How's this for revising the tax code?

The other day I was contemplating the federal government's various sources of revenue, marveling at the wisdom of the framers in constructing a government that has such a hard time approving new revenues (i.e. tax increases), and lamenting that the political class can simply borrow the money instead -- or even print it if needed, as the Federal Reserve Bank has done to astonishing levels recently.

I then free-associated to the nature of the fed's money-printing privileged.  It's essentially a free license to counterfeit.  The reason counterfeiting is considered 'bad' is because it effectively reduces the value of the currency being counterfeited, which can cause a lack of confidence in the currency, and all of the attendant issues arising from that lack of confidence.  But many economists seem to believe that not only is it acceptable for the federal government to issue counterfeit* paper, but that it is in fact the only way to get out of a business cycle recession in which the core issue is perceived to be a 'liquidity trap' (i.e. we're in a recession because of a lack of spending, but people are spooked so they won't spend).  As I understand it the theory is that you pump the economy so full of liquidity that people 'feel' rich, and therefore spending resumes, thus pulling the economy out of the 'liquidity trap'.  In this case, the fed is putting the cash directly into bank reserves in order to 'pump up' their books so they look less risky.  This is supposed to encourage short-term lending, which is supposed to allow businesses to borrow-and-spend at pre-recession levels.

My purpose with this post is not to get into whether or not that theory is valid, or whether or not its implementation has worked (although I think evidence shows that it hasn't -- thus Obama's new $400b+ jobs bill stimulus package).  My purpose is rather to highlight a solution to the revenue problems of the federal government, based upon the fed's ability to counterfeit.  The solution is this:

Instead of bothering with trying to get taxes and spending cuts passed; instead of implementing and maintaining a tax code that is thousands of pages long and impossible to comply with in an absolute sense; instead of periodic political squabbling over revenue vs. tax increases; instead of maintaining the charade that we're ever going to cut spending and increase revenue such that the budget can be balanced, why not simply do four things:

1. Eliminate all taxes
2. Authorize the federal government to borrow all the money it needs for spending
3. Use the federal reserve to print all the money necessary to pay for that borrowing
4. Require a balanced budget

The result would be an inflation rate that would most likely be in the double-digits, but it would also be the effective tax rate -- the amount of money each person loses due to inflation each year would be their yearly federal tax rate.  It would also mean that any time new spending was approved a corresponding change in the inflation rate would also have to be approved.

Now, this is somewhat tongue-in-cheek.  I certainly don't believe it is a viable (to say nothing of moral or ethical) solution.  But that's the point.  The only difference between what the federal government does now, and this plan, is a matter of quantity.  Are we to print money to pay for all spending, or just some portion?  If just some portion, what makes that more sustainable than the alternative?  At what point does the portion that we are paying for through counterfeit become large enough that the plan fails?  Is that failure point some absolute value?  A specific rate of inflation?  A percent of GDP?


Now, I know there are very obvious arguments against this: Keynesian economists would probably argue that massive expansion of the monetary base is not warranted except in dire circumstances -- using it as a matter of course is not recommended.  Progressives would probably argue that the result is a flat tax that doesn't allow them to practice class warfare effectively target revenues according to financial status.

Really, the point is simply to highlight the questionable nature of the fed printing machine.  However, I actually prefer this plan in some ways to what we have currently:

• It would inflict real, immediate pain on the people each time new spending is approved -- the associated increase in inflation rate would force politicians to convince the current electorate of the need, rather than simply off-loading it to future generations.
• It's effectively a flat tax -- there is no way for the federal government to divide the people into groups by their finances, and then pit them against each other... unless they issue separate currency for poor people versus rich people and set the inflation rate for each at different levels.
• It would make it clear to everyone exactly how much of their wealth was being confiscated each year by the federal government. With a tax code that fools even Warren Buffet into believing his effective tax rate is only 17%, this would be an improvement.
• It would make it transparent whether or not the federal government's tax rate was helping or hindering the economy: If interest rates settled under this regime to a value less than the inflation rate, then it would become quite clear the the federal government was destroying wealth rather than creating it!  (of course, that would only work if the fed wasn't manipulating interest rates)
• It would make it more difficult for the fed to pick economic winners and losers (i.e. crony capitalism) -- if there were no tax breaks to hand out then there would be no way, other than explicit handouts in the form of direct subsidies and/or guaranteed loans, for the fed to create preferential conditions for specific industries and companies.
• It would make it more difficult for the fed to interfere with free trade since it would no longer be able to implement punitive and/or preferential tariffs (remember point 1 -- all taxes have been eliminated).  
• It's potentially more stable and predictable than the current regime... though I suppose there's no reason to think the fed wouldn't make quantitatively large adjustments to the spending (inflation) rate over short-term periods.

At this point I think I've taken it far enough...

