping acquisition activity, hostile or otherwise impedes capital flows, which is the opposite of our goals here. So open the floodgates and let management be rewarded for good efforts and punished for poor performance.

There is one practice that appears to have been going on that does need to be stopped however. Namely, using analyst reports and crony newspaper reporters to drive down the price of a stock temporarily so that short sellers can benefit. That amounts to a type of slander by the reporters and theft by the short sellers and those activities should be prosecuted as such. I would even support a law enabling shareholders to sue reporters and analysts who publish false or poorly sourced information even without a connection to short sellers being proven. There’s just too many antics going on with business reporting right now, and it needs to be cleaned up.

Enforce Settlement

Counterfeiting stock is and should be, always illegal. There is no circumstance for counterfeiting stock and selling it on the open market, even if you intend to buy it back at some future date. Naked short selling is when someone electronically counterfeits stock, sells it on the open market to someone who doesn’t realize it’s counterfeit, thus driving down the price. Done in enough volumes, the stock price can collapse causing the stock to be de-listed, forcing the company into default on it’s debt covenants after which point it folds.

This is a criminal activity that played no small role in the financial crisis that we have just witnessed. The website Deep Capture has done an excellent job of documenting and reporting on the phenomenon, and I would strongly suggest you read through their site. Suffice it to say, naked short selling is and ought to be a crime.

Unfortunately, the SEC has chosen not to enforce laws regarding naked short selling as of late. As a result, many people have lost confidence in the markets, and this benefits only the short-sellers. What’s worse is the SEC requires a list be published of companies for whom significantly more shares are trading than have been issued, yet the SEC refuses to publish who it is that is selling these shares. It’s criminal. The SEC needs to immediately prosecute those firms who are selling counterfeit shares and force them to buy them back on the open market. People need to go to jail over this. There is just no two ways about it.

Finally, settlement of all trades must happen within 24 hours, no exceptions. Unsettled trades which accumulate to equal more than 1% of a company’s outstanding shares need to result in trading being halted in the shares and the names of those who have sold more stock than they own made public. While I normally would call for respecting the privacy of those who trade stock, I have no respect for those who are in effect counterfeiting shares. So when that happens, a full and public investigation is immediately necessary.

The pre-borrowing rule is a good start, but does not negate the need to expose naked short selling when it is occurring.

Systemic Risk in Banking

So it would appear that we have a problem with systemic risk in the banking industry. And while adopting my housing reforms and eliminating naked short selling will do more to eliminate systemic risk than anything described here will, there are a few things that ought to be said still.

First up is the fact that if a bank really is too big to fail, then it should be broken up by anti-trust statute before anything bad happens. Not that I really believe that any bank is too big to fail. But if we as a country are going to bail our banks above a certain size when they screw up, they they will ALWAYS screw up eventually, because of the moral hazard involved. Better to break up those larger banks into smaller banks first, than have to bail them out later.

Secondly, the best way to ensure that no bank gets too big to fail is to increase the degree of competition in the sector. For years now, retail establishments such as Walmart have wanted to be able to open bank branches of their own within their stores, just like they have pharmacies. Federal laws prevent this. But to my mind a retail establishment should be good at retail of all kinds, including basic depository banking. And Walmart would provide real competition to existing banks, drawing customers away from them, creating more diversity in the marketplace. And diversity in the marketplace, i.e. more players, is what increases redundancy and reduces systemic risk. So why not do it already?

I should also mention that it appears as if the Obama administration wants to attempt to reduce systemic risk by having increasing central authority in the Federal Reserve. This will, of course, have the opposite effect as any mistake made by the central authority itself will generate more systemic risk than any one large bank’s mistakes possibly could. The Obama administration also seems to think that Venture Capital represents a systemic risk, a claim too silly to take seriously. Finally, they seem to want to force private equity firms to open their books to the public, a move which seems designed to pry open proprietary trading strategies, and seems to be more about nosiness and probably spawning tax generation ideas than anything else. Again, dumping reporting or other types of regulation on private equity will do nothing to reduce systemic risk. Far better to go after naked short selling as described above and expose it when it happens. Forcing hedge funds who do legitimate trading to disclose proprietary trading strategies will just put them out of business.

