Monday, December 30, 2013

California's Decentralized Voting Proposal

In California, the voters are able to put proposed laws on the ballot if they gather enough signatures. This process is called an “initiative”. The legislature may also place propositions on the ballot, a process called a “referendum”.

One of the ballot propositions for 2014 is “The Neighborhood Legislature Reform Act”, which would decentralize the election of representatives in order to reduce the political power of special interests such as corporations, labor unions, and trial lawyers. This reform would shift political power to the people of California. (For the text of the initiative, see http://neighborhoodlegislature.com/legislature/).

Like the US Congress, the California legislature has two houses, a Senate with 40 members and an Assembly with 80 members. The population of California is 38 million. The districts for the California Senate now have 950,000 persons, a greater number than for Congressional districts, while about 475,000 people live in each assembly district. It now takes a million dollars to win a California Senate seat.

The Neighborhood initiative would instead create Senate districts of 10,000 persons and Assembly districts of 5000. These neighborhood districts would form a greater association of 100 neighborhood districts within the current districts. The association council would elect a representative to the state legislature, thus keeping the same number of representatives in the state legislature. However, the final approval of a law would require a vote by all the neighborhood district representatives. That vote could be done on an Internet web site, as corporations now do for their elections of board members and propositions.

The Neighborhood Legislature proposition was initiated by John H. Cox, who has been a lawyer, real-estate management executive, and local office holder. The aim is to have the measure on the November 2014 ballot. That will require over 800,000 valid signatures, 8 percent of the votes cast for governor in the last election, by May 19. That is a high hurtle, which usually requires several million dollars to pay for signature gatherers. This initiative has already made a splash, with articles in the Wall Street Journal, Washington Post, The Los Angeles Times, and other media.

I have been writing for years on reforming democracy with tiny voting districts in a bottom-up structure. Back in 2007, I wrote an article, “Democracy Needs Reforming” (http://www.progress.org/tpr/democracy-democratic-reform-2/), proposing that the political body be divided into cells of 1000 persons, each with a neighborhood council. A group of these would then elect a broader-area council, and so on up to the national congress or parliament. The state legislature would then only need one house, rather than a bicameral legislature that mimics the US Congress and British parliament. This “cellular democracy” would eliminate the inherent demand for campaign funds of mass democracy.

The Neighborhood Legislature Reform Act would not be quite as thorough a reform as a cellular democracy based on tiny districts, but it has the same basic concepts: smaller voting groups, and bottom-up multi-level representation. This initiative would indeed greatly reduce the demand for campaign funds that are needed in today’s huge California electoral districts.

It will be a great challenge to obtain the needed signatures. It could happen if the media provide editorial support and coverage. At any rate, the fact that this initiative is taking place will go a long ways to publicizing the gross corruption of democracy that is taking place, and the only effective remedy to the inherent dysfunction of mass democracy. Many reforms are needed in today’s governments, reforms in taxation, pensions, environmental protection, transit, criminal law, and economic deprivation. The main reason that useful reforms are not taking place is the subsidy-seeking and reform-blocking induced by mass democracy. The initiative process in California and other states is a way to circumvent the corrupt legislature, but in a large state like California, that process itself requires big money.

It will be interesting to watch the progress of the Neighborhood Legislature initiative, and to watch the special interests jump in with misleading negative ads. If this goes on the ballot and wins, it will be a victory for the people and a defeat for the moneyed special interests.

(This article first appeared in www.progress.org).

Tuesday, October 22, 2013

Criminalizing Innovation

The U.S. government has attacked an entrepreneur and his new product, as another episode of the federal government’s war on enterprise. In this case, the entrepreneur CEO is Craig Zucker, the company was Maxfield & Oberton, and the product was Buckyballs.

Buckyballs were small magnetic spheres made of neodymium, a rare-earth element that is a powerful magnet. As they stick together, the balls can be assembled into shapes such as pyramids. They were named “Buckyballs” after Buckminster Fuller, an American architect, inventor of the geodesic dome, and futurist visionary. His friends called him “Bucky,” and the neodymium spheres were somewhat like Bucky’s domes.