What Ever Happened to the Constitution? | Andrew Napolitano

Judge Andrew Napolitano always struck me as somewhat of a goober on Fox, but in other venues he turns out to be quite thoughtful and intriguing.

Here's a fantastic talk he gave before an audience at the Mises Institute, in which he discusses the total lack of fealty the federal government shows to the Constitution, how it came to be that way, and the insidious ways in which it results in the gradual degradation of individual liberty in this country, in a way that was the exact opposite of what the framers intended. He explains that in essence the Constitution describes the way in which the federal government is to go about its primary function -- the preservation of individual liberty -- and that all other functions are illegitimate... and I would add, contrary to the former.

Watch "Thomas Woods speaks on Nullification at Nullify Now Los Angeles" on YouTube

A rebuttal to Obama's rebuttal to the S&P credit rating downgrade

On Monday, President Obama saw fit to reiterate the same tired talking points about the debt and deficit that he's been repeating ad nauseam for weeks and months now. I have some comments in response:

On Friday, we learned that the United States received a downgrade by one of the credit rating agencies -- not so much because they doubt our ability to pay our debt if we make good decisions, but because after witnessing a month of wrangling over raising the debt ceiling, they doubted our political system’s ability to act.

A month? Sure -- the decades of overspending by both Democrats and Republicans, leading to $14 trillion in debt had nothing to do with it. And neither did the last 3+ years of massive entitlement expansion and extension of the Bush war expenditures.

The markets, on the other hand, continue to believe our credit status is AAA.

He says as the markets plummet. On Monday -- the day on which Obama delivered this speech -- the Dow fell 600+ points for the 6th largest decline in history.

In fact, Warren Buffett, who knows a thing or two about good investments, said, “If there were a quadruple-A rating, I’d give the United States that.” I, and most of the world’s investors, agree.

Of course, Buffet doesn't have millions riding and stocks, and therefore has absolutely no interest in influencing the markets.

If you and Buffet and "most of the world's investors" agree that the US is "quadruple-A [rated]," then make the case. I'm waiting. In the mean time, the reaction of the markets seems to indicate that S&P does have some credibility in their minds.

As far as I'm concerned, the federal government of the US has no credibility on this front. Point to me one single thing that is stable about the U.S. economy. There is none, because the stability of any and all segments of the U.S. economy -- and much of the world economy -- are attached to the stability of the U.S. dollar and U.S. financial institutions. The dollar is continuously devalued by excessive printing, and the financial institutions are regulated by politicians and bureaucrats. Who wants any part of that? The only reason we're not in a lot more trouble is the status of the dollar as the world currency. But that won't last forever.

The fact is, we didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction.

What does "balanced" mean? My guess is that it means a combination of tax increases and spending cuts. But who knows? As far as tax increases: the federal government shot that wad decades ago. It has no credibility left on that front. If tax increases are granted, the spending cuts will never come. The politicians will simply spend the additional revenue, and then some.

We knew from the outset that a prolonged debate over the debt ceiling -- a debate where the threat of default was used as a bargaining chip -- could do enormous damage to our economy and the world’s.

No -- the damage was done, and is being done, by the psychotic and irrational control that the federal government asserts over every aspect of public life. The "prolonged debate" wasn't even the straw that broke the camel's back -- the President's and the Democrat congress' desire to create a massive new entitlement, coupled with a paralytic inability to come up with a budget, was the straw.

With respect to debt, our problem is not confidence in our credit -- the markets continue to reaffirm our credit as among the world’s safest.

True... the rest of the world's credit tends to go down with, and in proportion to how tightly their economies are tied to, the US'. I'm sure they're very satisfied with that arrangement and have no desire to change it any time in the future.

What we need to do now is combine those spending cuts with two additional steps: tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare.

Who are "who can afford it," and what is "their fair share?" Answer: whatever the politicians decide. If Obama gets his way, those tax increases will go straight into funding massive new entitlements -- not paying for existing ones. If you're gullible enough to fall for this B.S. then you are likely disassociated from any real understanding of the history of government.

Furthermore, we need more than "modest adjustments." Medicare, Medicaid, and Social Security are illegal ponzi schemes (or worse) that can only work to subvert the rule of law, enslave those that aren't fortunate enough to be part of the political class, and, ultimately, bankrupt the country.

Making these reforms .... [requires] compromise.

Compromise is exactly what passed last week. If the Republicans had had their way the problem would have been solved. I'll even allow, for discussion, that if the Democrats had had their way the problem would have been solved*. Compromise is what we got, and it failed miserably, as it always does. Compromise is what has gotten us to $14 trillion in debt, with no hope of solving the deficit problem.

[* but only in the short term -- the tax increases would have further stalled the economy, which would have resulted in reduced tax revenues, perhaps enough to undo the effect of any tax increases]

Let me go into this a little more deeply:

When the federal government of the United States was founded, it was constitutionally limited to a certain small set of functions. To maintain this limited scope the government was founded with three coequal branches (really four since congress is bicameral), each of whose interests were intended to be at odds, so that they wouldn't join up and work together in order to enact some function unless that function was so agreeable to both houses of congress and the executive, and legal according to the judiciary.