I should point out that while I do have thoughts on monetary policy and the Federal Reserve, they are the subject of another chapter in the Grand Plan.

I should point out in conclusion that the Obama administration has a number of other reforms that have nothing to do with the aforementioned parts of the Grand Plan. ReasonTV does an adequate job of addressing them. Suffice it to say that their “reforms” have little to do with fixing the systemic problems that created our current mess, and if anything are harmful to the operation of the markets. But as the Grand Plan is for me to express my own views and not attempt to refute every other plan that is out there, I’ll leave it to others to address his plans, and to the viewer to choose whether or not to consider them.

I should note that monetary policy will be discussed in a later chapter of teh Grand Plan.

I want to thank Neil Gordon for reviewing this for me prior to its publication.

Postscript: It looks like Obama is going to reveal his own version of finance regulatory reform on Monday. Should be interesting to see how he matches up against what I’ve proposed here.

 
 

Rob Sama Grand Plan – Taxation

Sunday, April 19th, 2009

Rob Sama Grand PlanBecause it would appear that as a country we are most concerned about the economy at the current time, I’d like to start there. There are many facets of economic policy, so let’s start with a big one: taxation. Given that there seems to be some current momentum behind enacting tax reform of some sort on both the right and the left, it seems like a good place to start the Grand Plan.

Taxation was a major facet of the supply sider’s revolution with Reagan’s presidency in the 1980′s, and the issue has been contentious ever since. Walter Mondale wanted to raise taxes and lost in a landslide, and ever since then, the left has attempted to parse the issue as one of fairness, or certain segments not paying their fair share. Unfortunately, intelligent discussion regarding taxes has basically flown out the window some time ago, and what we seem to have today is a “taxes bad” argument from the right and a “class warfare” argument from the left. Let’s try to sort through this a bit and see if we can’t come up with a more intelligent tax policy.

A sound tax policy ought to be governed by a few basic principles. Let’s enumerate them here then see what kind of policy can be derived from those principles:

  • Encourage Capital Accumulation: Free market economies, or “Capitalist” economies, in order to work, require capital to be accumulated in order to be invested. Or, to put it more glibly, capitalism doesn’t work without capital. Any tax policy that confiscates capital accumulation retards economic growth. Therefore, a sound tax policy is one that rewards its citizens for investing earnings rather than spending them.
    As an aside, I should distinguish this from hoarding, which is not at all economically desirable. Hoarding, or stashing gold bars in the basement (or some such equivalent), removes capital from circulation, and is tantamount to consumption.
  • Economically Neutral: Aside from the forementioned principle of encouraging capital accumulation and investment, any tax policy ought to be neutral as to where one should invest or spend one’s earnings. An economy cannot be centrally planned, and any effort to encourage people to invest or spend in one sector or item over another will eventually result in a misallocation of resources, and a boom/bust cycle.
  • Once and Only Once: A tax should be levied once and only once. Earnings should not be subject to multiple taxes. Once a tax is paid, the earnings (and taxpayer) should be free and clear of future taxation on that dollar earned.
  • Everyone Must Pay: It is important that everyone in society feel that they have a stake in how government funds are spent. That means that everyone must pay something, even if it is a nominal amount. Systems where some people pay and others don’t will result in the payors being looted of everything they have by those who pay nothing. Best that everybody pay, even if it’s just a token amount.
  • KISS: You’ll remember the acronym from high school, Keep It Simple Stupid. Complexity favors the rich over the poor, the connected over the disenfranchised. Plus it costs all of us an enormous amount of money to comply with a complex system. So the simpler a tax policy is, the better it is. Simplicity should be preferred over perfection or absolute fairness. Because complexity is by definition overtly unfair.

Our current tax regime fails on all counts. It does nothing to encourage capital accumulation. Indeed, it taxes capital gains as incurred (and taxes inflation on capital gains to boot), it is unbelievably complex, having approximately 4.8 times as many words as the Bible, it enables large swaths of the population to pay nothing at all or worse, get tax “credits” on taxes they never paid, and is anything but economically neutral.

