Category Archives: ethics

Thoughts on Taxes and Property

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I’ve written elsewhere about the property nature of money that is taxed, and how that property is owned by the individual and not by any government.  In this post, I’d like to talk about another aspect of taxes and about the concept of eminent domain as a kind of tax.

The House Committee on Small Business, a few days ago, held hearings to see what the major target (whether intended or not) of the Obama increase-taxes paradigm thought about taxes and what a tax régime out to look like.  The question of interest here was Congressman Joe Walsh’s (R-IL), and he asked this of a number of small business owners.

When it comes to this issue, tax reform and specifically how it impacts pass through entities*, what’s one word of caution or one word of advocacy — what would you advocate for if you had a moment or two in front of the super committee?

To a man, they decried the uncertainty in the current administration’s proposals.  They can’t plan for the future when they can’t know that their costs—of which taxes are a major part—will be reasonably stable.  When businesses can’t plan from one year to the next, there are a lot of other things they can’t do: they can’t predict the cost of components for their own production, since their suppliers can’t predict their costs, so purchase are held down, and production is held down; they can’t plan for R&D since they can’t know the tax costs, or subsidy availability, of those, so R&D falls off; they’re inhibited from hiring, since one of the costs of an employee is the incremental tax cost just from having him on the payroll.

And they want lower tax rates.  This isn’t just a self-serving matter, either.  Money the government taxes is money the business does not have to spend on its own needs.  What are those needs?  Supplies for their own production, R&D, labor.  And in the present administration, part of that labor cost is the mandated set of benefits levied on them.  Additional costs, which high(er) tax rates reduce their funds for covering, include regulation compliance costs from financial reporting, environmental reporting, privacy reporting, and the like.

But these businessmen aren’t alone.  Americans, generally, are tired of the constant drumbeat of raising taxes to claim monies for government to spend on politicians’ purposes.  Coloradans, a number of years ago, passed a state constitutional amendment requiring that the citizens of Colorado, not the politicians, approve any new tax, tax rate increase, emergency tax spending, or any tax policy change that causes a tax revenue increase or creates more debt.  In special elections just concluded, Coloradans suited these words to action.  Earlier this week, Colorado’s citizens defeated, roughly 2-1, a state measure that would have increased income and sales taxes, ostensibly to provide funding to the state’s K-12 schools.  The rejection was local, also.  More than 10 separate local tax questions, with the funds claimed to be aimed at schools, were put to local communities.  They all were voted down.  This, though, wasn’t a decision by Coloradans to reject supporting their education system; it was a rejection of higher taxes as a useful or effective means of doing that.  It was a rejection of higher taxes.

Aside from that, some taxes are simply capriciousness, which brings me to eminent domain.  Under our Constitution, governments have the authority to seize private property, paying the erstwhile owner “just compensation.”  But even though compensation is paid, this is little more than a tax on the individual whose property is confiscated.  It’s true enough that the man gets something of value back, but that’s the idea behind taxes, generally—a public good (roads, education, national defense)—is returned to each man for the money property taken as taxes.  Indeed, as the 5th Amendment is written, the government’s sole legitimate purpose for such a seizure is that the property taken had to be for public use—to provide a public good.

20th Century Supreme Court decisions, though, have morphed that public good requirement into a simple need asserted by a private commercial interest for whom a man’s house has greater value than that house has to the man who owns it.  Google on Kelo v. City of New London, for instance.  The claim here is that there is in fact, some sort of public good resulting from this: jobs, perhaps, and certainly higher tax income for the government exercising that eminent domain.

One of  the fallouts of this is a referendum next week in Mississippi that, if passed, will essentially bar the state of Mississippi, or any jurisdiction within it, from exercising eminent domain for such purely private commercial/economic purposes.  One brief discussion of this can be heard here (click on the video link, and sorry about the lead-in commercial).  The eminent domain part can be heard beginning at about 5:30 of the video.  Oddly, Gov. Haley Barbour is hoping the referendum is defeated; he insists the economic gains are worth the costs of such an eminent domain tax—and the costs to freedom.

