A Series of Unfortunate Blogs: Part VII—Not just getting out of the hole, but getting ahead

So with the last blog I outlined getting rid of most of the biggest government socialistic habits in terms of spending. Let’s talk about the final piece required for true capitalism to make a comeback: Regulation and Enforcement.

Despite what some people think, capitalism is not anarchy. In fact capitalism is not possible without a government. Rule of law is a corner stone requirement for capitalism to work. But that law needs to only set the rules of the game and work with a light touch.

Some of the things you need.

Contract law needs to be sacrosanct. Unless the contract is fraudulent or illegal (like bilking the public for obscene pensions) no contract should ever be broken nor will the law or courts allow it to be broken except under the most extreme situations (for instance bankruptcy).

Private property rights. John Locke listed private property along with life and liberty as our most basic unalienable rights; the Fifth Amendment also sees these three as a holy trinity; and I doubt Jefferson thought most people would pursue happiness as paupers. Property rights need to be placed as absolute. The government has no right to your property beyond an absolute necessity to continue its existence as a necessary evil.

Sadly both of these rights have come under fire by recent Supreme Court decisions. If you are going to have capitalism then they need to be reiterated by Constitutional Amendment that in no uncertain terms lists them as unalienable and absolute.

Further the government has an obligation to punish those who would steal or commit fraud. Next to violent crime these are the two greatest sins in capitalism.

But what else does the government need to do:

(1) I know I said in the last blog we shouldn’t mess with the tax rate but I have one exception. A flat tax. If a simple 12% tax on personal income were put in place then you could change the tax code. Let me make this clear, no deductions for anyone. No floor, if you only got paid $20 last year, then 12% of that belongs to Uncle Sam. Yes this will all but put the IRS out of business, and it will also put tax accountants out of business (sorry Tony, it’s nothing personal, but it’s better in the long run) but it needs to be done. This will stop the rich from hiding funds, and it will finally allow everyone to pay their fair share in this government. Other taxes, while they need to be eventually dismantled or changed, my suggestions are radical as it is…one thing at a time.

(2) The Fed needs to stop messing with the interest rate. It needs to over the course of the next decade raise the interest rate back up to 6% and then never touch it again. No real growth can occur with it currently at 0% and no stability can occur with the Fed constantly changing the rate. It needs to go to 6% and stay there. No exceptions.

(3) A Constitutional Amendment needs to be passed making this a right to work nation. Forcing people to join unions just because they want a job is a violation of the most basic freedoms of capitalism and it must end. Will this kill unions, no. But it will make them actually have to work for their employees instead of just taking their money. Further in the industries where union salaries have become outrageous (auto industry) this will bring the pay scales back down to what is reasonable thus making the products made by those industries affordable again.

(4) Minimum wage needs to be lowered by at least a dollar (disbanded entirely eventually, but one thing at a time). Everyone knows you raise minimum wage you will increase unemployment and raise prices…it works the same in reverse.

(5) Congress has the power to put a ceiling on what credit cards can charge. They should use it. 20% interest rates are a good ceiling. Maybe if they couldn’t charge even higher rates they might exert some discretion on who they give cards out to. Credit cards companies have a right to a profit, but over 20% is just usury and it’s stupid because it only encourages people to default on their payments.

(6) There needs to be a new rule that any bank that is FDIC cannot give a loan unless the applicant has a 20% down-payment and their monthly payment is no more than a third of their income. This may slow down home sales, but it will all but kill foreclosures which are far more detrimental to the long term health of the economy. However with this banks must be allowed to opt out of the FDIC program, this will lead a resurgence of smaller Savings & Loans which will be able to make riskier investment, but for higher returns for the people who invest in them. And if someone is actually dumb enough to put all their money in one of these noninsured S&L’s rather than just a small fraction of their income, well then that person was a complete idiot and needs to live with the result of their actions.

(7) Regulation about insurance companies crossing state lines need to end. This will provide more competition, less overhead for large corporations and drive costs of medical bills down down down.

(8) Tort Reform. If you get rid of litigious frivolous lawsuits you will save billions across the board in almost every field, billions which will trickle down to the customer.

(9) Anything that can be privatized in the government should be. I have no doubt UPS and FedEx can deliver letters better than the US Postal Service. I have no doubt a private firm can keep national parks cleaner, with more interesting tours and gift shops, for much lower costs. I know for a fact freeways work better as privatized toll roads. All the government has to do is in addition to the initial lease fee, they get 5% of any profits the company makes off these services. Everybody wins.

(10) Either through Constitutional Amendment or through Supreme Court decision the commerce clause of the Constitution has to be reinterpreted to only apply to commerce that actually does cross state lines, not that could theoretically cross state lines and not that aids in crossing state lines only that which does cross state lines and those actions which impede commerce crossing state lines. The commerce clause was meant to only stop barriers from being put up, not to allow the Federal government to put up restrictions.

(11) And this was implied in the last blog but I felt this needs to be made explicit Fannie Mae and Freddie Mac must be destroyed.

These reforms remove barriers and lay the groundwork for true capitalism. If you put in place all 24 of my suggestions we would still be several steps off pure laissez-faire capitalism, but we would be much closer and the system would be on a stable foundation to grow in such a way that it would not collapse at the first slow down.

Or we could continue spending ourselves into oblivion?

