In 1873, Walter Bagehot wrote that "the business of banking ought to be simple; if it is hard it is wrong." He would have struggled to recognize today's banking system.

It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.

Complexity -- as Bagehot predicted -- has become a curse. If nobody can understand financial firms, they will become ever more accident prone.

The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.

Regulators too could be forgiven for scratching their heads.

"Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships," former Fed official Vincent Reinhart has written.

Indeed Basel II -- the international capital code -- was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.

Yet many intelligent executives of these same institutions failed spectacularly. It is no mean feat keeping tabs on an army of specialized financial engineers, lawyers and accountants.

As Robert Rubin, the former Treasury Secretary and Citigroup executive, acknowledged last year on the Charlie Rose show: "Unless you are either running the trading operations or running the independent risk management, you are not going to know the risk well enough to have a real sense of where those risks are."

Making financial firms simpler will be far from simple.

One approach is coercive. Regulators can make it very uncomfortable to be big. Capital requirements that ratchet up with size would encourage firms to split themselves up into their component parts, giving managers and regulators a better shot at following what is going on. On the whole, smaller firms tend to be more straightforward.

Failing this, Reinhart has proposed a Lego model, in which financial firms would be composed of "well-defined modules." A company made of units that can be easily disconnected from the whole would be easier to manage, with individually simple parts. Regulators can foster this model by insisting on a "living will," complete with plans for how companies would salvage their firm in the event a single unit implodes.

Regulators need to make it much easier to understand financial statements. First, they should impose a strict consolidation of bank balance sheets, forcing them to incorporate all special purpose vehicles.

In addition, more information should be made available about banks' risk-taking. Firms should be compelled to publish monthly indicators drawn up by regulators, including a measure of the relationship between short-term borrowing and long-term lending.

This would enable creditors to exercise proper discipline over the banks by pushing up their borrowing costs if they become too reckless. The notion that only banks themselves can understand their own risk-taking needs to be jettisoned.

Lastly, the government should also reduce the incentives for complexity. Financial institutions mirror the Byzantine structure of regulation, tax and accounting rules. They become complicated in order to shop for the most lenient regulator, lightest capital requirements and most tax efficient structure.

Paring down these rules and structures should be an underlying goal of any regulatory overhaul.

The first step to reducing the magnitude of future mishaps is to ensure that we can make sense of our financial institutions. The respect and awe often accorded to "black box" financial institutions is misplaced and dangerous. Instead we need to embrace simplicity.

The Year Since Lehman -- related columns:

"Living wills" are easier said than done

A year on, it's still a housing story

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.

Canada, for example, gives up about a third of potential revenue by excusing food, drugs and transportation from the tax. Even if the United States did the same, a 10 percent tax rate could raise $500 billion a year, according to Eric Toder, an analyst at the Tax Policy Center.

Raise the rate to 15 percent and you get $725 billion. (In comparison, income taxes are expected to yield $968 billion this year.)

This might be hard to square with President Obama's commitment not to raise taxes on anyone making less than $250,000 a year. VAT is a regressive tax -- eating up a larger share of the income of lower wage groups.

This could be offset through the income tax system. In addition, there would be a natural counterbalance if the tax were used to fund an expansion of healthcare. With current health proposals expected to cost around $100 billion a year, there would be plenty of money to spare.

Obama could also borrow a trick from Margaret Thatcher, who used the proceeds from almost doubling VAT to slash British income taxes. A 15 percent VAT would give Obama tremendous leeway to simplify a Byzantine income tax system and to cut rates.

And introducing a VAT need not derail economic recovery. Indeed, if the tax were introduced with a six-month delay it could even provide Americans with an incentive to bring forward spending.

America cannot temporize forever. The aging population will demand both painful spending cuts and tax increases. If the burden is placed on income taxes alone then any increase in rates will be monumental.

When politicians finally confront the looming fiscal crisis, a VAT would be an invaluable tool.

Even in weak employment markets, the United States has typically had a trump card to play. The nation's workers are legendary for their willingness to travel across the country for new opportunities.

The result has been a speedier recovery of job growth than in Europe and possibly a higher productivity rate, since skilled workers are better matched to openings.