In fact, our current tax code is economically biased in favor of the highest bidder. Each corporation or constituency who wants a minor exemption carved out for itself lobbies congress and more or less gets what they want. The result is a tax code that favors those with the most money, and is incredibly complex, consisting of a trillion and one exemptions for a trillion and one constituencies. An overhaul of our campaign finance laws will be required to fully ameliorate this problem, but that is the subject of another plank in the Grand Plan.

I don’t need to explain to you how devising a tax code by means of creating exemptions for the highest bidder is completely insane, how it relates to a code of insufferable complexity, how complying with that complexity imposes enormous costs on the economy, costs which would both be better spent as capital invested by private enterprise and as revenue collected by the government. But I would like to briefly explain to you, by way of an anecdote, the enormous psychological cost that such a code creates.

My father was the head of the tax department for a number of Fortune 500 companies during his career. When he was first promoted into that position, in the early 1970′s, he happened to find himself in the elevator with the CEO on the way home at the end of the work day. The CEO, trying to make small talk, asked “So, Bob, do you have any good tax shelters to invest in?” To which my father replied, “Yeah, our company’s stock.” The CEO paused for a moment, taken aback, and slowly nodded his head and replied, “Yeah, you’re probably right.”

My father, of course, did not literally mean that investing in his company’s stock constituted a tax shelter. Rather, what he meant was that you’re always better off concentrating your efforts on how to make money, rather on how to avoid having it taken by the government. But while the former will always yield you more profits at the end of the day, the latter that has an inexorable psychological draw, a draw strong enough to suck in the CEO of a Fortune 500 company. Personally, I’ve seen would-be entrepreneurs spend hours trying to understand the complexities of taxation when they should be growing their business. It’s extremely damaging, and the only way to get people to focus on their businesses is to make the tax code economically neutral.

So having said that, let’s enumerate the Grand Plan tax proposal and then discuss each point individually:

  • Eliminate the corporate income tax.
  • Tax capital gains as ordinary income.
  • Construct one and only one tax code.
  • Allow individuals to defer income tax by (re)investing their capital.
  • Eliminate death and inheritance taxes.
  • Eliminate ALL deductions and credits other than for individual and dependents.
  • Everyone must pay at least $500/year.

Ok, let’s take each of these at a time:

Eliminate the Corporate Income Tax:

I really wanted to do an analysis of how many dollars of revenue the Federal Government raises annually per word of corporate income tax code, vs the personal income tax code. I would guess that the difference would be of an order of magnitude, but when I went to attempt a word count on the code, I found it was too unwieldy and spaghetti like to be able to easily break apart the code into the two components. Regardless, the corporate income tax is a bevy of complexity, and it only accounts for 7.5% of the Federal Government’s annual revenue.

Surprised?

Don’t be. From all appearances, the purpose of the corporate income tax code is NOT to raise revenue for the treasury, but rather to give congressmen influence to peddle. Who better to peddle your influence to than to moneyed corporations. And what would you expect after said influence has been peddled? You have a code that is full of holes and isn’t all that effective at raising revenue.

But the corporate income tax code isn’t just insidious because of its corrupting effect upon congress. It’s insidious because it constitutes a double tax on earnings (capital gains being the other tax) and it discourages capital accumulation. A business that is retaining earnings to reinvest in its operations should be encouraged to do so.

But our current tax regime encourages businesses to spend money on any and all expense items possible (meaning not physical plants), including interest payments. In other words, the corporate income tax encourages businesses to finance their operations with debt instead of equity. This may be good for the banking industry, but it isn’t particularly good for business. And we can see the effects of an economy built on debt instead of equity today, namely that in a downturn the debt cannot be rolled over and businesses fail.

Best to eliminate the corporate income tax, and tax distributions made from dividends.

Tax Capital Gains As Ordinary Income (And Adjust Gains For Inflation):

The most obvious way to make up for the loss of revenue from eliminating the corporate income tax is to tax capital gains as ordinary income. There is no reason why capital gains ought to be treated as a special category that receives a preferential income tax rate. Taxing capital gains at a special rate only serves to encourage people do do contortions to get their earnings structured as capital gains.