The company imported the balls from China and started selling them in 2009. They became a popular office toy. But the Buckyballs were banned in July 2012 by the federal Consumer Product Safety Commission, which is now seeking to prosecute Zucker for having sold the balls.

In 2012 the Commission also sent letter to retailers warning of the risks to consumers of using Buckyballs and asking them to stop selling them. That was effective in stopping the sales. The Commission stated that the balls were a hazard for young children who swallowed them.

The company had developed the Buckyballs in collaboration with the Consumer Product Safety Commission, and after the action by the Commission, the firm provided it with a corrective-action plan. Buckyballs were sold with a warning against access by children, and they were not sold in toy stores. But the Commission pursued a lawsuit against the firm even before examining the corrective plan. As pointed out by the Wall Street Journal article (cited below) on that case, there are many potentially dangerous products being sold, such as cleaning chemicals, knives, and balloons. Buckyballs were intended and marketed for adults, and, according to the WSJ article, no deaths have been associated with the Buckyballs.

The Commission declared, as a justification for the ban, that Buckyballs have “low utility” and are unnecessary, despite purchases by 2.5 million adults who spent $30 each. The principle established by the Commission is that government determines which products are desirable, not consumers. Any product could be banned by the standards of the Commission.

The company then engaged in a publicity campaign regarding the actions by the Commission. In the end, the government was too powerful to resist, and the company was terminated in December 2012. However, in February 2013, the Commission charged Zucker as being personally liable for the costs of a recall costing $57 million if the Buckyballs are judged to be defective.

The federal government has by this action abolished limited personal liability under U.S. law for corporations as well as partnerships. From now on, the executives of a firm will be vulnerable for the liabilities of the firms. Any entrepreneur will now risk losing all that he owns if he engages in the production or distribution of any product. The effect of this government action is to strangle American entrepreneurship.

In the case of United States v. Park in 1975, the Supreme Court ruled that the CEO of a food company was criminally liable for a rodent infestation. This ruling was based on the federal Food and Drug Act. But another case, Meyer v. Holley in 2003 ruled that ordinary liability applies unless there is a clear Congressional intent to hold corporate officers personally liable. The relevant law in the Buckyballs case is Section 15 of the Consumer Product Safety Act, which regulates corporate persons, not individual persons.

The WSJ article says that since Zucker did not commit any criminal violation, the Commission’s continuing prosecution of Zucker “raises the question of retaliation for his public campaign against the commission.” If the Commission achieves its goal, personal-injury lawyers will take advantage of personal liability to go after CEOs and other company personae.

This action by Congress, the Courts, and the Commission has to be seen in the perspective of a broad war by government on private enterprise and consumer choice, using taxes, restrictions, mandates, and prosecutions, ultimately resulting in an economy that is nominally private but substantially controlled by governmental chiefs. The name for that system is “fascism.”

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Reference: Sohrab Ahmari, “What Happens When a Man Takes on the Feds,” Wall Street Journal, August 31-September 1, 2013, p. A11.

Saturday, October 19, 2013

FATCA closes Americans’ Foreign Bank Accounts

When the USA adopted the 16th Amendment to the Constitution a century ago, did the people understand that this would deprive Americans world-wide of foreign banking services? Americans thought that the income tax would just grab the money from the rich, but they did not understand that the income tax would tax everybody else more. All that is needed to equalize wealth without damage to the economy is to stop government subsidies, but this requires an economic sophistication that so far has eluded most people.

Inherently, an income tax yields an incentive to cheat, as the government depends on reporting. So the Internal Revenue Service has to monitor financial accounts to prevent tax evasion. Gradually, the IRS has extended its reach into accounts, first within the USA, and now into the foreign accounts held by American citizens.

No other country has imposed such costs and mandates on foreign accounts as the USA. So ironically the “land of the free” has the least economic freedom for its citizens abroad. The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 requires foreign financial institutions to make reports on American accounts. Foreign financial institutions with American customers are required obtain a Global Intermediary Identification Number. FATCA requires foreign financial firms to identify their U.S. account holders, to disclose the account holders' names, social security or other tax IDs, addresses, and the accounts' balances, receipts, and withdrawals. For some accounts, the foreign bank is required to withhold some of the interest paid to the account, and send it straight to the IRS. This US law overrides the privacy laws of the foreign countries.

