Tag: VAT

The Corporate Income Tax

Should the U.S. Corporate Income Tax be increased from its current 21% (plus state corporate income taxes that average about 5%) back to 28%? No, it should be reduced to zero. The corporate income tax should be abolished. Only people pay taxes, either workers from their wages, consumers in the prices they pay goods and services, or shareholders from their business incomes. The corporate income tax, taxes these people twice.  So who really pays a corporate income tax?

One of the standards applied by economists for a “good” tax is that it does not distort the allocation of resources. If tax treatment encourages investments that are less productive than otherwise, output will be lower, and we will be poorer. This is called the tax neutrality principle. “Next up: tax-reform”  The corporate income tax violates this principle because it taxes the same income twice contributing to a bias toward debt rather than equity financing. The activities of corporations generate wage income to its workers, which is taxed as income of its workers. Their purchases of supplies and services from other companies generate income for those companies, which are taxed there. The difference between a corporation’s revenue on its sales and these expenditures–its profit–is paid to its owners (shareholders) and is taxed as part of their incomes.

But corporate income is taxed again in the name of the company itself–double taxation. That tax must come from some combination of reduced employee remuneration (wages and benefits) and shareholder income.  Studies indicate that it comes largely from reduced wages. https://www.forbes.com/sites/johngoodman/2021/04/02/who-pays-the-corporate-income-tax/?sh=4eb92e9b58ab

Another problem with this double tax on corporate income is that many corporations operate in many countries. It is not easy (if even possible) to agree with each of these countries, which have their own tax policies, which income to tax in which country. Companies have become expert at shifting their activities and attributing income to the lowest tax jurisdictions.  Where, for example, is the intellectual property, which can be an important source of company’s income, owned for tax purposes? The answer is often Ireland.

Economists agree that the most neutral tax is a flat rate consumption (sales) tax.  “The Principles of Tax Reform” Consumption would be taxed were it takes place thus avoiding the issues in current income taxes of where the income is produced. In our global, internet linked world, the applicable consumption tax would be the one levied on the residence of the consumer as it finances the government services provided there.

In an earlier note on a Universal Basic Income, I presented back-of-the-envelop estimates of the consumption tax rate required to finance a UBI of 18,000 dollars per year for each and every adult and half of that amount for children (under 20 years old) if we abolish all income taxes (individual and corporate) and replace existing entitlement programs (Social Security, Medicare, Medicaid, food stamps, unemployment insurance, etc.) with that UBI. The combination of a flat rate consumption tax and a UBI produces an interesting degree of tax progressivity relative to income. I hope that you find it interesting. “Replacing Social Security with a universal basic income”

Our Social Safety Net

Virtually every country provides assistance to their poorest citizens–to those who fall for one reason or another from normal employment. Approaches to fulfill this objective differ widely. The Federal safety net spending in in the United States in 2019 was 2,600 billion dollars. Total government (Federal, State, and local) entitlement spending was 2,900 billion dollars. Of this, about one third was for Social Security and one third for Medicare and Medicaid.

“The federal government funds 126 separate programs targeted towards low‐​income people, 72 of which provide either cash or in‐​kind benefits to individuals. (The rest fund community‐​wide programs for low‐​income neighborhoods, with no direct benefits to individuals.) State and local governments operate more welfare programs.”[1] This year, in response to the Covid-19 pandemic, the Federal Government has added about $3 trillion dollars ($3,000,000,000,000) for temporary one-time assistance for the impact of the forced interruption of production, and is likely to add more.

The goal of these programs is, or should be, to adequately support those needing it without creating disincentives to work and with minimal abuse (corruption). The CARES Act and other pandemic assistance programs were quickly created in an emergency. It is thus understandable that mistakes were made. As time goes on charges of corruption (politically motivated expenditures) are multiplying. The administrative challenges of suddenly making millions of individual payments quickly and correctly were and are huge.

There is a dramatically better way to do this. We might characterize our existing approach of government directed assistance (e.g. food stamps) as the Socialist Model. It is top down and dictates how the assistance is to be used. Replacing all of these programs with a Universal Basic Income (UBI) leaves the decisions on how its recipients use it with each individual. This might be characterized as the Individualist Model. It has many advantages over our existing approach.

A UBI would eliminate all government discretion over who receives assistance and how much they receive.  Every adult citizen would receive that same amount monthly (and every legal child would receive the same smaller amount). The government could not favor one group over another on any bases other than age. This removes political considerations from defining and administering the payments. Every birth and death in the country is recorded in a county hall of records and every legal immigration is recorded with the United States Citizenship and Immigration Service (USCIS). Thus, the records upon which payments would be based already exist. Using them would remove my need every year to submit a certified document to my pension plan stating that I am still alive. No special measures or supplements would have been needed to address the personal income shocks of covid-19.

