Commentaries
Now raising intellectual capital
We’re all doomed, part 94
If you really want to spook yourself, try this. The sweep of history, courtesy of Dylan Grice of SocGen (he starts with 3rd Century Rome) shows that all fiat money eventually collapses under the weight of its internal contradictions, as politicians struggle to meet promises made under more benign circumstances.
There are some really spooky charts here, showing the real level of government liabilities (rather than merely the actual borrowing) and none of the Western countries looks remotely solvent. Oddly enough Spain comes out best – or least worst – with liabilities totalling a mere 250 percent of GDP. The US is joint worst with 550 percent.
Grice comes up with even scarier figures when he calculates the income/liability ratios, which effectively show that Europe and the US have no hope of returning to long-term fiscal stability.
Alas, he gives us no idea of how to protect ourselves from the consequence of fiscal incontinence. Perhaps that’s in his next piece of research. I’ll let you know.
Why the U.S. needs a Value Added Tax
Swelling deficits and an aging population leave few palatable options when it comes to taxes.
The best choice by far would be the creation of a new value added tax — a “money machine” that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.
Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.
The timing of a new tax on consumption may also seem suspect. Aren’t we supposed to be getting Americans back into the malls?
VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.
Unlike taxing the rich — which has emerged as a favorite strategy of many Democrats — a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.
Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer’s share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.
If the US issues a VAT then it also needs to do away with income tax. It also needs to do away with all of it’s very poorly run programs and instead take a position of referee.
That is to say that rather than actually running programs like education and medical programs, and housing programs etc.. It needs to institute a financial social safety net which distributes assistance payments to the citizenry. It would be much like continuously receiving stimulus payments. They wouldn’t amount to very much for each household, but it would serve to smooth things over during difficult times.
Then the government simply needs to uphold standards of ethical business practices, and the rule of law. And in all law it is the citizen that must come first. No more special interest groups. EVERYONE has the same rights. Gay, straight, man, or woman, it doesn’t matter. All citizens have the same rights to life liberty and pursuit of happiness.
On the surface this may seem like it would be very expensive. But in actuality it would cost much less than what the government currently pays for corporate welfare and the administration of its entitlement programs. With what our war is costing us alone this plan could be easily carried out for decades.
The advantage of putting money directly into the hands of the citizenry is that they will be encouraged to consume, pay bills, choose their own medical care, schools, etc.
Our money is backed by faith alone. If one is going to have faith in something, then that something actually has to come through in a positive way. Otherwise why would anyone have faith?
If you want the forest of American business to grow strong then the roots of that forest must have the water they need. The citizenry are the roots of American business. Capitalize the citizenry. Then even if all they do is buy cheetos with their money they will still be supporting the economy. And as long as they are capitalized they will continue to support the economy.
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The Wall
None of this had to happen and it was not the inevitable conclusion of social security and medicare. Had the gov properly invested (or even just saved) the social security taxes each year, the system would be functioning fine. Congress just couldn’t resist spending the money. Imagine if you put away money for retirement by writing a postdated check and then spending the money! That is exactly what congress did.