Stephen Hayes makes a very good case concerning the centrality of individual property rights, a natural right, to American freedom.  Charles Lane, though, makes the governor’s case, and he utterly misses the point of property rights (and so of taxes levied on property, whether money property or real).  Lane assures us that a man’s land wouldn’t just be taken from him; he’d be paid for it.  But other taxes are agreed to by the citizenry as a whole through their elected representatives and through those citizens’ collective decision concerning who should represent them.  The man whose land is seized has no say in the matter.

In the Mississippi case, the man wouldn’t even share in a public good—his land would be turned over to another private enterprise for that enterprise’s benefit, which might also have a general economic benefit for the region.  But there’s a problem here.  The rights to private property are durable, long-lasting (I won’t get into their inalienable nature in this post).  The economic benefits are not long-term, and often they’re pure chimera.  That seminal Kelo case provides an illustration.  A private developer got the city of New London, CT, to condemn a neighborhood-full of private houses so he could develop the property for a shopping mall.  The public good these displaced homeowners (assuming they could stay in the area, absent any homes) and the remaining community were to get were jobs, a new shopping mall, and more taxes for their city government.  In the end, the developer was unable to finalize financing, the mall never was built, and the jobs and tax income never materialized.  The homeowners are still out of their homes, though.

More than that, the 5th Amendment demands “just compensation.”  But there is not enough money in the world to pay a man, there is no way at all to make him whole from his loss, if what is taken from him is something with which he does not wish to part.

 

*Pass-through entities, according to Congressman Walsh, are partnerships, S-Corporations, LLCs, sole proprietorships, and so on.

Democracy

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From Spiegel Online International:

Not even a day after [German Chancellor Merkel] and French President Nicolas Sarkozy suspended aid payments to Greece pending the results of a bailout referendum called by the government in Athens, Prime Minister Giorgios Papandreou has backed away from his plan.

And this, from the Greeks’ own government:

On Thursday, Papandreou [yielded] to demands that he enter into negotiations with the opposition on the formation of a cross-party caretaker government. Shortly thereafter, plans were scrapped to hold the controversial referendum….  Papandreou’s own finance minister broke ranks.

The people will not be allowed to speak on the matter, save through continued riots.  And their own government will not hear them.

Greek democracy, RIP.

A Back of the Envelope Bailout of the Bailout

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Let us say that Greece survives the EU’s assault on democracy (Brüderle’s “It’s a strange thing to do [hold a plebiscite],” for instance), and the Greeks proceed with their referendum on whether they want the latest bailout.  Say, further, that the Greeks reject the bailout.  Now accept, arguendo, that all of the dire things EU leadership claims will happen, do happen: there is a 90% write down of Greek sovereign debt; the Greeks leave, or are dismissed from, the euro zone, and perhaps from the EU altogether; and the Greeks go back to using (a now severely devalued) drachmas.  Beyond these, some are even claiming, apocalyptically, that the future of the euro and of the EU are at stake.

What will, in fact, happen from these desperate consequences, and how might they be mitigated?

Looking at these in reverse order, it’s possible to achieve some clarity.  Greece’s economy is 3% of the EU economy, even in good times.  Greece is one small nation of 27 nations in the EU and 17 in the euro zone—the subset of the EU that actually uses the euro as their common currency.  It just isn’t that big a player.  The threat, such as it is, comes from the large holdings of Greek sovereign debt that private banks, investors, national central banks, and the European Central Bank hold—a total of some €340 billion—and the threat from this sum comes from the fact that those who hold this debt hold it as a central part of their assets.  If the debt becomes worthless, these holders’ survival—at least that of the private banks and investors—becomes problematic.  I’ll address these debt holders in a bit, but it’s clear that the failure of the EU or the euro as a result of a Greek rejection of the latest bailout—of a Greek default—is nothing more than hysteria for political purposes.