Moreover, it creates a wedge between the “investor class” and everyone else in that the investor class is relatively immune from changes in the overall tax rates and complexity of the tax code. Investors ought to feel the pinch of tax rates that are raised too high just like everyone else does. Trust fund children ought not be spared from high tax rates. Psychologically, sparing them allows them to live in a fantasy world where tax rates don’t matter. And just in terms of having people pay their fair share, it’s manifestly unfair to exempt society’s richest people from paying the payroll taxes that everyone else has to pay.

So make earnings all taxed at the same rate. What’s earned is earned, and it shall be taxed according to one code.

Finally, capital gains should be adjusted for inflation. People should not be asked to pay taxes on the rate of inflation. Of course, we could eliminate the need for this calculation by having a more stable currency, but that is the subject for a different plank of the Grand Plan.

Construct One And Only One Tax Code

Today’s tax code has become so complex that it has become difficult even to debate about it. For one thing, the Alternative Minimum Tax is beyond obnoxious, both in its intent and its implementation. Requiring citizens to complete their tax compliance calculations twice according to two different sets of rules is not only overly burdensome from a compliance perspective, but it renders tax planning impossible at the margin when people slip from paying ordinary income tax to the AMT. Our principle of KISS demands that the AMT be done away with.

But that’s not all it demands. It demands that we eliminate all distinctions between payroll and income taxes. Today, the right makes absurd claims that the lower classes don’t pay a proportionate amount of income taxes while the left says a disproportionate amount of income taxes goes to pay for defense spending. But both complaints amount to accounting slight of hand. If you were to look at the paystub of the average person paying “no” income taxes, you’d find he is paying a substantial amount in what are called “payroll” taxes, namely FICA and Medicare, etc. Similarly, if you look at the Federal Government budget, you’ll find that social spending easily eclipses defense spending. By splitting up what is taken out of your paycheck into two different classes of taxes, each side is able to make absurd claims about how much money is being collected and spent.

So call all taxes collected “income taxes” because that’s how they’re thought of and that’s how they’re collected. And collect them according to one and only one tax code.

Allow Individuals To Defer Income Tax By (Re)investing Their Capital:

One thing that has always bothered me about the Capital Gains tax is that it amounts to a transaction tax on moving capital. That is stupid, and only impedes proper resource allocation across the economy.

Another thing that bothers me about the income tax is that it is based on income taken in one year. In a progressive income tax system, that means that you get taxed the highest rate when you’re at the end of your career. But that is unfair. One may have skimped out on income for years, slaving away in school, in order to get a high paying job later. That person’s lifetime income may be the same as someone who didn’t go to school, but they are penalized because they are making their money over a shorter number of years.

The obvious way to rectify these problems, while simultaneously encouraging people to put their money to work as invested capital, is to enable people to defer taxes on ANY income invested, and to allow any withdrawal from an investment to be deferred as income so long as the money is reinvested within a short amount of time, say 3 months. This way, individuals can save money up for retirement, school or whatever, and pay taxes only as the money is withdrawn and not re-invested. And they can do this without worrying about paying a transaction tax as they move money from one business to another, or one fund to another.

Oh, and one minor point, investment in land for business purposes would be shielded form taxation so long as the land is actually put to use for a legitimate business purpose, but investing in your primary residence would not be subject to any tax shield. That expenditure would be an after-tax use of cash.

Since I’ve kind of described the basics at this point, let me walk through two examples:

  • Bob earns $150k/year, and socks $50k/year away in mutual funds. That is invested capital, so he’s only taxed at the appropriate rate for $100k/year. He reinvests any dividends he receives, and so he pays no tax on those. He owns a house, but receives no tax shield on mortgage interest, nor is his investment in his house viewed as an investment; it’s an expense. When Bob goes to retire, he withdraws $50k/year out of his mutual funds. At that time, he’s taxed as having an income of $50k. Thus his income is smoothed out. He pays taxes appropriate for his lifetime of earnings, and pays as he withdraws capital from the economy to be consumed.
  • Jane is a trust fund child, and earns no money in the traditional way. She does not have a job, but spends her days attending sit-ins, rallys and the like. Jane has $5 million in an investment account, from which she withdraws $350k/year, or 7% of her principal. Jane pays tax on her $350k/year at the appropriate rate for that bracket. Instead of paying tax on transactions as her trust fund manager buys and sells investments, she simply pays money on the withdrawls she makes, whether or not there is a gain or loss. If her fund earns more than 7% in a year, she pays on $350k. If the fund earns less, she still pays on the $350k she withdraws. She can, of course, always withdraw less and thus keep her principal amount in check.

