Economic Food for Thought

I recently read an article proposing a “progressive consumption tax.” It made me look at economics and taxation from a totally different viewpoint. On the surface the ideas have merit, but I am a little concerned about the possible unforeseen consequences.

The author, Professor Frank, suggests that the Feds tax consumption rather than the income. You report your total income, the amount you saved, and the amount you spent. Both the amount saved and a pre-determined portion of the amount you spent are not taxed. The “excess” spending is taxed at a progressive rate. To me, it seems a lot more fair than the "fair tax."

The populist side of me has always sought a way to tax the super-wealthy. The article reminded me of Thorstein Veblen’s writings about “conspicuous consumption.” And it occurred to me that if we really want to “soak the rich,” we should find a way that does not penalize earning, but instead punishes wasteful consumption and enables and encourages spending of money on things for the common good. Theoretically, government revenue increases. With this approach, the economy is not driven by an "invisible hand," but by a very visible government.

The article does bother me a little because I believe that the purpose of taxation is to fund government operations, not to control human behavior.

I am including a link to the article. It is fun to see the (almost fanatic) comments it drew from the (somewhat conservative) Cornell alumni.

http://cornellalumnimagazine.com/index.php?option=com_content&task=view&id=483

If you are too dogmatic a conservative to read this with an open mind, please don't append knee-jerk tyrades in your comment. I am looking for calm analytic discussion of the merits and potential dangers of the concept.

Who Are the Bad Guys?

Like just about everyone, I have been watching the value of my house and my IRA decline over the last year.

Someone once told me we should try to fix the problem, not the blame. But to fix the financial mess we are in, fixing the blame is essential. That's because problem was caused by people acting irresponsibly, and we must identify the people and stop their greedy and irresponsible actions.

So who are the bad guys? They are in two groups of people that I have criticized before:

The first are corporate executives who not only take obscenely large salary and benefit packages, but also accept gigantic bonuses and/or separation packages even after their poor decisions have driven their company into the ground. In addition, they pay out large bonuses to second- and third-tier executives even when their actions fail to improve the company's financial position. They attempt to justify these bonuses by saying they need to pay them in order to keep good employees from leaving the company. If these employees are so great and so worth keeping, why have they driven the company down the drain? Some companies even used Federal bailout funds to pay the bonuses. The Orange County Register of Sunday, Feb. 1, names some of the specific bad guys:

• Ameriquest--Roland Arnall and Dawn Arnall, whose net worth was estimated at $1.5 billion in the year their company closed. Lee was paid $34 million as a consultant. A federal lawsuit brought by a group of borrowers argues the Arnalls paid Lee "hush money" to keep their predatory lending secret.
• Countrywide Financial--Angelo Mozilo, who sold off $478 million in shares while his company fell into the position where it had to be sold, then walked away with a gigantic separation package.
• Lehman Brothers--Richard Fuld acceped $40 million in compensation in 2007. He recently transferred his $13.3 million Florida home to his wife for $100.00.
• Washington Mutual--Kerry Killinger accepted $46 million in compensation from 2005 to 2007 while he lowered WaMu's underwriting standards.
• Merrill Lynch--John Thain spent $1.2 million to redecorate his office last year, and doled out $4 billion in 2008 bonuses after the investment house lost $15.3 billion.
• New Century Financial--Robert Cole, Ed Gotschall, Brad Morrice took $58 million in stock profits, dividends and bonuses in 2005 and 2006 as the company headed for collapse in 2007.

A second category, related in some ways to the first, is people who identify their profession as "investor." An investor buys shares in an enterprise in hopes of sharing the the profits from its success. There is nothing wrong with investing--it's the core of the capitalist system. In fact, if we are all smart, we make investments in addition to doing our "real job." But some investors have no "real job." They buy one stock and sell another, based on projections from analyists, newspaper articles, and plain old rumors. Their entire "work day" is spent pushing paper, gambling on the success of one business or the failure of another. That's what they really are: professional gamblers. They do not make a product or provide an essential service. They invest their money in a company, but not their time, work, or wisdom. They do not contribute to a company's success. If a company they have invested in runs into hard times, they do not try to help it succeed, they just sell their stock and buy a more promising one. Even today while the rest of us work, these professional "investors" are responding to rumors and driving the stock market further down with their continuing gambles.

The goal of the bad guys is not to help companies be successful, but rather to get as rich as they can.

Some people have already identified a few of the bad guys. Federal and state attorneys have begun investigations. Shareholders and borrowers have initiated lawsuits. But the bad guys are devious, and not dumb. They will rationalize, duck, and weave. The process of nailing them will be long, costly and inefficient.

We need to identify the bad guys and pursue them zealously. We need to punish the greedy, the incompetent, the gamblers, and the thieves. We need to regulate their successors so that the errors and the crimes will not be repeated. And we need to stop rewarding people who do poor work, or no work at all.