On the matter of Greece leaving the euro zone—what the hey, Greece leaves the EU—some other things become apparent.  One is the nature of the downside of Greece leaving and striking out on its own.  I see little beyond the disruption of the leaving process itself.  Greece’s Mediterranean culture and its economic principles and imperatives (large government involvement in its people’s lives, early retirement ages, vast social programs paid for with high taxes, those taxes routinely evaded, the budget deficits associated with this (even if the taxes were paid)) made Greece a poor fit with the northern European EU (with its different work ethic, smaller government and fewer social services, and lower tax rates) from the start.  This nature of this mismatch has made for a large, continuous movement of northern European private and taxpayer money into Greece in the form of those loans, in the unrealistic expectation that they actually would be paid.  Or, maybe the expectation actually was that only the stream of interest income would last long enough for a profit.  With these differences in mindset and in government and economic goals, though, the Greeks could not, and cannot, compete in the EU, and so long-term servicing of Greek sovereign debt, including final repayment, has always been a chimera.  Larger than this, it simply has been a losing proposition all along to try to force inhomogeneous economies and cultures to integrate.  The Greeks are better off on the outside, on their own, and so is the EU.  I’ll come back to how the Greeks are better off, beyond this no longer having to take part in a losing game, in a bit.

As an aside, this same set of differences, with the possible exception of tax collectability, can be said to underlie the relationship of the other major Mediterranean economies (which are, incidentally, the rest of the PIGS: Portugal, Italy, and Spain) with the EU.  And the result of this may well be the same.

Now we come to that write down of Greek debt.  First, let’s put that debt into a perspective.  The banks (private and government, including Greek banks) hold around €340 billion, as I mentioned above.  This is against an EU economy with a GDP of some €12 trillion.  The loss of those €340 billion would be disruptive, to be sure, but it’s not catastrophic.  What exacerbates the problem is the key role many of those banks play in the national and EU economies.  The EU claims that there are around 95, or so, “systemically important” banks, and the EU claims further that these must be propped up virtually at all costs because of that perceived importance.  These are the banks whose reserves are required by the terms of the present bailout proposal to be increased to 9%, an increase intended to enable the banks to handle the disruption from the 50% write down of Greek debt that this bailout envisions.  Oh, yes, one more little fillip: it’s only the private banks that must suffer the 50% loss; the governments’ banks are to be kept whole.

Now let’s look at how this might be handled.  Assuming a bailout ever is appropriate, assuming that it ever is optimal to ignore moral hazard and morality in favor of short term convenience, I offer this solution, which has the advantage of at least being a better targeted, more efficient bailout.

For simplicity’s sake, and in keeping with the back of the envelope estimating of this proposal, let’s take a worst case condition: the Greek debt is written down 100%, not 90%.  The European Stability Fund Facility, set up explicitly for a Greek (and ensuing nation) bailout, has around €234 billion left after the last round of Greek bailout, and it’s capable of borrowing to a current maximum of €440 billion.  Private banks hold around €200 billion of that Greek debt, and the governmental banks hold the remaining roughly €140 billion.  Since Brussels has said that 9% reserves is sufficient to handle the 50% write down of Greek debt, it must be so.  This leaves €100 billion of losses from a complete Greek default to be covered (again, assuming a bailout is at all appropriate).  These “systemically important” banks can be made whole, then, for just €100 billion from the EFSF piggy bank, leaving €134 billion to cover the governmental banks’ complete loss of their €140 billion holdings.  That’s rounding error, but if Brussels’ accountants get too upset, the EFSF easily can tap its debt capacity to borrow an additional €6 billion to top up the bailout.  And with the EU leadership’s views of national taxpayers, it’ll be a simple matter to adjust the national subscriptions to recover the ECB, and the nations can simply ask their taxpayers to pay a tad more for their own national banks.  This bailout is a piece of cake.  And the object lessons here will instruct the rest of the PIGS.