US law is thus legislating not only within US territory but throughout the whole world. If a financial firm does not comply, the IRS will tax 30 percent of its US-sourced income. The IRS is also busy laying out the legal infrastructure for enforcing this law with agreements with foreign governments for data sharing. Governments world-wide are signing on, because they too face the problem of tax evasion when they tax income that can hide.

FATCA does not just affect fat cats. Many foreign banks are now refusing to provide Americans with bank accounts and are closing the accounts of Americans, who are now also unable to obtain mortgages and insurance abroad. Americans are increasingly giving up their US citizenship in order to be able to work or retire abroad.

The US economy depends on international trade and global finance, with many Americans working abroad for US and foreign firms. Six million Americans live outside the territory of the USA. If Americans can no longer have foreign bank accounts, because the costs to the banks are too high, they will be so hampered that fewer Americans will be willing to live abroad, and this will hurt American enterprise.

Since the US government cannot directly impose laws on foreign lands, many foreign firms will sell their US affiliates and stop holding assets within the USA, thus putting themselves beyond the control of the US government. The overall cost to the US economy of FATCA may be much greater than the increase in tax revenue from reduced tax evasion. Also, those who seek to evade income taxes will find other ways. High taxes induce tax evasion, and enforcement drives evasion into other channels. How successful are US drug laws in stopping the smuggling in of drugs, and how successful have US immigration restrictions been at preventing illegal immigration?

Another consequence of greater reporting of American accounts is the increased risk of identity theft and theft of money from accounts. The greater the reporting, the greater the revelation of data that can be stolen.

It is no use seeking to repeal FATCA. The regulation of accounts, no matter how costly, follows from the income tax being, as Henry George put it, a tax on honesty. The taxation of wealth that can hide and flee requires strict and costly reporting and enforcement. The only effective remedy is to tax something that will not flee, hide, or shrink when taxed. A tax on land value cannot be evaded, and if that were the only tax, there would be no need to impose costs on finances.

Monday, October 14, 2013

Inequality Unexplained

Inequality Unexplained

by Fred Foldvary, Senior Editor, 14 October 2013

There is a new economics documentary film that stars Robert Reich, former Secretary of Labor under President Clinton and now a professor at the Goldman School of Public Policy at the University of California at Berkeley. The film, Inequality for All, directed by Jacob Kornbluth, won a U.S. Documentary Special Jury Award and has been shown nation-wide.

Unfortunately, Robert Reich has not explained why the US has had an increasing inequality of income. Neither in the film nor in his writings and interviews does he examine the cause. Without the elimination of the cause, there can be no remedy. As usual in documentaries of social problems, most of the film just describes and tells stories about the inequality.

Inequality for All is typical of welfare-state presentations in jumping to governmental responses that only treat the symptoms and effects. Reich advocates a higher minimum wage without any analysis what determines wages in a market economy.

Most basically, in a free market, ordinary workers are paid what economists call the “marginal product,” or what an extra worker contributes to output. If a worker adds $10 each hour to total output, then that is what he is paid, and that is what he is worth to the company. If the company pays him any less, say $8, that provides an opportunity for a similar company to offer $9 and get the $10 worth of output, so competition will drive the wage up to the worker’s contribution, his marginal product.

A minimum wage forces the firm to pay more than the worker’s marginal product. The firm will not hire a worker who costs more than he is worth. The reason that workers are not all dismissed is the law of diminishing returns. In a farm or factory, if there are only a few workers, each worker’s marginal product is high, because there is a lot of land and machines, and few workers. As workers are added, each extra worker contributes less extra output. Workers are hired up to the quantity for which the wage equals the marginal product.

The minimum wage acts like a tax on labor that forces the firm to reduce the number of workers employed to that level where the higher marginal product equals the required wage. In some cases, the firm will also respond by reducing benefits such as medical insurance such as by hiring part-time instead of full-time labor.

Many firms in competitive industries respond to the higher minimum wage as they would to a higher tax. They pass on some of the costs to the customers. The higher price reduces sales, production, employment, and income.