One carveout would be required for medical insurance. Every person or family should be required to use part of its monthly UBI to buy a health insurance policy that at a minimum includes catastrophic care coverage. At the launch of UBI and this insurance mandate, insurers would not be allowed to refuse coverage to people with preexisting conditions and the government would cover the actuarial estimate of the extra cost of such conditions.

As the UBI would replace Social Security pensions, another modification would be for the unlikely case that the UBI would be less than ones current Social Security pension (which in 2017 was $13,824 for someone who retired at age 65). So, for such a person who has already retired or is, say, within five years of retirement, their UBI should not be less than their existing Social Security pension. But a UBI of $1,500 per month ($18,000 per annum) for everyone seems reasonable, which would make this case mute.

Those with a welfare state mentality argue that people can’t be trusted to spend such income wisely (from their perspective). I reject such thinking. There are among us, of course, those individuals with addictions and mental illnesses who are indeed not capable of making their own decisions and thus caring for themselves. Our laws and practices already provide for such special cases and would continue to supersede the rights of such individuals to make their own decisions about the uses of their UBIs.

But can we afford it? Today’s American population is about 330 million, of which about 80 million are under the age of 20. To get a rough sense of what is possible, if we replaced today’s safety net expenditures of 2.9 trillion with a UBI to the 33% poorest (110 million people, of whom 25% or 26 million are under 20 years old) in the U.S. in 2019 each person could received about $26,000 per year or about $2,200 per month. If children (those under 20) are paid half what is paid to adults, existing safety net expenditures could finance about $15,000 per child per year and $30,000 per adult if a UBI is given to the lowest third of the population in terms of income. For a family of four this would be an annual income of $90,000, which is above the median household income of about $64,000 in 2019, and is clearly excessive.

But a UBI must be universal. It must be paid to everyone for several simple reasons. Most importantly, it would eliminate the disincentive to work in the existing programs, which end if a person’s income rises above a specified level. With a UBI, every additional dollar of income joins an irreducible UBI. Every additional dollar earned make the recipient that much better off (the UBI amount plus the earned income). This is a very important feature. In addition, it would remove any political question over the level of income at which it should be withdrawn. It would be paid to everyone regardless of their income.

But paying the UBI to everyone, not just the lowest one third, would triple its cost. Can we afford it? Clearly those who pay taxes will have to pay more to cover this additional cost. But as the additional cost is to cover payments to these taxpayers, they would not pay more on net (depending on the nature and structure of our tax systems).  For reasons of equity and tax efficiency I have long advocated a flat tax, meaning the same marginal tax rate for everyone paying taxes. “My-political-platform-for-the-nation-2017” I would go even further and replace income taxation (both corporate and personal) with a flat rate, comprehensive consumption tax.  When a flat rate tax, whether income or consumption, is combined with a UBI, the net result is mildly progressive. Low income people pay no tax on net and in fact receive net income via the UBI (what Milton Friedman called a negative income tax). Middle income families might break even (receive a UBI sufficient to pay for their extra taxes) and for higher income families their extra taxes would be greater than their UBI, hence a progressive average tax rate system even with flat marginal rates.

A UBI with a flat rate consumption tax would enormously simplify our tax and welfare system while improving the financial incentives to work and returning more control over our lives to individuals from the state. Covid-19 dramatically demonstrates that the time has come to replace existing welfare systems with a Universal Basic Income (UBI).

[1] Michael Tanner, “When Welfare Pays Better than Work” CATO Institute, August 19, 2013.

Next up: Tax Reform

Hopefully the tax reform law to be adopted by Congress in the coming months will closely resemble The Better Way Tax proposed outline by Congressmen Paul Ryan and Kevin Brady on June 24, 2016. Their plan would be revenue neutral (i.e., would raise the same revenue as existing income tax laws by a combination of a broadened tax base and lower marginal tax rates), and would dramatically simplify returns for both individuals and companies. It would remove many distortions in investment and resource allocation decisions and thus promote growth and fairness. It would include an incentive to repatriate the U.S. corporate profits held abroad, estimated in 2015 to be $2.6 trillion, and by basing taxes on income earned in the U.S., it would eliminate the tax minimization strategy of shifting production abroad.

Unlike tax systems in most other countries, both U.S. individual and corporate income taxes are currently source based, meaning broadly speaking that an American’s income is taxed on his or her income wherever it is earned. Even Americans living and earning income abroad pay U.S. income taxes on it. Similarly companies operating in the U.S. pay U.S. taxes on their income no matter where it is earned. However, it is not taxed until they bring it home. This unusual approach to taxation for companies operating globally has given rise to all kinds of strategies for reducing U.S. taxes by earning income in (or attributing it to) low tax jurisdictions.