But what of the Greeks, now that they’re on the outside looking in?  To be sure, they’re in for tough times, but the “austerity” measures the existing and EU-proposed bailouts were putting, and are going to put, on them will create the same tough times.  Only without the EU props, now the Greeks will be forced to learn to stand on their own.  They’ll be forced, both their government and themselves, to learn to live within their means.  A cash and carry economy will teach that.  The Greeks will find it hard, as all bankrupts do, to borrow; they’ll be forced to earn their way, and success will come slowly at first, but with each success, the next will come more easily.  Over time (and in less time than will seem possible in the days after the default), the Greeks will earn their way back to respectability.  Borrowing will become possible, albeit expensively so.  With continued prompt repayment, made possible from the lessons of earning one’s own way (of necessity, since there will be no outside help available), borrowing costs will come down to a normal range.  Their newfound understanding of their responsibilities will prevent them from over-borrowing for several generations, as happens with all bankrupts, as happened with the American society after the Great Depression (whose cause was different, but the lessons of work and frugality are the same).

And Bob’s your uncle.

The Bailout, Again

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I’ve disparaged in other posts the Greek people’s response to their economic crisis.  However, the decision of their Prime Minister, Giorgios Papandreou, to put the latest EU offer of a bailout to a plebiscite—to let those Greek people speak directly and for themselves on whether they think the bailout, or its terms, are suitable—has led to an interesting set of responses from the other governments of the Union, and from within the Greek government itself.

On the one hand, there is a great deal of legitimate frustration on the part of those governments over the decision for a plebiscite of the people who would be the “beneficiaries.”  Regardless of what we might think of the bailout itself, a lot of hard work and political capital, and yes, sacrifice and good faith, went into working out the parameters of this latest bailout, and filling in the details will take much more of the same.  On the other hand, how those governments are expressing their frustration says a very great deal about their views of democracy.

French President Nicolas Sarkozy insists, “Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts….”  The Greeks really must have other nations’ permission to speak for themselves.  It’s a cute idea, though; thank you for playing.

Rainer Brüderle, a leader of the Free Democrats Party (part of Germany’s ruling coalition), says in all seriousness, “It’s a strange thing to do [hold a plebiscite], but all you can do is take precautionary steps in case there is a state insolvency in Greece.”  Indeed.  How alien a concept it is, this letting citizens speak and instruct their government.

The Swedish Foreign Minister, Carl Bildt, has Twittered,  “I truly fail to understand what Greece intends to have a referendum about. Are there any real options?”  Aside from the question of whether the Swede’s understanding is necessary to a Greek referendum, his professed inability to understand the matter says more about his understanding of the imperatives of democracy than it does about Papandreou’s decision to consult his employers.

Even from within Greece’s own government, we have a lack of clarity.  “I never expected Papandreou to take such a dangerous and frivolous decision,” huffed Dora Bakoyannis, an independent member of the Greek Parliament.  In the birthplace of democracy, it’s a frivolous thing to have the government’s employers speak up and tell their government what it must do.

Socialist deputy Hara Kefalidou wrote to Papandreou this, among other things: “I cannot back a referendum which is a subterfuge by a government that appears unwilling to govern.”  Letting her constituents, and the constituents of the rest of the government, speak is mere subterfuge, and not democracy in action.  And a government which fulfills this duty is unwilling to govern.  This is interesting….

Even support for the decision to hold a plebiscite is founded, not on recognition of the fundamental tenets of democracy, but on the purely utilitarian grounds of its political practicality: a successful outcome would silence, once and for all, opposition to the bailout in Greece.