With the August employment report on Friday expected to show little improvement in the job market, America has never needed this flexibility more. Yet, at the risk of adding to the gloom, this advantage appears to be fading fast. The good news is that the United States still boasts one of the most dynamic labor markets of any rich nation. OECD rankings of its 30 wealthy member nations put the U.S. far
ahead of other large countries. (It comes second only to Denmark, which has unmatched programs to help the unemployed back to work.)

On average, around a quarter of American workers change jobs each year, compared with 15 percent in Italy and 13 percent in Greece, says Stefano Scarpetta, head of employment research at the OECD.

Yet there has been a striking decline in U.S. mobility in recent years. Since 2000, the movement of Americans across state lines has halved to just 1.6 percent of the population this year -- the lowest rate since records began in 1948. Even movement between counties is at historic lows.

(Click chart to enlarge in new window)

Americans may be becoming less adventurous because they are getting older. During the recession of the early 1980s the median age in the labor force was 35, according to the Bureau of Labor Statistics. Now it is 41.

In middle age, people are less willing to leave their home and yank their children out of a school district for anything less than a dream job. OECD figures show that workers above 45 are half as likely as those under 34 to change companies.

Another factor is at work -- the housing meltdown. Tighter lending standards and negative equity make it much harder to relocate. The willingness of people to move for a new job halves when a family is suffering from negative equity, according to research by Joseph Gyourko and Fernando Ferreira at the University of Pennsylvania.

Those who owe more on their mortgage than the property is worth face a tough choice if they are offered a job elsewhere. Either they can sell and hand over the balance of the debt to the lender -- often tens of thousands of dollars -- or walk away and suffer years of higher borrowing costs.

This is a problem that is certain to grow. Negative equity currently afflicts around 26 percent of borrowers, or 14 million properties, according to Deutsche Bank. By the time the slump is over, Deutsche expects that close to half of households will suffer from negative equity. More than a quarter of borrowers could end up owing more than 125 percent of the value of their home.

Economists believe there may be other factors chipping away at the flexibility of the workforce. Rising healthcare costs have increased the risks associated with going without insurance -- something than many dynamic startups can't afford.

When a recovery gathers pace, the frustration of being tied down to depressed areas will become ever more acute. The United States may not have the onerous labor market laws seen in much of continental Europe. But the housing market collapse combined with an aging population may end up having a similar effect.

If American companies find it harder to draw on the nation's full pool of talent or if workers can't move where they will be most productive, the prospects for a full-blooded recovery will dim.

The victorious Democratic Party of Japan did not put economic growth at the heart of its electoral sales pitch. The party's manifesto mentions "growth" only once. The word "support", by contrast, appears 19 times.

Even so, there are reasons for optimism that the DPJ's softer and more nurturing policies are just what the economy needs.

The global slump provided a painful reminder of the dangers of Japan's export-oriented growth strategy. Output has fallen even faster than in other rich countries, leaving national income at roughly the same level as in the early 1990s.

After two decades of stumbling between recessions, policy makers need to convince their citizens to spend some of their vast cash savings, which are now equal to 1.5 times GDP. Making the Japanese feel more secure may be the best way of doing this.

There is plenty in the DPJ's platform that looks encouraging. If Japan's new government can enact election pledges, Japanese citizens would have fewer reasons to hoard cash.

Parents would benefit from a generous child allowance. High-school education would be made free and university scholarships more plentiful. For the elderly, there would be a minimum guaranteed pension of at least 70,000 yen (about $750) a month. The unemployed would get 100,000 yen (about $1,100) a month during job training.

There are two problems, however. The first is how to pay for this largess. The party's belief that its $180 billion social agenda can be financed by cutting wasteful spending has left some economists unconvinced. A good deal of the fat in the budget was cut out when Junichiro Koizumi was prime minister from 2001 to 2006.

Canceling public works may be easy. But reducing the cost of Japan's powerful civil service by 20 percent is a tall order -- especially when combined with a drive to strip senior mandarins of much of their influence.

Meanwhile the DPJ seems reluctant to privatize the government's giant postal savings and insurance businesses. An IPO could provide a large injection of cash without the need to trim costs or raise taxes.