Under the Better Way proposals business income will be taxed on a territorial or destination rather than source bases. In addition to removing a tax bias for debt financing (by eliminating the deduction of interest costs) and expensing capital investments rather than amortizing them over their estimated life, businesses will be taxed on the basis of their income from domestic sales only. Their so-called Destination Based Cash Flow Tax comes close to being a consumption tax (the gold standard tax bases among economists). https://works.bepress.com/warren_coats/47/  Cayman Financial Review, July 2013. A key feature of their proposal is that the tax would be levied on business revenue from domestic sales of goods and services and not on goods and services sold abroad. For domestic sales the tax would be the same whether they are imports or were produced domestically.

This would remove the existing tax subsidy for imports. As congressman Brady put it in a June 24, 2016 WSJ article: “And because ’Made in America’ products and services currently face a price disadvantage both at home and abroad, American exports will no longer be taxed, and imports will not be subsidized. Competition will occur on price, quality and service—rather than tax regimes.” “The GOP plan for tax sanity.” It would also remove the existing double taxation of exports, the income from which is now taxable as part of American business income and is taxed again at whatever rates apply in the country receiving them.

This is all very sensible and in fact the practice of most other countries that rely heavily on VATs (Value Added Taxes). Regrettably for public understanding, this proposed treatment has been dubbed a “Border Adjustment Tax” by which imports are taxed and exports are exempted from U.S. taxation. This sounds rather different, but it isn’t. It suggests punitive (protectionist) treatment of imports when in fact, as explained above, it gives imports the same tax treatment as received by domestically produced goods.

Some have argued that by removing the import subsidy (i.e. by taxing them at the same rate as domestically produced goods), American consumers of “cheap” imports will have to pay more. It is certainly true that subsidies encourage consumption in excess of a competitive market rate just as subsidizing debt (by deducting interest costs from taxable income) encourages excessive borrowing. So if people import less because they must pay more for such imports without their subsidy, resource allocation and economic efficiency will be improved. However, the reduced demand for foreign currency needed to pay for imports and the increased supply of those currencies to buy larger amounts of American exports are expected to appreciate the exchange rate of the dollar for these currencies. An appreciated exchange value of the dollar will reduce the cost of imports and increase the cost to foreigners of American exports. The impact on import and export prices of the “Border Adjustment Tax” and the resulting exchange rate adjustment are expected to approximately off set each other.

It is tempting for each affected group to evaluate the fairness of proposed tax reforms on the basis of whether it increases their taxes or lowers them (and thus increases someone else’s taxes). On that basis any tax change will always have proponents and opponents. The proper basis for judging a reform’s fairness is in relation to a broadly agreed concept of fairness. This calls for a John Rawlsian veil of ignorance, i.e., judging the fairness of a tax system without knowing in whose shoes you will stand.

There is much more to the prospective tax reform proposals, including unfortunately changes that might be made to buy off special interests affected one way or another, and it promises to be an interesting debate. I hope that it is more open and considered by all (Republicans and Democrats) than was the case for the now (temporarily) abandoned effort to reform Obamacare. And in the end I hope that something very close to the Better Way proposals of last year is adopted. The reality of a bipartisan approach to Tax reform is unfortunately unlikely under the current climate, but we can always hope and dream.

Health Care in America

It is hard to get our arms around the issues raised by health care in America. Indeed, President Trump was telling the truth (for a change) when he said that health care “is so complicated.” There are a lot of trees in that forest, and each one matters, but it is helpful to see the forest first, which is my modest objective for this note.

Cost

Americans spend twice as much on average for healthcare as do Europeans and with poorer results. To take one example, the U.S. has an infant mortality rate of 5.8 deaths per 1,000 births while in South Korea it is 3.0. How the delivery of medical services is paid for is a critically important part of why healthcare is so expensive in the U.S., but it is not the only factor. Most health services in the U.S. are provided by the private sector. Government and professional regulations and restriction on how these services may be delivered play a very important role in their cost.

These regulations govern the extent to which technology and medical experts with less training than MDs (e.g. nurse practitioners) may be used to provide routine medical advice. The use of computer diagnostics, either to assist MDs or directly accessed via the Internet by patients; phone consultations, assisted by Internet delivered medical metrics; and nurses for routine medical treatment, will significantly reduce costs while improving the average quality of service. Some of this is already happening, but the American Medical Association, the union for doctors, like most unions, has historically “protected” the incomes of doctors by restricting completion in providing their services. In this instance, I believe that technology, when allowed will make a major contribution.