Over time, politicians realized that they could increase their ability to wield power by "compromising" with each other... "If you vote for X I'll vote for Y."

Over yet more time, politicians of both major parties effectively "compromised" their interests into legislative being -- each side compromising on issues that were of less interest to them. For the Republicans this meant giving in on spending decreases (which they really aren't interested in anyway) in order to get increased military expenditures... usually by way of deficit spending and issuance of sovereign debt. For the Democrats this meant giving in on tax increases in order to get increased entitlement/welfare expenditures... usually by way of deficit spending.

In the end, spending has been very successfully increased, while revenue has remained flat or decreased, both in the name of "compromise."

For the average person, what does this mean? Answer: a government that is very well capitalized -- on debt that you will have to pay back -- to kill people around the world (military), and to restrict liberty at home (nanny state).

[The problem is] the insistence on drawing lines in the sand, a refusal to put what’s best for the country ahead of self-interest or party or ideology.

Gee, that's funny, because I'm pretty sure the GOP cut, cap, and balance, bill, passed in the House, would have prevented a default, AND would have avoided a credit rating downgrade. If you really believe this statement, Mr. Obama, then shouldn't you have spoken out in favor of the Democrat-controlled Senate passing the bill?

More to the point, if what's best for the country is at odds with what some want, doesn't that behoove those with the country's interests at heart to draw lines in the sand? Doesn't doing what's best for the country require absolute principals be adhered to?

I understand that there are differences of opinion about what principals are important. This is the EXACT REASON government should have a small footprint in every day life. When government does something it necessarily forces a single viewpoint on everyone.

We should also help companies that want to repair our roads and bridges and airports, so that thousands of construction workers who’ve been without a job for the last few years can get a paycheck again.

Why? If they're unemployed that means there are too many construction workers out there. Do you really think you're doing someone a favor by deluding them into staying in a dead career? What happens when those government-created jobs are gone? All this will do is to delay the inevitable. The fact is that the housing bubble employed too many construction workers. The ONLY way to solve this over-supply of construction workers is to let the creative destruction of the market lead them to new careers... OR, if possible, to REAL, SUSTAINABLE construction work.

Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we’ve always been and always will be a AAA country.

Just saying it doesn't make it true.... I don't think even the most naive among us believes this balled-faced assertion. Everything comes to an end. [anyway, doesn't Obama sound like he's appealing to "American exceptionalism" here?]

For all of the challenges we face, we continue to have the best universities, some of the most productive workers, the most innovative companies, the most adventurous entrepreneurs on Earth.

Entrepreneurialism is a natural human attribute that is expressed and exercised when it comes in contact with sufficient opportunity afforded by liberty. It does not come from some fantastical magical attribute of being a U.S. national. Government kills opportunity. The only reason we've had "the most adventurous entrepreneurs on Earth" is because -- even until recent history -- we've also had the most laissez-faire economic policies. No more. From crushing debt, to overbearing regulation, to a devalued currency, to a cultural atmosphere -- cultivated by progressive elitists in the armchairs of academia -- that hates entrepreneurial behavior, entrepreneurship is suffering mightily in this country.

What sets us apart is that we’ve always not just had the capacity, but also the will to act -- the determination to shape our future; the willingness in our democracy to work out our differences in a sensible way and to move forward, not just for this generation but for the next generation.

Don't try to define us together just because we live within the same pot of 300+ million individuals. The only thing that the 300 million inhabitants of the U.S. have in common is the federal government that tyrannizes them. Before that the common trait was the federal government that protected them from tyranny.

... ultimately, the reason I am so hopeful about our future -- the reason I have faith in these United States of America -- is because of the American people.

If you actually believed this then you'd be doing everything in your power to put more power into the hands of these people that you have so much faith in.

Tear it down and start over

Watch "Nicholas Merrill Speaks Out About Receiving a National Security Letter" on YouTube

Juan Williams -- my liberal hero

I can count on two fingers the number of talking heads who call themselves 'liberal' and/or 'democrat' that I think are worthy of paying attention to. Juan Williams is one of them (guess who the other is?).

In this piece at foxnews.com, although he doesn't intend it, he describes the exact reason I give so few people in that camp any credence. In short: they have become the religious-right extremist kooks that they believe themselves to be the Paladin army against... not in specifics but in methodology.

I don't agree with Williams most of the time, but at least he has the intelligence to make a coherent point, and the respect and understanding to address his opponents' viewpoints directly.

Go, VDH!

Victor Davis Hanson has a nice piece at National Review about the (all-too-predictable) self-destruction of the liberal nanny-state, here and around the world.