If the Japanese feel the new social programs are unsustainable, they may be more reluctant to spend. With national debt at over 200 percent of GDP, a degree of skepticism would be natural.

The second economic headwind for the DPJ is even harder to overcome. Shrinking pay checks will make it difficult to tempt the Japanese into the shops. This year wages have been falling at their fastest pace on record -- 7.1 percent in the year to June.

Beyond the cyclical downturn, deeper demographic forces are at work. As highly paid baby boomers retire, they are being replaced by cheaper youths, according to Edward Lincoln, an economics professor at New York University. This is ratcheting down wages.

A decline in the working age population will also make economic growth more of an uphill struggle. Overall the number of Japanese citizens has been falling since 2005. This makes Japan an unlikely engine of global growth even if the DPJ gets everything right.

Promising as some of its policies are, Japan's new government will face strong headwinds. But it is good news both for Japan and the world that the country now has a leadership that seems inclined to put the interests of consumers before exporters.

At first glance this week's budget projections paint President Obama as a spendthrift. The White House itself offered a grim glimpse of a future in which U.S. debt more than doubles to $17.5 trillion in a decade -- an increase of nearly $10 trillion.

Merely servicing the U.S. debt will cost more than America currently spends on either defense or social security.

But the yawning deficit can't be blamed on Obama -- or for that matter, on Bush or on the financial crisis. Instead the government's finances are locked on autopilot, with entitlement programs driving the country towards a fiscal crisis.

Spending on three giant programs -- Social Security, Medicare and Medicaid -- will account for three quarters of the extra borrowing over the coming decade. By 2019, it will more than double to $2.5 trillion -- more than the U.S. government expects in total tax revenues for next year.

Washington needs to address the deficit soon. To avoid pointless political wrangling, it is first important to make clear what is not causing the fiscal meltdown -- including the economic stimulus.

Even if you add in interest payments from the $789 billion recovery bill, the stimulus accounts for only a tenth of the rise in debt up to 2019, according to calculations by Chris Edwards at the Cato Institute.

Three years of weak tax receipts, courtesy of the recession, will cost the country about $1.3 trillion if interest costs are included. This represents just 15 percent of the borrowing binge.

And there is little the government can do with the other spending it has under its control. Indeed Obama is assuming that he will have little money to play with.

The White House forecasts have discretionary spending falling slightly in real terms from $1.26 trillion to $1.12 trillion. This includes a hefty real cut in defense from $687 billion to $559 billion in 2019. Spending on all other departments, including energy, education, labor and agriculture, is also set on a downward trajectory.

Failure to act could have a number of severe consequences. The first would be that debt servicing will swallow up an ever greater share of tax revenue. By the time current teenagers are working, around 36 cents for every dollar of income tax they pay will go to interest payments, according to White House figures. This compares with about 19 cents now.

Then there is the threat of a buyers strike on U.S. bonds. Berkeley economist David Romer argues that investors can quickly pivot from being eager to lend to governments at low rates of interest to being unwilling to buy Treasuries at any price. This may never happen, but the dangers increase along with the deficits.

Time is running out. Powerful as the United States is, the country continues to accumulate debt at this rate at its peril. The focus must be squarely on the real problems -- medical spending and social security.

On healthcare this means ensuring that the costs to Americans are no longer hidden by employer-provided schemes. A more transparent system would put the brakes on rising costs more effectively than any other measure.

On Social Security the United States should gradually start to ratchet up the retirement age until it reaches 70. Social security was not designed to cope with an average retirement that now lasts more than 20 years.

The first step to preventing a looming fiscal disaster is to have a non-partisan discussion about the source of the problem.

The financial crisis has brought forward crunch time. Political procrastination on entitlement reform is now even more dangerous.

On healthcare, the White House is struggling with a political riptide that threatens to drag it into deep water.

Americans, as they contemplate change, have suffered a weakness of nerve. The main reason is that nearly two thirds of Americans are apparently happy with their healthcare coverage, for all its deficiencies. Repeated reassurances from President Obama that those who like the existing set-up will not be forced to change, have had little effect.