Improved transparency with regard to the cost of alternative treatments would help reduce the shocking disparity between the costs of the same treatment from different providers. How medical services are financed (the subject of the next section) profoundly influences whether patients care about and monitor costs and what doctors provide and charge for.

Financing

The provision of health care services in the U.S. can be divided into five categories – five separate systems. Data reported here is for 2014 as reported by the U.S. Census Bureau. https://www.census.gov/content/dam/Census/library/publications/2015/demo/p60-253.pdf

U.S. military veterans receive care through the Veteran’s Administration. The VA program covers 14.1 million people or 4.5 percent of the population. The VA health service is a single payer (government), government run program, which is regularly condemned for its poor service and corruption.

Medicaid and Medicare are single payer (government) programs for the poor (Medicaid) and the elderly (Medicare) that finance privately provided medical services. The single payer, the government, sets the service standards and their costs for the health services financed by these programs, but they are delivered by the private sector, though the government determines which doctors may participate and thus must be used by the program’s beneficiaries.

In 2014 Medicaid covered 62 million people or 19.5% of the population and currently covers 68 million. Quoting from government websites: “Medicaid is an assistance program” (i.e. not insurance). “It serves low-income people of every age. Patients usually pay no part of costs for covered medical expenses. A small co-payment is sometimes required. Medicaid is a federal-state program. It varies from state to state. It is run by state and local governments within federal guidelines…. In all states, Medicaid provides health coverage for some low-income people, families and children, pregnant women, the elderly, and people with disabilities. In some states the program covers all low-income adults below a certain income level.”

In 2014 Medicare covered 50.5 million people or 16% of the population, a number that is growing rapidly as the U.S. population ages. “Medicare is an insurance program. Medical bills are paid from trust funds that those covered have paid into. It serves people over 65 primarily, whatever their income; and serves younger disabled people and dialysis patients. Patients pay part of costs through deductibles for hospital and other costs. Small monthly premiums are required for non-hospital coverage. Medicare is a federal program. It is basically the same everywhere in the United States and is run by the Centers for Medicare & Medicaid Services, an agency of the federal government.” This program seems broadly to have been operating satisfactorily. Hence the often-heard demands from older Republicans of “don’t touch my Medicare.”

In addition, 208.6 million people or 66% of the population had private health insurance plans in 2014. Of these, most (175 million or 55%) had insurance plans offered by their employers. The rest (47 million) bought their health insurance directly. Employer provided plans are subsidized because their premium payments are not taxed as part of an employee’s remuneration while the income from which people buying their own policies pay their premiums is taxed (including the amount they spend on insurance). This has created several serious problems.

Employee provided insurance policies are not portable, i.e. when a worker leaves that employer (fired, resigned, or retired) she cannot take the policy with her. This creates the preexisting condition problem. But first a time out for a quick look at the nature of insurance.

Insurance is a mechanism by which a group of people (the insurance pool) shares the costs of expenses (heart operation, car repair from an accident, home repair from a fire, etc.) that are expected to fall only on a few of them. Those who are lucky enough not to incur such costs help pay for those not so lucky. The group as a whole pays the entire cost of what ever was insured, but the lucky help out the unlucky. This means that the over all aggregate cost, and thus each person’s share of it, depends on who is in the insurance pool. If the pool is the entire population of a country, city, or company, then (if we are discussing health insurance) there will be more healthy people than unhealthy and the average insurance cost per person will be lower than if only unhealthy people are in the pool. Any one who knows that he will not get sick or have an accident (and who doesn’t care about sharing the cost of the less fortunate) would have no reason to join the pool and buy insurance. But of course no one can know that for sure.

If in the course of your employment you acquire or learn that you have a liver disease, the costs of your treatment will be covered by your company insurance plan. But if you change jobs and must take out a new insurance policy with your new employer (or as self employed) your condition will be known in advance and no insurance company would want to insure you at their normal group rates knowing that they would lose money by adding you. This is the origin of the pre existing condition problem. Anyone who acquires an insurance policy in his or her youth and is able to keep it continuously will not face a preexisting condition problem.

At the end of 2014, 33 million people (10.4 percent of the population) were uninsured. This dropped to 27 million people at the end of 2017. The Congressional Budget Office expects that number to rise modestly under Obamacare to 28 million by 2026. This group on average receives less medical care and relies more on emergency room services.

Two major objectives of Obamacare were: a) to forbid insurance companies from denying policies to people with preexisting medical conditions or to charge them more for coverage, and b) to reduce the number of uninsured in part to increase the size of the insurance pool with more healthy members to help cover the costs of the unhealthy. It also expanded eligibility to Medicaid to all able-bodied adults below 138 percent of the federal poverty level and initially covers 95% of the cost to each state for its expansion of enrollees.