The minimum wage is lethal to the economy as it acts as an extra tax on employment on top of payroll taxes, unemployment taxes, workers insurance taxes, and the income tax on the profits of the firm. All these taxes reduce employment and reduce the take-home pay of the worker.

Henry George stated in his 1883 book Social Problems that “There is in nature no reason for poverty.” Poverty is caused not by any lack of natural resources but by human institutions that deprive workers of the ability to buy what they produce. The institution with the power to impose this intervention is government. The totality of restrictions, mandates, taxes, and subsidies reduces enterprise and takes away much of the product of labor. Then impoverished workers need the welfare state to provide the necessities of life.

The ideology of welfare statists makes them only think of governmental aid and reject the idea that governmental intervention is the source of the problem. They sneer at “free market fundamentalism.” They don’t understand the fact that taxes on labor redistribute wealth from workers to landowners as government taxes wages to pay for public goods that generate higher rent and land value. They don’t understand that the worker-tenant pays twice for the public goods of government, once by having half his wage taxed away, and a second time in the higher housing rental he pays because greater governmental services increase locational rents.

The effective remedy for poverty is to remove all punitive taxes and land-value subsidies. We can remove subsidies to the landed interests by having them pay back the rent generated by useful public goods such as roads, schools, and security. Without taxes on labor and enterprise, the cost of labor is lower to employers, while the worker’s take-home pay is higher. The replacement of wage taxes with land value taxes would reduce economic inequality while also increasing the productivity of the economy.

Of course the elimination of poverty also has to include better education, and that can be accomplished with vouchers, payments not to schools but to parents. A voucher is a ticket that a parent could use to send his children to the best schools. It provides an incentive for educators to produce better schools. It is not a panacea, because the home and neighborhood environment are also important, but it would shift the incentives towards better schooling.

It is not only unfortunate but astonishing that a leading professor of public policy who cares about the poor would not make the prosperity tax shift, replacing wage taxes with land value taxes, the core of his policy proposal. I suspect his response would be that while this is a good idea, it is politically unfeasible, while raising the minimum wage has political support. But the reason it is politically unfeasible today is precisely that leading reformers such as Robert Reich refuse to bring the effective remedy to public attention in the ultimately futile effort to advocate policies with the least current political resistance.

Much of the gains from economic growth and welfare get captured by higher rent and land value. Raising the minimum wage is futile because if all workers get a substantially higher minimum wage, their landlords will be able to raise their housing rentals by the amount of their greater ability to pay, and the landed interests will end up with the gains. Why do you think that housing costs have been escalating while wages stagnate?

Sunday, July 21, 2013

My favorite economic things

Free grocery samples and
discounts for teachers.
No fees for checking and no charge for credit.
Nobody asks for ID for my beer.
Those are just some of my favorite economic things.

No tax on wages nor taxes on goodies.
No tax on buildings nor taxes on business.
No tax on anything ‘cept for the land.
Those would be some of my favorite things.

No crimes for acts that are without victims.
No laws restricting my speaking and writing.
Nobody tells me what I have to do.
That would be some of my favorite things.

When the tax bites.
When police sting.
When I’m feeling oppressed.
That’s when I remember my favorite things.
So why do I still feel bad?

Peace in the world, even for Jews.
Peace and justice for Arabs as well.
Muslims and Christians no longer at war.
Those would be some of my favorite things.

Animals treated humanely and kindly.
No more pollution or else compensation.
Tolls make congestion a thing of the past.
Those are my favorite wishes for sings.

Someone to love, and someone to be with.
A cat, dog, or rabbit that we can have fun with.
Friends and the relatives that we enjoy.
Those are the best of my favorite things.

When disease strikes.
When my hives itch.
When I get the flu.
That’s when I remember my favorite things.
I wish they could all come true.

Monday, May 27, 2013

Income Taxes are Inherently Corrupting

There is no way to have an honest income tax. As Henry George wrote, the income tax is a tax on honesty. Cheaters gain while honest people lose because they have to pay a higher tax to make up for the nonpayment by cheaters.

