Wednesday, February 25, 2004

Pushing on a Rope

Some readers have raised questions about the relationship between my Modest Proposal and the current recession and the benefits to business as well as labor. I hope this answers some of your questions.

A short discussion of the short term situation.

Why are we in a recession? Because businesses aren’t selling enough products, so their inventories grow, they cut production, and eventually lay off workers, or reduce labor costs by shipping jobs overseas. They have excess capacity, and don’t see anywhere to invest that makes sense, since demand has diminished.

Why aren’t they selling enough products? Because people, domestically or worldwide are not spending as much, or because they are not competitive in overseas markets. People have reduced their spending for a number of reasons. They are overextended on their debt, or lost equity when the market bubble burst, which paid for some of their previous purchases. They have lost confidence that their job is secure, or their incomes will no longer meet expenses, due to uncertainties in the economy or deteriorating worldwide conditions, and or other reasons.

So what should be done to get out of the recession? Where will tax cuts for business and investers go? One place is in the bank or in the market where it won’t create any demand. Will modernizing business or innovating create more demand? Maybe, if costs can be reduced so products can become more competitive in overseas markets. But, what if overseas markets are also depressed? Putting money in the hands of business and investors will be like pushing on a rope. It will only create demand if modernizing will improve competitiveness and demand is already there. Demand pull is needed either domestically or from abroad to stimulate business. Only after overcapacity is worked off will investment and hiring be needed. GNP increases, without corresponding hiring suggests that overcapacity is not yet worked off, or that hiring is coming mainly from offshore. What is needed in the short term is to put money in the hands of people who will spend it, i. e. tax cuts for spenders, not business or investors.

What is required in the long term?

About the only thing that will help the long term situation, with the disparity in labor rates here and abroad, is for companies to improve their competitiveness in offshore markets in other ways. The domestic market in the US is a small percentage of the world market, and it’s not growing as rapidly. If we are to remain an affluent society, we must prosper in international markets, and the profits from those sales must be spread over the great mass of people in the country to sustain domestic demand and to maintain a high average standard of living.

What my proposed program does.

First, on the business side, it reduces or eliminates administration, labor, health care and pension costs from the price of the products sold, making them much more competitive in both domestic and foreign markets. It recaptures some of these costs through taxes on the increased profits which will accrue to businesses and distributes them across all economic levels in the stipend and healthcare and education benefits. The important distinction is that these costs are not including in the price of products which makes the products much cheaper both domestically and overseas.

On the people side, it reduces the cost of domestic labor to business, making domestic labor more competitive relative to foreign labor. One reason we are not as competitive as we could be on world markets is because other countries are doing precisely this already. They ship products offshore at production costs, which don’t include the costs imposed by company sponsored health care, pensions, and high administrative costs.

Even if the current complex tax system were kept, and just the earned income credit adjusted in leiu of the stipend, it would accomplish some of the benefits to business and labor addressed here. This may be more easily implemented, but there is major savings to be reaped from eliminating the whole administrative tax code mess as I have proposed.

Friday, February 20, 2004

A Not so Modest Proposal

After watching the Frontline program, “Tax Me If You Can” and reading the book, “Perfectly Legal” I am convinced that half the corporations and the people who run them are eating everyone else’s lunch through deceptive, or even illegal, practices. Their access to, and power over, government through campaign contributions, is made possible through complex tax and regulation laws that neither congress nor the administrators fully comprehend. Corporations, including major accounting, legal, and financial firms have the resources to keep one step ahead of the politicians and administrators in devising schemes to avoid paying their taxes and to keep labor costs at a subsistence level.

There are several related issues which the country supports but which politicians will not support because it will limit their access to contributions and their ability to manipulate the various sectors of society to get elected and reelected. Among them are tax code simplification, illegal immigration control, health care cost containment, and limitations on the export of jobs. This lack of support for programs the country favors is not only undemocratic, it borders on fraud when laws get enacted that allow corporate cheating.

The press is complicit in sustaining this situation. Driven by the bottom line, the press concentrates on the sensational, the sexy, and the salacious while the real problems are addressed only by a few outlets, not dependent on commercial success, like C-SPAN and PBS. Until the press sees fit to inform the public about what is going on, voters will continue to vote for candidates on the basis of their religiosity, their company or union’s recommendation, their standing in the polls, or their spin on the stump. Therefore it is imperative that grass roots pressure be applied on the press to inform the American people about the problems, and on the politicians to start acting ethically and enact programs the people support.

There is immense wealth in this country, but it’s in the hands of a few. It may be time to give every person a stipend of about $1000 a month, with cost of living adjustments. Then tax people at graduated rates on incomes above the stipend. This would take some people, who want to do their own thing on a shoestring, out of the job market and raise wages for those who stayed in. And companies would only have to pay wages above the stipend. So some people would be willing to work for little or nothing above the stipend, and fewer jobs would move offshore, since the stipend is not being paid to offshore workers.

Social security, along with the payroll deduction for it could be phased out over time when existing contributions by workers are paid out.

The tax bureaucracy could be eliminated almost entirely. No tax return would need to be submitted. Every employee could be taxed at their average rate for the previous year and employers and institutions could deduct the tax and submit it to the Treasury. Any reconciliation could be factored into the next year’s withholding. All deductions, exemptions, and tax credits would be eliminated. Instead of corporations maintaining two sets of books as they do now, one for the IRS and one for shareholders, businesses would be taxed on the net earnings in their quarterly and annual reports, eliminating the need for any tax return. All businesses would be required to publish these reports and be subject to ongoing audits by the appropriate agencies.

Government regulation of business could actually be reduced and limited to protection of the environment, worker safety, and accurate reporting . The only thing left for the politicians to manipulate the electorate would be the progressivity in tax rates. That would insure that the cliché, “class warfare” would not disappear from the lexicon.

Together with this tax program, the government should negotiate and pay for health insurance contracts with insurance companies for everyone in the country on competitive bids – no cherry picking of healthy people, no special programs for government employees, everyone in one gigantic group. Medicare and medicaid could be phased out, along with their payroll deductions. The health care system would still remain private as it is now. Pressure for cost containment would come from the bidding process and copays. Business will no longer be the custodians of health care and retirement plans.

Government should also work towards fully funding education at government controlled institutions, through the college level, as was done in the 1950’s. Outside of health insurance, education is the single largest cost to families with childen.

Believe it or not, this should not represent a big dislocation in the economy, since everyone now employed or on unemployment is making at least the stipend. Education and health care costs are being paid right now. And, gigantic savings would accrue from the elimination of all the paperwork associated with the programs that would be terminated. The only significant change would be that the tax burden would be shifted from struggling people on the bottom rungs of the ladder to corporations and the people who run them who have been robbing the rest of us for a long time.

There is one caveat. You would have to show proof of citizenship and reside in the US in good standing to receive the stipend. If you’re incarcerated, owe taxes, have outstanding warrants or unpaid infractions, the stipend would stop until arrangements are made to get back in good standing.