9 Comments

Filed under Capitalism, Conservative, Debt, Economics, Free Will, Government is corrupt, Government is useless, Laws the GOP should pass, Long Term Thinking

9 responses to “A Series of Unfortunate Blogs: Part VII—Not just getting out of the hole, but getting ahead

  1. Cris, I will speak to one part of your post because you have oversimplified it and it will kill almost all business. While I am in support of a drastic simplification of the tax code, what you suggest would be the greatest tax increase ever created and, like I said above, will kill business. One, taxable business income is and should be net income, not gross income. What it appears you are suggesting is to tax gross income. If so, a rate of 12% would extract almost all profit in most industries. For example, most construction companies make 3-6% profit on their gross income. Your proposal would require them to pay taxes equal to twice the money they have left over after expenses. Clearly, you see the flaw here. You and I, as employees, have few, if any, deductible expenses against our pay. For our purposes, a flat tax in the manner you suggest is conceivable. However, 12% would still be an increase of about 5% on me. Two, your assertion that cooking of the books can't happen if the tax code is simple is simply untrue. Fraud is subversion of the rules laid out. If you commit fraud, you break the law. If you have decided to do what you want by not following the law, it doesn't really matter what the rules are. Furthermore, the accounting fraud you seem to reference has much less to do with the IRS than you think. A group called FASB establishes accounting standards, or GAAP, which is what public companies must follow. There are stark differences between GAAP and the tax code. Sometimes these differences result in more taxable income than accounting income; sometimes the inverse occurs. Accounting dishonesty occurs because people have incentive to do so, plain and simple.Because of this, I'm not concerned about a flat tax because a flat tax will still have to be applied to net income for businesses and arriving at net income for businesses and reporting that properly will still take the efforts of a professional such as myself. About half of my work has nothing to do with taxes, anyway. It is simply providing business owners with the information they need to make solid decisions. So no need to apologize, Cris. I would be wary of your numbers 3, 6 and 7 as well. This reeks of heavy handed gov't intervention, but I don't have time to get into those here. Thanks for the posts. They are always an interesting read.

  2. Tony, I was only suggesting the 12% for personal income (I actually hate coporate taxes on principle and would be more than willing to lower them into oblivion). And I realize there will still be fraud, but that's already illegal. It's the conveluted Enron style juggling (remember Arthur Anderson's accounting wasn't what they were charged with, they only got charged with shredding documents) that make a bussiness worth $0.02 in reality look like its worht billions on paper which is helped by the conveluted tax code that I wish to correct.As to which organization the IRS or GAAP, it's doesn't matter (I used the IRS because it's the one more people are familiar with)…but the mere fact that we have multiple angencies on this is part of the problem.As to your worry about 3 and 7 the government is already heavy handed in these categories and what I'm suggesting would actually limit its powers.As to 7 it's more because I do beleive the government does have a responsibilty on outlaw gross stupidity, which allowing credit card companies to charge usury is.

  3. Tony, if I may ask, how would you rewrite point one to ensure the Arthur Anderson/Enron style accounting (which is currently still legal as far as my understanding goes) becomes a thing of the past.

  4. I completely disagree with a flat income tax. The best measure of actual disposable income is the out flow….the spending a person does. So a flat sales tax that is either paid nationwide or as a tariff on imports will make this possible.

  5. Secondly I take issue with the idea of regulating the credit cards. The banks should have the right to give those "loans" out. However, if they do their "insurance" rate with the FDIC should be higher – depending upon the risk of the loans they make. That's what annuity tables are for! And the banks should be allowed to fail, and the FDIC to auction their assets and liabilities off just like any failed business. If the FDIC is losing money on the deal they need to examine their rates more carefully TOO.

  6. Nathan, while I agree with you that we should consider going to a national sales tax…one thing at a time, lets close up the massive loop holes and stabilize taxation so that everyone is paying taxes instead of just the middle class(12% is less than you're paying now)……and why is everyone opposed to usury laws? The only reason they charge those insane rates is because of all the government programs for debt repayment which means the purpose of those rates is to force people into a position where they can't pay off their loans. Offering people a deal you know up front they can't pay off is not only bad business it's the ethical equivalent of theft. And I said 20% which really means 20% plus prime (that's beyond a logical profit margin…any other business promising that kind of profit is a con game).

  7. Cris, it's not that I would rewrite your #1. I would mostly dismiss it. The "Arthur Anderson/Enron style accounting" you refer to was primarily related to non-disclosure of off-balance sheet financing and very complicated derivative trading. In talking with some individuals who worked at Anderson before they went under, they explained to me that there were few people around that truly understood the derivative trading in which Enron engaged. To prepare any financial statement, a large amount of estimates and judgments must be made. Much of what Enron did was and still is illegal. What Anderson did was poor business practice and they paid the price by going out of business. Making poor judgments isn't illegal, but it won't keep you in business. You need to understand that Anderson was the auditor of Enron's books. Anderson was supposed to have caught the off-balance sheet financing and, perhaps, judged the derivative values lower and, thus, not given them a "clean opinion" on their financial statement. Anderson did not do their accounting.The real reason Enron was able to post the kind of profit it was making before its collapse was the gov't regulations CA set in place, which the company had found a way to exploit. Most of their profits and value were based upon "paper" transactions founded in derivatives. I don't feel I can go into enough detail here to provide the background and education one would need to make meaningful recommendations regarding accounting standards. The tax code does not have anything to do with the value a company shows in its financials. However, my point above stands: Accounting dishonesty occurs because people have incentive to do so.

  8. Tony, I find this interesting as my belief that the clever accounting practices are causing economic instability come primarily with my talks with people who worked for Arthur Anderson and have a background in accounting and their assertion that the way the tax code and accounting rules are written is what allowed them to get away with all of their activities. They were quite adamant about this being a government oversight issue (which I do believe is a responsibility of the government under capitalism). But until I can do more research on this I will take the point down in deference to your experience in this field…

  9. Cris, I'd be more than happy to discuss this in more detail via email, if you would like. captcook@hotmail.com

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