In effect, this plan would allow for infinite investing without taxation, so long as investments are not liquidated to be consumed. And that’s the idea: encourage as must investment in the economy as possible so as to generate a maximum amount of economic growth. In effect, we never tax the stock seed, only the crop that is to be consumed.

Eliminate Death and Inheritance Taxes:

Death and inheritance taxes force individuals to liquidate their investments when it would not necessarily make economic sense to do so. This fact alone makes the death tax disruptive to the economy. For this reason alone, it ought to be abolished.

The death tax constitutes a double tax as well. Under the current tax code, all assets being passed from one generation to the next have already been taxed at the time they’ve been earned. And under the Grand Plan system, they will be taxed at whatever point investments being passed down are liquidated (and not reinvested). So taxing the investment just because it’s being passed form one generation to the next constitutes a double tax as well.

The only impetus for an inheritance tax is envy. Envy is a bad reason for any public policy. Tax income once when it’s about to be consumed, and leave capital invested in the economy as long as its owners are willing to let it go to work. Interrupting invested capital amounts to eating stock seed, a foolish proposition in nearly any circumstance.

Eliminate ALL Deductions And Credits Other Than For Individuals And Dependents

This is pretty basic. Keep the tax code simple. Stop trying to influence behavior. Attempting to influence behavior is inconsistent with a belief in freedom, and just causes mis-allocation of resources in the marketplace. Give people a deduction for themselves and their dependents (only because we need successive generations to perpetuate the species and thus society) and leave the rest be.

Everyone Must Pay At Least $500/year

I know Ari Fleisher just wrote a piece on this (just as I was authoring this plank of the Grand Plan) but his justifications are all wrong. It’s not that the poor aren’t paying their fair share (though they may well not be). Rather, it’s just the principle that everyone benefits just from living in the United States, and therefore every able bodied adult ought to pay in a minimum amount, regardless of how the rest of their taxes come out.

Frankly, I don’t care if you don’t even earn any money. You still ought to incur a de minimus tax debt to the government every year. Paying a de mimimus amount makes everyone a stakeholder in society, and incurring the debt motivates one to get up and get to work. I don’t know if $500 is the right amount, that’s not really the point. The point is about social cohesion, and about caring how the government spend money.

Conclusion:

You will note here that I have said nothing about particular rates. That is because congress should manage rates on an annual basis, seeking to generate a small surplus when the country is in debt (namely, for the forseeable future) and otherwise do its best to break even. Whatever rates accomplish that feat are the rates that should be charged, no more, no less. Congress should feel free to manage rates, and refrain from generating an infinite number of exemptions, rebates, refunds and credits instead.

Another thing you may have noticed is that this plan is not functionally all that much different from a consumption tax. So why not just go for a consumption tax, you may ask? The answer is two-fold. Firstly, I fear creating a consumption tax and then having the income tax return, at which point we are burdened with double taxation on a whole new scale. But secondly, I do not think the country really wants a flat tax, as in one rate for everybody. So to reconcile that desire with a consumption tax would involve income tax like calculations anyway, and people applying for tax refunds from the government… in short it would be a mess. And it would be anything but simple for taxpayers. Better to let them withhold based on what they earn less what they plan to stash away, and leave it at that.

Instituting this tax plan would raise the savings rate of the country, make more capital available for investment generally, encourage people to save for retirement, eliminate complexity, reduce corruption on Capitol Hill, and radically reduce compliance costs across the country. It would be more fair than our current system, and be economically neutral, letting the economy allocate resources according to the collective wisdom of the market rather than the political pulls of Washington. The only people to lose out would be those in congress and those who have their ear.