The taxing agency must have the power to intrude into people’s finances to check the taxpayer’s honesty and his competence to report all gains. One should not blame the IRS when it listens to telephone calls, reads email messages, checks social media postings, looks at mail envelopes, and audits records, because it is its job to check for cheating.

It is too costly to check all taxpayers and non-payers, so the tax-man has to be selective. The need to discriminate - to investigate one group rather than another - tempts the authorities to exploit their power to favor their friends and punish their enemies.

A value-added or sales tax is also corruptive. To enforce a high sales tax, the authorities need to check the records, and receipts of the sellers, and they also need to invade the privacy of buyers to make sure they have, for all their goods, receipts that disclose the taxes paid.

Any tax based on transactions, whether obtaining income or selling goods, requires an invasion into the privacy of both buyer and seller, including the income payer and the income earner, because the tax tempts both parties to evade the tax.

When income is taxed, the government recognizes that some income consists of transfers rather than payments for services. Therefore there are also taxes on gifts and inheritances. But some transfers are intended to finance activities of social rather than individual benefit, so to promote such activities, the funds received by charities are not subject to income tax. The exemption from income taxation is another temptation to cheat, and therefore government has to impose disclosures, and that then also inevitably tempts the authorities to exploit their power.

It should be no surprise that sometimes the exploitation by the governmental authorities will be so stark that it becomes a scandal. The targeting of conservative groups by the Internal Revenue Service is just the most recent example. The chiefs then have to deny responsibility and refuse to answer questions. The official who initiated the biased screening has not be identified. The response of the tax agency is always to claim that they have not been given enough funds for better enforcement.

To exert power, the taxing agency has to call on other government agencies to bring an army of intruders into the targeted persons. A woman in Texas who founded two public policy groups and sent in applications for tax-exempt status became a target of the FBI; the Bureau of Alcohol, Tobacco, and Firearms; and the Occupational Safety and Health Administration, as well as the IRS. This serves as an example to others that IRS can invoke the full might of the US government

IRS officials say they need to engage this power to do their jobs, which is true. The top officials cannot know all that the underlings are doing. And it would fight human nature to require agents to avoid acting on their biases. The firing of one or two officials will not stop the practice because the structure of the tax system inflicts unstoppable perverse incentives.

Economics tells us that to change outcomes, we must change the incentives. A tax system that minimizes corruption requires that the tax base be based on implicit reality rather than explicit transactions. Adam Smith in the Wealth of Nations recognized that the implicit reality that is best suited for public revenue is ground rent.

We minimize tax corruption by fully disclosing all tax records. A tax on land rent or land value is based on property prices that are a public record. Today, in the USA, property assessments can be, and often are, available on the web sites of county governments. In a properly-applied land value tax, one can look up any property address and find the assessed value.

Also in a proper land value tax, all land is subject to the tax payment, including land held by nonprofit organizations, including governments. There should be no exceptions. Besides disclosure and universal tax payments, the third element that minimizes bias is the ability to appeal an assessment. If a property owner thinks his property was assessed too high, relative to his neighbors, he can bring the case to an appeal board, and then to a jury.

Land is inherently public. It cannot hide or flee when taxed. One’s wage or business profit or income from savings is inherently private, and should not have to be publicly disclosed. Also the capital goods of your home - the wiring, the plumbing, the paint, the attached appliances, and the quality of the walls, floors, and ceilings, are subject to inspection with a tax on buildings, but irrelevant if only the ground is taxed.

Only a land-value tax has complete privacy for one’s personal finances and complete disclosure of the tax base. We cannot claim that a land value tax is 100 percent free of corruption, because any human institution is imperfect, but utopia is not an option. We can only select the tax base that minimizes evasion, cheating, corruption, and intrusion, and that is land.

The land value tax is based on implicit reality rather than the superficial appearance of transactions. The tax on ground rent or land value is implicit because it is based on the economic rent of land, the highest rent it will fetch, rather than any explicit payment by tenants to landlords. Therefore land value taxation conforms to what economic theory tells us is the best source of public revenue - best for the economy, best for honesty, and best for avoiding tax scandals.