A change of tactics may be in order. The administration must do a better job of underlining the glaring defects of the existing system. The genius of the U.S. healthcare is in providing the illusion of value and security. For their own sake, Americans must be encouraged to set aside jingoistic claims about having the best care system in the world and look more honestly at its short-comings.

Let's start with value. Most Americans are blissfully unaware that their healthcare system provides appallingly little value for their money. This is because when it comes to costs, they see only the tip of the iceberg. While companies typically pay about three-quarters of an employee's family premium -- on average $12,680 a year -- individuals ultimately bear the burden. In a free market, companies do not hand over to their workers more than they absolutely have to. Money spent on healthcare is carved out of take-home pay or other benefits.

"We pay for healthcare in considerably lower salaries," Uwe Reinhardt, a Princeton University economics professor, said in a telephone interview. "The system seduces people into thinking care is pretty cheap. We are kidding ourselves if we think that the shareholder pays."

One measure of this financial sacrifice is that employer premiums are now 17 percent of median household income -- up from 15 percent in 2003. From 1999 to 2008, family health insurance premiums rose by 119 percent.

With healthcare costs rising fast, it is small wonder that middle-class Americans have failed to wring real pay increases out of employers. The drag on pay will increase further, according to research by the Commonwealth Fund. The foundation estimates that without reform, the cost of premiums could double again by 2020 -- gobbling up still more take home pay.

The second big healthcare mirage is security. If the current downturn has demonstrated one thing, it is the fragility of an employer-based healthcare system. Lose your job -- as more than 6.5 million have in this downturn -- and your insurance can disappear with it. (COBRA provides only a temporary patch and can be expensive.)

It also means that you can lose your coverage if you get very sick. "Get so sick you can't work, you can also forfeit coverage," Gary Caxton, an analyst with Kaiser Family Foundation, said in an interview. The very idea of insurance is to protect you during a crisis. Instead Americans are getting insurance that works only when the sun shines. "The American system is least good at the worst times," as David Cutler, a Harvard healthcare economist, puts it.

The final illusion is that the healthcare system can be relied on in the longer term. In reality it is taking on water fast. This is most obvious in small companies. Less than half of companies with fewer than 10 employees now offer insurance, down from 57 percent in 2000, according to the Kaiser Family Foundation. For all companies, the percentage is down from 69 percent to 63 over the past 8 years. Companies are also starting to unload a growing share of costs onto employees anyway.

Deductibles for most employees have more than trebled since 2000 -- a trend that looks almost certain to continue. This is all before you take into account the prodigious quantity of tax dollars soaked up by healthcare.

As the private sector has faltered, the state has been forced to step in. The result is that America is stumbling toward nationalization.

A recent Gallup poll found the share of Americans dependent on the state for healthcare -- including Medicare, Medicaid and VA benefits -- had climbed to 29 percent from 26.5 since the start of 2008. If you include the 17 percent of U.S. workers employed by the state, then closer to 40 percent are covered by the government.

Americans need to take a good look at their existing healthcare system, warts and all. It is the administration's job to hold up a mirror to U.S. healthcare. If they fail to do so, the U.S. will pass up an opportunity to build a system that's fair, sustainable and offers better value.

For most policymakers, deflation is the stuff of nightmares -- scarier even than bank failures and stock market collapses. As the economy stumbled, deflation became Lords Voldemort and Sauron rolled into one.

In recent months, however, this economic supervillain seems to have lost its power to intimidate.

With growth reviving, many economists now believe that deflation is highly unlikely to materialize.

Another group suggests that deflation is not nearly as nefarious as often portrayed. Since falling prices are not generally associated with depression, we were wrong to be frightened in the first place.

Sadly, both of these reassuring premises are wrong. We should still be afraid of deflation.

First, the notion that deflation is a misunderstood and potentially benevolent economic force is only partially true. Supporters of this theory often cite research from the Federal Reserve Bank of Minneapolis, which showed that falling prices seldom coincide with depression.

Looking at data for 17 countries over more than a century, the Minneapolis Fed concluded that "nearly 90 percent of the episodes with deflation did not have depression."

A swelling dollar can clearly be good news for shoppers as well as for those who are sitting on cash. Deflation is often a result of economic progress -- productivity improvements that increase spending power. This was the friendly species of deflation caused by surging Chinese output from the 1990s onwards.