To encourage the uninsured (those not eligible for Medicaid choosing not to have insurance) to join the insurance pool, thus helping to pay for the sick, Obamacare subsidizes the premiums of policies purchased on health insurance exchanges established under Obamacare in most states for anyone whose income is less than 400% of the federal poverty level. However, the number those uninsured that have acquired health insurance under Obamacare has fallen short of expectations. Those who have signed up have often had preexisting medical problems. As a result the cost of insurance acquired on these exchanges has risen more than expected. The rising cost of insurance is discouraging more people from acquiring it, a phenomenon referred to as a “death spiral.”

American Health Care Act

The House GOP’s American Health Care Act (AHCA) proposal to “replace” the Affordable Care Act (Obamacare) tweaks many of the costs and subsidies in Obamacare in an effort to improve the structure of incentives for cost effective care but this would take us from the forest to some of its individual trees.

The GOP proposal would eliminate Obamacare’s penalty for those choosing not to insure and allow people to keep their policies (portability) when they change jobs or become unemployed. If there is a gap in coverage, a person would have to pay a one time penalty over standard insurance rates of 30%. Republican leadership argues that these incentives are sufficient to encourage more people to get and retain health insurance thus solving the prior condition problem and provide for a large enough pool of insured to keep premiums down.

The assessment of the Congressional Budget Office, on the other hand is “that 24 million fewer people would have coverage a decade from now than if the Affordable Care Act remains intact.” Obamacare-revision-would-reduce-insured-numbers-by-24-million/2017/03/13/. The Washington Post titled their report on the CBO’s findings “Affordable Care Act revision would reduce insured numbers by 24 million, CBO projects”. Readers would be forgiven for thinking that the GOP proposal would take away or eliminate coverage by that amount, when in fact the CBO estimate reflects their expectation of the number of people who would choose not to insure given the terms proposed by the Republicans. The Wall Street Journal gave a more balanced headline to its report on the CBO assessment: “CBO Sees 24 Million More Uninsured, $337 Billion Deficit Cut With GOP Plan”

Whenever costly services are provided free of charge, they are not allocated and rationed by price. In place of market price allocation, the mechanism by which almost everything else in a free market is allocated, services provided “free” must be allocated and rationed by regulations. Whoever pays for the medical care received determines the care options chosen and thus has a major impact on its cost. Currently for most people (other than the poor and elderly who qualify for Medicaid and Medicare) the payer is the insurance policy they chose plus the copay that it requires. For a single payer insurance program such as Medicaid and Medicare, the payer is largely the government, which determines by regulation the quality, choice and cost of service. Democrats generally favor a single payer approach and the government regulation of the health service industry that that would require, while Republicans generally favor government financing only for the poor and disabled (safety net) and reliance on greater individual choice in a more competitive market for both insurance and medical care. This reflects the more general preference by Democrats for government regulation of products, services and markets and by Republicans for primary reliance on individual consumer choice.

An alternative Approach

In my opinion, the public policy goal for the provision of health care should be to provide satisfactory care to those who cannot afford it (the poor) in a cost effective manner, to provide everyone else with as much choice as possible and the information that would be helpful in making such choices, and to open medical practice to as much flexibility and competition as possible. The tax proposals I have made earlier would lay the best foundation on which to build such policies: My political platform for the nation-2017.  I would replace all business and personal income taxes and payroll taxes with a flat consumption tax (Value Added Tax—VAT) and introduce a per person minimum guaranteed income (tax credit) that varies with age but not income and is sufficient for a minimum level of healthy existence. US federal tax policy, Cayman Financial Review July 2009 A mandatory health savings account contribution (in place of Medicaid and Medicare and any other insurance subsidies) and a mandatory retirement account contribution (in place of Social Security) would be made from the monthly minimum guaranteed income payments in amounts sufficient for satisfactory health care insurance and retirement. Saving social security. The administrative requirements for such a simple system would be minimal.

I do not wish to suggest for a second that providing everyone with a satisfactory guaranteed minimum income will deliver the good life to everyone. In fact, most people are not happy—do not feel fulfilled and whole—without a decent job. Most people want to work. The recent spike in suicides and opiate overdose deaths seems related to the idleness of those who have given up looking for work. Nicholas N. Eberstadt points out that:

“According to [Alan Krueger’s] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis…. But how did so many millions of un-working men, whose incomes are limited, manage en masse to afford a constant supply of pain medication? Oxycontin is not cheap…. One main mechanism today has been the welfare state: more specifically, Medicaid, Uncle Sam’s means-tested health-benefits program.