And they deserve to lose out.

 
 

Empowering Mobsters

Tuesday, January 6th, 2009

Former Mondale speechwriter Charles Krauthammer has been pushing a line for some time about increasing gasoline taxes. He does it again in an extended article in the current Weekly Standard, this time getting picked up by Sully and I’m sure others, who are latching on to his idea. This is an idea that will empower mobsters and encourage criminality throughout our society, and should thus be avoided.

The basic idea goes like this: back when gas prices were over $4/gallon, people seemed motivated to drive around less and spend money on more energy efficient cars. So if the invisible hand isn’t charging $4 for a gallon of gasoline, let’s force it by means of a tax hike, which will then be refunded to people by means of an income tax reduction.

The problem with this is that while people are motivated to drive less and choose fuel efficient cars when the price of gas is actually above $4/gallon, people become motivated to avoid the tax when the price is artificially set above $4/gallon by the government. And the primary catalyst for such avoidance is organized crime, or the Mob.

None of this should be news to anyone who is even casually schooled in economics. The concept is price elasticity, which states that the less elastic a price is, the less the price effects demand. This can be for a number of reasons. In some cases, like cigarettes, it’s because the consumer is addicted. In the case of something like gasoline, it’s because the switching costs are too high, i.e. moving closer to work, selling the car and buying a new one, etc. In THOSE instances, it behooves the consumer to seek out the cheapest alternative when making a purchase. In a world where the actual price of gasoline is above $4/gallon, that may include taking public transportation, etc. In a world where the actual price of gasoline is less than $4/gallon, but the artificial price of gasoline is above $4/gallon, then one becomes motivated to seek out someone who can procure the good at its actual market price. That someone would likely be a mobster.

This is basically what happens when goods for which there is demand is either made illegal or absurdly expensive by government. On the illegal side, we saw this with prohibition in the 1920′s, gay bars in the 1950′s, and see it with prostitution and drugs today. On the absurdly expensive side, the big one that comes to mind is cigarettes, where Hamas started smuggling them into New York City to help keep the price low. And of course, there’s gasoline in Europe, where the Russian Mob currently does a brisk business smuggling gasoline. I would recommend reading the book Red Mafiya for more details, but if I remember correctly, they already smuggle gasoline into New York City today.

Yeah, that’s exactly what I want, to create public policy that helps Hamas and Russian Mobsters enrich themselves, while encouraging them to be violent on our streets.

Here’s a better idea. If you want the price of gasoline to rise such that people choose more green vehicles and terror states stop being enriched, then you need to cause the ACTUAL price of gasoline or rise, or alternatively find an alternative fuel that is cheaper than gasoline to switch people onto. The former solution would be to bomb Saudi Arabia into dust, but since all our politicians appear to be on the Saudi payroll, I wouldn’t count on that happening any time soon. The latter plan would be the Zubrin plan, which may see some light in an Obama administration, but I wouldn’t count on it.

But raising gasoline taxes, that’s a monstrously bad idea.

 
 

Economics 101

Wednesday, June 25th, 2008

A few links on economics for your morning perusal:

John Stossel on John McCain: “It would be nice if McCain would finally learn some economics.” Yep, it sure would.

Robert Samuelson on inflation, yet again: “Surveys show that people’s “inflationary expectations,” after years of stability, are rising. The Fed is holding its key interest rate at 2 percent, well below prevailing inflation. In the 1970s, this condition stoked inflation. An indecisive Fed risks repeating its previous blunder.”

Don Luskin on Obama’s cockeyed Social Security tax increase: “But the most alarming thing about Mr. Obama’s proposal is that the $250,000 threshold, above which the payroll tax would be applied, refers to household income, not individual income. So it’s quite deceptive when he claims that the $250,000 threshold will “ensure that lifting the payroll tax cap does not ensnare any middle class Americans.”

Suppose your household consists of you and your spouse, each earning wages of $150,000 per year. Currently, you are each subject to the payroll tax up to $102,000 of wages, so together you are taxed on $204,000. Under the Obama plan, you’d be taxed again on another $50,000 of wages.” YIKES!!!!!