The current variety of deflationary pressure is far less benign. It stems not from efficiency savings but rather from weak demand. Worse still, it is accompanied by record levels of debt.

Despite frantic efforts to pay off loans, household debt is still around 130 percent of disposable income. This was precisely the combination that Irving Fisher warned about in his celebrated 1933 article on debt deflation.

Under these conditions, the rising real value of debts encourages households and businesses to sell their assets to pay down loans. As fire sales reduce asset prices -- stocks and property -- real net worth declines further. Output and employment decline, accelerating the slide in prices.

To add to the pain, real interest rates increase whether central bankers like it or not, discouraging borrowing and promoting even more savings.

"The more debtors pay, the more they owe," Fisher wrote, since "the liquidation of debts cannot keep up with the fall of prices which it causes."

But with the U.S. economy clawing its way out of recession, surely the danger has passed? Not quite. Prices are the ultimate economic straggler.

In Japan, for example, the country only started to experience falling prices roughly three years after the start of the recession in 1991. Wages didn't start to fall until 1997. The United States could still follow Japan's lead.

Downward pressures on prices in the United States continue to intensify, according to the latest research by Capital Economics. Core inflation may have held at a respectable 1.5 percent, but this is deceptive. U.S. goods inflation has defied gravity in part because of hefty increases in tobacco taxes over the past six months. A 28 percent increase in tobacco prices from a year ago is adding one percent to core goods inflation, according to Paul Ashworth of Capital Economics.

"Without this, core inflation would already be matching the lows reached at the end of 2003," he says. The tobacco effect will soon fade.

Services inflation, meanwhile, has been very weak. Here the key factor has been weak rental prices, which account for about 40 percent of the total core index. Unemployment and foreclosure will continue to put relentless downward pressure on rents. Already the rental vacancy rate is at a record 10.6 percent.

So we are right to be afraid of deflation -- very afraid. It still has the potential to sap energy from the American economy for years to come.

The Federal Reserve is preparing to lay down its unorthodox monetary policy instruments. But it may have to dig deep into its tool box before too long if deflation takes hold.

The FOMC is determined not to make waves, either in the markets or in Congress. Today's decision looks to be a compromise between these two goals. Lawmakers such as Jim DeMint are yearning for an end to the credit easing policies. But going cold turkey might unsettle the Treasury market. Allowing the program to taper off gently is a good middle ground. With the Fed's regulatory role hanging in the balance in Congress over the coming months, this is no time to attract adverse attention.

Even so, I think it's a shame that the Fed didn't follow the Bank of England's lead in extending asset purchases. If the Fed is so confident that it can quickly suck back any liquidity then why not try to make sure the recovery gets off to a stronger start?

The economic revival will soon start to look quite statistically impressive, with growth rates of up to 3 percent. Beneath this there will be climbing unemployment and surging foreclosures. The Fed itself is forecasting tepid growth and mounting joblessness. They could still help ease this pain by striving to shave more off the cost of borrowing for consumers and businesses.

They have done a great job at helping save America from depression. But this is a limp end to a historic policy.

– Christopher Swann is a Reuters columnist. The views expressed are his own –

Recession historians on Wall Street often consider a downturn over when job declines fall to half their peak.

The July employment report, with its revisions, takes us past this milestone. The numbers were better than expected in almost every respect. There was even a tick up in hours worked, especially in manufacturing. The output component of the recession has probably already ended.

Even so, the labor market is likely to remain grim for a very long time. That a decline in payrolls of 247,000 should be taken as good news is an indication of how bad things have become. Such falls were close to the average in most postwar recessions, not an indication that the worst was over.

In the recession of the early 1980s, the peak job loss was 389,000. In this recession it has been around 740,000. So we are still on a different trajectory. The United States may continue to bleed jobs at a fast pace for some time to come.

There has seldom been more slack in the labor market. Businesses have plenty of room to increase the working hours of existing employees — which have declined far faster than in previous downturns.

Part-time workers can be brought fully on board. Only then might companies add to payrolls.

