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.”

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?