Another, ulterior, motive for the EU leadership’s crocodile tears seems apparent.  “While Greece is threatening a vote, nobody will ever give Europe the resources for the enhanced [EFSF],” said Jan Poser, Bank Sarasin’s chief economist.  Those uppity Greeks are going to cause an embarrassment for the EU at this week’s G-20 summit. The EU members had intended to beat the wallets of the other members, especially China and Brazil,  for funding to bail out the now over-committed EFSF, so that it could bailout Greece, and then Portugal, and then Spain, and then Italy, and….  However, with those Greeks so rudely planning to speak for themselves, it seems there will be great difficulty getting anyone from outside the EU to support these efforts.

Apparently, the European view of democracy is that the citizenry very democratically vote politicians into their government, and then the citizens are to shut up, sit down, and let their government speak for them.  But when governments speak for the people, with no obligation to heed those people, governments instead speak in the people’s place.  And the people have ceased to have a voice in their own governance.

No.  Let the Greek citizens speak through their ballot box.  They’ve been speaking in the streets for months, and they’ve been studiously ignored.  It isn’t government’s role to protect people from themselves (leaving aside the minor fact that it has yet to be established that a popular decision to reject the bailout is something from which protection is warranted).  Especially when government does such a terrible job in the attempt.  And putting off the default will only make it worse when it happens.

Metaphors

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The current administration set up, a short while ago, a Web site intended to facilitate the efforts of those seeking Federal employment.  In doing so, the administration internalized a task that had been handled by Monster.com.

The proxy server did not receive a timely response from the upstream server.

This is an all too common complaint about that new USAJobs Facebook wall.  After a multi-million dollar, two-year to “upgrade,” Office of Personnel Management’s new site has less capability and reduced reliability compared to Monster’s original site.  Additionally, not everyone is convinced the price tag for these two years is justifiable.  “I might make some people mad if I say this, but without knowing the specifics of the contract I can’t really see something like this costing over half a million dollars,” Zach Katkin, President and CEO of Atilus, notes.

At the end of 2008 and start of 2009, the government passed TARP, a $780 billion bailout package for failing businesses.  The package was originally intended to buy all the “toxic assets” (credit default swaps, mortgage backed securities, and other even more esoteric debt instrument derivatives) from vulnerable financial institutions to facilitate their recovery.  Then it was morphed—without Congress’ involvement—into outright bailouts of financial institutions deemed to special to be allowed to fail and go through bankruptcy proceedings, and it was expanded in scope to include bailing out car companies and unions.  Thus was born the whole too big to fail thing and the moral hazard stemming from that, demonstrated by all the demands by other businesses, and even individual Americans, for similar bailouts.

Early in 2009, the government passed the Stimulus Bill, a nearly trillion dollar spending package intended, in the finest Keynesian tradition, to stimulate the economy and promote job growth.  The government even guaranteed that this package would keep national unemployment below 8.5%.  National unemployment soon peaked over 10%, and it’s been above 9% ever since.  But we got those trillion dollars successfully spent, and our national debt successfully ballooned.

In 2010, the government passed the Patient Protection and Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act on the claim that health care costs for Americans and our businesses would go down drastically and on the claim that Americans would see more transparency in our business transactions and gain protection from the nefarious machinations of our financial institutions.  The response since has been rising insurance costs, to the point the HHS has threatened to bar insurance companies from Obamacare’s insurance exchanges if they don’t straighten up and fly right.  In addition, small business employers are saying, in droves (30% of them, and rising), that costs for the insurance coverage they’re required to provide will be so high when this part of the law takes effect, they’ll be forced to stop providing insurance coverage at all.

Further, small businesses are facing nearly $3,000 per employee in incremental compliance costs due to Dodd-Frank’s reporting requirements.  And Dodd-Frank hasn’t yet had even half of its required rules written.

And we get great ideas like this one from Rep Jim Moran (D, VA):  “The banks aren’t doing it, but the federal government can borrow money at three-and-a-half percent today. They should use that money to refinance every home mortgage, and that would put $750 billion into homeowners pockets.”

We’ve been getting “The proxy server did not receive a timely response from the upstream server” messages since well before the botched USAJobs effort.