After the end of the 2001 recession, it took 21 months for the labor market to fully turn around. Even the White House, which is becoming much better at managing expectations, is saying that it still expects the unemployment rate to reach 10 percent.

Once people lose their jobs, they are also spending longer out of work than in previous downturns. In the recession of the early 1980s the average spell of unemployment reached a peak of 20 weeks. Now it is at 25 weeks. A third of the jobless have now been without work for more than six months, up from 29 percent in June — both post-war records.

This is bad news for consumption, since state payouts typically cover less than half of a previous salary.

For America’s hobbled banking system the ever growing duration of unemployment is almost as ominous as job destruction itself. Few consumers have sufficient precautionary savings to continue to service debt for such extended periods once their income is halved.

Under an optimistic scenario, in which job creation rebounds to about 100,000 a month, it will still take five years to recover the more than 6.6 million jobs lost during the recession. This should keep consumer spending weak and means that the United States will remain vulnerable.

Over coming months the temptation to ease off the monetary and fiscal pedals will increase. It should be resisted. Policy makers should get used to looking at economic data in absolute as well as relative terms.

– Christopher Swann is a Reuters columnist. The views expressed are his own –

Cash-strapped politicians are more willing to play Robin Hood than at any time in a generation. Tax rates on the rich may soon hit levels not seen since the 1980s.
The wealthy, alas, are not easy prey. Backed by highly paid lawyers and accountants, no other group is better able to run circles around the taxman. As a result, America’s politicians may get less cash than they bargained for and more economic distortions.

There are many easier and less disruptive ways to get the cash.

Of course, the temptation to launch a direct strike on the rich is understandable. The past three decades have been very good to the affluent. The top 1 percent of earners now account for 19 percent of America’s income, up from 9 percent in 1980. This elite group has also been quiescent, dutifully paying 40 percent of all income tax, according to the non-partisan Congressional Budget Office.

It has been many years since the rich had a powerful incentive to test the limits of the tax code. The top rate of income tax has fallen with only minor interruptions since its vertiginous peak of 92 percent in 1953. But a foretaste of what might be expected was offered by Maryland’s ill-fated creation of a millionaires-tax bracket in 2008.

A year later 1,000 millionaires had disappeared — a third of the total — and revenues from this group had fallen by $100 million. Some may have left the state while others may have found ingenious ways to reduce their reported income.

The U.S. tax code is replete with legal dodges for the wealthy, whether you are a top executive, independent business owner or the lucky recipient of inherited wealth.

Well-paid salaried employees often have considerable leverage over how they are paid. For this group, tax-efficient fringe benefits — including lavish health plans, and use of the corporate jets and other perks — may increase. Stock options may become more popular still, enabling employees to defer tax until they retire and have lower incomes.

Business owners have even more flexibility and can deliberately muddle personal and business consumption. And as income tax surges above corporation tax, business owners may choose to pay themselves risible salaries, locking up their wealth in their companies.

The wealthy may also choose investment strategies that avoid income and maximize capital gains, further reducing potential tax revenues. The capital gains tax is preferable because there is flexibility in when gains can be taken. Tax-exempt municipal bonds could also become more popular.

Significantly higher taxes on the wealthy, then, could reduce tax reduces while encouraging businesses to waste more money on executive perks. Such unintended consequences could undermine efforts to stabilize the financial system. Politicians should avoid this lazy and wasteful solution.

Tidying up the fabulously complex tax system and closing loopholes could raise just as much money and be easier to market politically. Many of these measures have the advantage of extracting cash from the rich in ways they will find harder to avoid.

Scrapping the tax exemption of municipal bonds would eliminate a favorite haven for the wealthy.

Reducing or eliminating the gulf between income and capital gains — as Ronald Reagan’s 1986 tax reform did — reduces sharply the opportunity for hiding money.

A number of other quirks in the code also primarily benefit upper-income groups — including breaks on employer-provided healthcare, mortgage interest and state and local tax.

For the less progressively minded, the gradual imposition of value-added tax, as proposed by Bill Gale at Brookings, could raise a great deal of cash in the future while actually encouraging people to spend now.

A clumsy increase in top rate taxes, by contrast, will mainly be a bonanza for tax accountants and lawyers.