Those who decry the abuse of power by taxing agencies are themselves guilty of helping to cause the problem unless they take their case to its logical conclusion - the replacement of taxes on earned income and produced goods with a tax on land value.

Sunday, April 14, 2013

Moral Markets and Immoral “Capitalism”

The question, “Is capitalism moral?” was raised by Steven Pearlstein in a 15 March 2013 article in the Washington Post. He is a professor of public and international affairs at George Mason University and a column writer for the Washington Post.

Pearlstein writes that we in the US are engaged in a “historic debate over free-market capitalism.” Maybe so, but “free-market capitalism” is a contradiction in terms. There are two reasons why the economic system is called “capital”ism rather than “laborism” or “landism.” First is that capital dominates labor. The second reason to call the system “capitalism” is to hide the role of land, so that people focus only on the conflict between workers and capitalists. The chiefs of finance and real estate are able to dominate because of their political clout. They obtain privileges from government in subsidies, limits on competition, and periodic bail outs. In contrast, in a free market, there is no domination, with neither subsidies nor imposed costs.

Pearlstein then says that if “markets” were providing prosperity for most folks, there would be no need for governmental intervention. But we don’t have pure markets. We have a mixed economy, with intervention into markets, so one has to first analyze whether it is markets or else interventions that cause high inequality, instability, poverty, and unemployment. Since pure markets are not given an opportunity to work, how can they be responsible for economic woes?

He then asserts that for the past 30 years, the world has been moving towards a greater role for markets. That is so for China and the countries previously dominated by the USSR, and these economies have indeed experienced greater growth and prosperity.

But, contrary to Pearlstein’s assertion, the US has been moving away from a market economy. Frequent governmental crises - the fiscal cliff, budget deadlines, ever changing tax rates - threaten the stability of financial, industrial, and labor markets. The subsidies to real estate and its financial allies have never been greater. The domination of the Federal Reserve over money, banking, and interest rates has reached historic heights. The tax reforms of the 1980s have been reversed by Congress, which has made income taxes ever more complex. Costly regulations continue to pour out of Washington DC by the thousands each year. And now the government will dominate medical provision like never before.

The decline in the role of markets can be measured by an index of economic freedom. According to the Fraser index of economic freedom (freetheworld.com), U.S. market freedom peaked out in the year 2000 at a rating of 8.5 out of 10, and then declined to 7.69 in 2010 as intervention grew. The US freedom ranking among countries dropped from third place in 2000 to 18th out of 144 in 2010, and most probably has continued sinking since then.

Critics of markets have asserted that stagnant household incomes and financial crises are the fault of a greater role for markets, when in fact, in the US and Europe, massive subsidies to real estate caused the recession, excessive government borrowing has caused the fiscal crises, and a governmental redistribution of wealth from workers to landowners has stagnated net wages.

I agree with Pearlstein that we should welcome the debate on economic morality. But we should use words that have real economic meaning, rather than propaganda terms. Any person who refers to “capitalism” other than with critical quotation marks contributes to the confusion. The critics of markets opportunistically use the term “free market” to refer to the mixed economy, and then use the term “capitalism” also for the concept of a pure free market. Hence they argue that “capitalism,” as the mixed economy, suffers from economic woes, and then jump to the false conclusion that “capitalism,” meaning the pure market, causes the problems.

A real debate should also unmask the role of land that hides under the label “capital”ism. Critics who speak of the “market’s” unequal distributions overlook the massive redistribution of income from workers to landowners, as taxes on wages pay for public goods that pump up rent and land values. Their call for higher taxes on the rich disregards the distinction between earned income from entrepreneurship and unearned income from governmental subsidies.

Pearlstein admits that “many of the arguments have been a bit flabby, with both sides taking refuge in easy moralizing.” That is true. An honest and robust debate should avoid the deceitful switching of meanings for “capitalism”, and indeed avoids using the flabby term altogether. Instead, use the clear and honest words “pure market,” “intervention,” and “mixed economy.” If we say that the mixed economy has economic woes, one cannot then conclude that the pure market has caused them, because the mix also includes intervention. Clear thinking about economic morality cannot begin until we have clear terms that reflect the full-spectrum of economic reality.