“By the way: Of the entire un-working prime-age male Anglo population in 2013, nearly three-fifths (57 percent) were reportedly collecting disability benefits from one or more government disability program in 2013. Disability checks and means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age. We cannot say that these programs caused the death of work for millions upon millions of younger men: What is incontrovertible, however, is that they have financed it—just as Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.” Commentary Magazine, Our miserable 21st century February 15, 2017.

Getting the incentives in government assistance programs right is difficult. But better jobs are needed as well. The government’s stifling regulations of too many aspects of the private economy have reduced investment and growth in productivity (the basis of increases in our standard of living) to a crawl. The medical care industry is only one of many in which a better balance between government and market regulation of economic activity and smarter policies with better structured incentives for those making decisions are badly needed.

Post Script

PS: The Republican leadership has chosen to put forth its American Health Care Act (AHCA) in the form of a budget “reconciliation” bill. This allows its adoption by simple majority rather than the usual 60% majority, but it limits the scope of the act to what might be considered budgetary aspects. This is behind the rush and the limited range of changes that are possible for the AHCA. There are pros and cons to such a process, which was also followed for Obamacare.

The advantages are that the bill can be passed with a lower level of congressional support and that the sectors of the economy adversely effected (a bill that changes anything will necessarily have winners and losers) will have less time to mount a fight to save or promote their special interests. The disadvantages are that the potential to improve the bill by hearing and considering all views will be limited and that the opportunity to build broad support via compromises will be missed. In my opinion such important and fundamental legislation should obtain broad support. The failure to do so was one of the flaws of Obamacare.

PPS. When new rules change the outcomes for some, fairness dictates an as painless as possible transition from the existing rules to the new ones. Some of the debate among House Republicans concerns transition issues, such as from current Federal financing of state expansions of Medicaid coverage to Federal block grants meant to give states more flexibility in how they use these funds.

My Political Platform for the Nation – 2017

For me, the ideal American government would deliver its important but limited functions efficiently and effectively and would raise the money to pay for these activities with efficient, minimally distorting (neutral), and fair taxes following a principle of maximum subsidiarity (decisions made and services performed at the most local levels possible). The government should do fewer things than it does now but should do them better and should fully pay for them with taxes and fees (cyclically balanced budgets).

My unrestrained, radical platform will be presented here at a high level of general principles. Details need to be refined by a political process involving public discussion and are likely to evolve somewhat over time. Links to earlier articles provide additional details. In the very broadest terms Americans should be self reliant and free to work and play as hard as they choose with the government supporting their choices by providing security, the legal foundation and framework of private property and contracts, and an efficient safety net when individual undertakings are not feasible or fail.

The limited functions of the Federal government are enumerated in Article 1 section 8 of the U.S. Constitution. Broadly these are to:

  1. Develop and maintain our relations with other countries and international bodies and to maintain an Army, Navy and Air Force for the purposes of defending and promoting the security of the United States;
  2. Establish and enforce the rights to property and contracts and to adjudicate related disputes;
  3. Provide for public safety;
  4. Provide an efficient and effective social safety net (welfare);
  5. “Regulate commerce with foreign Nations, and among the several States;”
  6. “Coin money, regulate the value thereof, and of foreign coin, and fix the Standard of Weights and Measures;”
  7. Arrange for the provision of roads and essential infrastructure; and
  8. Tax, borrow, and levy fees and tariffs to pay for these activities.

Our Social Contract

Sovereignty resides with each individual, who have collectively ceded limited powers to government for the general welfare. Each of us is free, within legal limits on doing harm to others, to lead our own lives and build or work at whatever we choose. Thus the government’s laws apply equally to each of us without regard to our race, religion, sex, or sexual orientation. From this environment of freedom and innovation, America has built the most successful economy in the world.

When building companies or developing products, many will fail and try again. The government provides the legal framework (bankruptcy) for resolving such failures. The implicit agreement between citizens and their government is that government will provide a floor—a safety net—whenever a person’s efforts fail or when, e.g., for health reasons, a person is unable to provide for him or herself. The level of the safety net should reflect the level of the country’s income and social consensus and should be designed to achieve its objective as efficiently as possible with careful consideration of the incentives it creates.

Income redistribution: taxation and a guaranteed minimum income

All income (personal and corporate) taxes should be replaced with a comprehensive, flat, consumption tax (Value Added Tax—VAT) and limited progressivity introduced by paying every legal man, woman and child resident a guaranteed minimum income. US federal tax policy, Cayman Financial Review July 2009 Each recipient of these monthly guaranteed income payments would be required to set aside a minimum amount for health insurance (chosen by each person or family in the competitive market place) and a minimum amount for retirement (invested in qualifying retirement funds in the competitive market place). Saving social security

As the guaranteed minimum income should be at a level sufficient to minimally support life’s basic needs, supplements such as unemployment or disability insurance would not be needed or provided. However, disabilities acquired from military or public safety service should receive additional income support.

Health care

Each person will be responsible for paying for at least part of routine medical care (the copay required by the insurance they have chosen) and will thus care about its cost. The cheapest insurance policies will be limited to major medical expenses (catastrophic health insurance). As everyone will be required to contribute monthly to a health savings account from their guaranteed minimum income, most people will chose to use such funds to buy health insurance, which would not be tied to employment or an employer.

Doctors and hospitals will be required to make medical service costs transparent. On that basis, patients, in consultation with their doctors, will decide the level of care and treatments to receive. These measures will introduce normal market competition into the provision of medical care that is currently absent, which will improve its quality and lower its cost.

Education

Equal access to quality education is a critical element in maximizing opportunity for all and the wealth of our society and each person in it. The public school system has often failed in this objective. While the wealthy can afford to put their children in private schools when the neighborhood school is of poor quality, lower income families generally cannot. Every K-12 aged child will receive a tuition voucher that covers the cost of state provided education. The amount will generally vary from state to state (or school district to school district). The voucher can be used to attend the local neighborhood public school with no additional cost, or any private school the family chooses, which might incur additional costs. Schools eligible to receive such vouchers must meet minimum education standards set by the state and must disclose the performance of their students on state administered achievement tests. This information must be available to the public. The learning progress of each child is more important than the average level of achievement of each school’s students as some schools might well specialize in slow or problem learners and performance data should reflect this distinction. The neighborhood school has the advantage of being easier to get to every day and will normally be chosen by families if it provides a good education. The argument for universal tuition vouchers goes beyond providing a level playing field to all. It also introduces the competition for students that is the basis for good quality, low cost goods and services in every other area of our economy.

Access to higher education raises different issues. Those with the aptitude and desire for a college or postgraduate degree can significantly increase their lifetime incomes as a result. It would hardly be fair to tax the general public to subsidize the higher education of those who will become wealthier as a result. However, the tuition loans that may be needed by those from lower income families to make this investment would be hard to get without insurance against default. Many states also provide community (or Jr.) colleges at public expense that provide training in various trade skills as well as four year college preparatory courses. These seem to have often been successful in leveling the playing field. The optimal structuring of higher education subsidies (e.g. between insurance guarantees and tuition subsidies) needs further examination.

Monetary and Financial Policies

Government policies that affect business should be as rule based and transparent as possible. Monetary policy stands out as a particularly important area in which clearer rules are needed. A currency with stable real value (purchasing power) is an important part of the foundation of efficient free markets. At the very minimum the Federal Reserve’s mandate should be tightened as provided in the very pragmatic Federal Reserve Accountability and Transparency Act of 2014. This act would require the Fed to chose an operational rule, from which it could depart only with an explanation to Congress of its reasons. A deeper review of options is proposed by the Centennial Monetary Commission Act of 2015. I have proposed a more radical reform in the spirit of the gold standard but with tighter rules and an anchor of a large number of goods rather than just gold. The supply of this currency, which ideally would become the global currency, would be regulated by the market using currency board rules and “indirect redeemability.” A hard anchor for the dollar.

The banking and financial sector are currently smothered with detailed regulations the compliance cost of which are driving smaller banks out of business. Under the Dodd Frank law adopted after the financial crisis of 2008, the largest five American banks have grown even larger (in absolute terms and as a share of the banking sector) than they were in 2008. Regulators, despite (or because of) their detailed banking regulations have failed to make banks safer and have slowed the competitive process of producing better and cheaper services. Bank owners and market preferences should regulate risk taking by banks.

Bank regulation by the government should focus on broad principles with strong owner accountability. Bank capital requirements should be raised and the no bail out rules strengthened. Bank owners and investors should absorb any bank losses. The payment services of banks should be isolated from the rest of its lending and investing business by adopting the Chicago Plan of one hundred percent reserve requirements against current account deposits, and virtually all other regulations (other than accounting and reporting standards) should be dropped. Larger banks will develop their own risk weighted capital requirements for their internal use, but the government’s capital requirements should state the minimum required leverage ratio (ratio of core capital to total assets) and set it at a high level. Changing direction on bank regulation, Cayman Financial Review April 2015. A bill now in congress moves in this direction: The Financial Choice Act

Business activities and regulation

The government should only provide services that that private sector can’t. It should provide the legal and regulatory framework for the private economy rather than compete with it. Though the approaches to providing “public goods” such as police, courts, prisons, firemen, parks, highways, airports, etc. have varied over time, they are almost always paid for by the government (i.e. collectively by tax payers) and should be provided efficiently at the level expected by the public. Publicly funded and privately produced goods and services are often sources of hard or soft corruption. Rather than over charging for services or paying bribes to win contracts (hard corruption), soft corruption exploits influence on government to obtain contract terms or regulations favorable to particular firms (“rent seeking”). The government’s purchases of goods and services from the private sector should be governed by transparent rules that promote competition among suppliers. This is easier said than done. Open the Books

While the government is involved in and trying to do far too many things, it doesn’t do many of them very well. Of those services the government needs to provide, states generally perform better than the federal government though performance varies across states. In Maryland, where I live, I was able to register my Limited Liability Company on line in about 30 minutes start to finish. Registering my car and updating my driver’s license is quick and easy. However, it took me months to obtain a statement of my residency from the U.S. Treasury and a personal trip to the State Department to have it certified to provide to the National Bank of Kazakhstan before they could pay me for my services. Getting a passport or green card is more complicated and takes longer than they should. The government should do much less and do it much better.

Those in the government who believe they can judge better than competitive private markets how best to allocate resources (what to invest in and produce) are generally wrong. Moreover, they establish an opportunity and thus incentive for corruption.

The government’s regulation of private businesses in the interest of public safety, environmental protection, and market competition should be limited and subject to very serious cost/benefit tests. Cost/benefit analysis unavoidably reflects subjective judgments but their role should be limited to the extent possible by full transparency of the basis of any assessment. Competitive capitalism vs. the other kinds.

Foreign policy and national security

The purpose of our foreign policy is to serve American security interests and the international rule of law under which American’s can explore the world and American businesses can compete globally on a level playing field. Our security requires a strong military, but it also requires the skillful use of diplomacy. Our military must be structured for defense, not offensive wars of our choosing. Our 2003 war in Iraq and subsequent developments in the Middle East have cost many lives (some American) and treasure, undermined our moral authority, and seriously damaged our security. Our foreign policy should be one of “restraint.”

Our relations with other countries should be based on shared interests consistent with our respect for individual dignity and the rule of law. We should support and, where appropriate, lead international bodies dedicated to developing, promoting, and overseeing compliance with the rule of law internationally. Our international leadership should rest, in addition to our economic and military strength, on our commitment to broadly shared values and standards of behavior. Just as we give up limited amounts of our individual sovereignty to our own government when it serves our individual and collective interests, so should we give up limited amounts of our national sovereignty to international bodies when it serves our national and international interests.

Our economic strength depends in part on providing for a sufficiently strong military in the most economical way possible. Money spent on tanks can be spent on building other businesses and producing goods that we enjoy. The very nature of the relationship between our military and the industries that supply it, what President Eisenhower called “the military industrial complex,” makes achieving this objective very difficult. As argued above, clear rules and transparency are important tools. Our unsupportable empire

Trade

Next to the right to personal property, nothing is as central to our liberty and well being as the right to trade. It is the basis of virtually all of our enormous increase in productivity and thus our standard of living. The government impedes our right to trade with a wide range of often unnecessary or excessive regulations. Restricting our freedom to trade across national borders is also a mistake that reduces our standard of living from its potential.

Trade has destroyed some jobs while creating others. “Since 1900, the portion of the U.S. workforce in agriculture has declined from 41 percent to less than 2 percent. Output per remaining farmer and per acre has soared since millions of agricultural workers made the modernization trek from farms to more productive employment in city factories…. Manufacturing’s postwar share of the labor force peaked at about 30 percent” in 1953 and has since declined to less than 9 percent while manufacturing output continued to climb. “Of the 5.6 million manufacturing jobs lost between 2000 and 2010, trade accounted for 13 percent of job losses and productivity improvements accounted for more than 85 percent.” George Will, Washington Post.

As with domestic, competitive trade, those out-performed in competitive markets suffer, at least temporarily. The safety net for “losers” in the competitive process discussed above is an important feature in our willingness to unleash the benefits of free trade. We must insure that they are adequate. We should support the World Trade Organization (WTO) as well as regional and bilateral agreements that reduce the barriers to trade and promote freer trade. Save trade. Globalization and nationalism-good and/or bad?. Trade and globalization

Conclusion

Our government should assume that each of us is capable of and has the right to make our own decisions and lead our own lives as we see fit. Its role is to protect those rights, in part by protecting us from others, foreign and domestic, who would violate them. We are, however, part of and best flourish within broader communities. Our government should develop legal frameworks to facilitate our interactions and relationships within and across societies both business and personal. Our successful flourishing will also depend greatly on a shared culture of mutual respect and comity.