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Location: Old Hickory, Tennessee, United States

Saturday, October 18, 2008

Tax and other Public Policy Issues-

Our citizenry needs to engage in serious dialogue regarding fair and appropriate distribution of wealth-

Market-oriented capitalists like myself recoil at the thought of wealth distribution but we already have a progressive income tax code and promised entitlement payments approaching forty trillion- that is five times the current federal deficit of 11 trillion so let us at least face reality!

While America is a republic and not a true democracy, the basic economic/political forces are the same- the "have-nots" have the power to take from the "haves" - this is the grand conundrum of an economic democracy.

We don't live in a totally free economy and no reasonable person would advocate that the government has zero responsibility to help those less fortunate and unable to provide for themselves. The problem centers around (1) personal responsibility, the (2) amount of assistance and (3) entitlement.

Personal Responsibility
Should I be required to help someone who is lazy and makes little effort to help themselves? Should those who are more ingenious and industrious not be rewarded for their labors? Should welfare recipients be required to do public service work? Should I have to pay for abortions by individuals who are not responsible for their own actions? Even worse should I have to do all the above for illegal aliens?

Amount of Assistance
Can we afford to continue mortgaging future generations to pay for our government's massive entitlement programs which by the way, go largely to the middle class in case anyone asks.
Can we afford to provide the "same quality" of health insurance to everyone whether or not they can afford such insurance? What will be the criteria for "means testing"?
Can we afford to bail out big banks and insurance companies whose management took millions and sometimes billions in bonus and severance compensation while grossly mismanaging the companies they headed?

Entitlement
I am personally happy to pay taxes in return for basic infrastructure (roads, bridges, airports, etc.) and government/institutional services such as clean water, sewerage system, police protection, public libraries, courts, national defense, postal service and such like. But I am not happy to pay taxes to support those who are too lazy to work and help themselves.

As a solution to the sub-prime housing debacle and the staggering amount of bank loans being foreclosed, some politicians are now proposing that the government (through the banks via the bailout money) write down the principal amount of these loans to market valve. This amounts to a gross inequity to those homeowners whose real equity has declined and a windfall to those who purchased homes they could not afford.

As a nation we seem to be accelerating down the path to socialism.
The government is now partial owners in the major banking institutions of America and there is a growing chorus for nationaliation of banks. It seems every time our government leaders come to us with a crisis we give up a little more of our freedom and get very little of the help we were promised. Remember the $700 billion dollar bank bailout was supposed to help "main street" as well as "wall street". I have yet to see much help to main street. Of course the other side argues that we would have faced enconomic catastrophe if we had done nothing- a negative can never be proved.

Sub-prime mortgages and the Perfect Storm-
No one person or factor is to blame but rather a convergence of several factors which together brought about an unprecedented destruction of wealth and left us in uncharted financial territory.
1) development of global financial systems which provided efficient methods of capital deployment coupled with historical low interest rates in the United States and world wide.
2) shortage of housing unevenly allocated in a number of large cities coupled with speculation drove housing demand and prices at a dizzying pace.
3) increased government and political pressure on banks to make loans to individuals and families who could not afford the houses they were buying which arose out of an entitlement philosophy
4) securitization of mortgages "Collateralized Debt Obligations" coupled with Credit Default Swaps created a false sense of security. The complexity of mortgage securitzation tied to collateralized debt obligations and credit default swaps is baffling even to the experts. Check out the the CDO and CDS links and you will see the complication involved in these credit derivatives which are estimated by some to be upwards of 60 trillion worldwide. Collateralized Debt Obligations and Credit Default Swaps and the related risk models employed by the underwriting financial institutions were unregulated and like an unchecked epidemic they quickly engulfed the global economy.

Collateralized Debt Obligations created an asymmetric-risk environment for orginators versus investors which encourgaged unchecked deregulation in credit standards and credit rating agencies. Most states, cities and municipalities issue variable rate revenue bonds which are attached to liquidity banks. Public revenue bonds are rated by specialized bond rating agencies who in turn have been impacted by the sub-prime housing defaults.

When bond holders sell their bonds back to the liquidity banks, a sort of buyer of last resort, the municipalities have effectively defaulted which means their interest and principal payments are accelerated. The municipalities must in turn raise taxes and/or charges for its services. Now you can begin to see the circular nature of this problem. That is a key reason why the congress is looking to allocate a significant portion of the next stimulus package to cities and states.

Here are some broad tax and public policy changes I think should be seriously considered.

1) Abolish our existing tax code and enact the Fair Tax Plan
2) Revise existing tort laws and cap litigation awards for errors and malpractice for all health care providers- in other words allow compensatory damages but no punitive damages. This change alone will provide sufficient savings to pay for minimum health insurance for everyone.
3) End short selling on all security exchanges- this is nothing more than speculation and provides hedge funds, pension and endowment funds and private equity funds with the ability to unfairly manipulate stock prices and effectively transfer wealth from long buyers.
4) Regulate Hedge funds like investment firms
5) Ban Collateralized Debt Obligations and Credit Default Swaps
6) Invest in America's infrastructure; roads, bridges, electrical grids, etc.
7) Invest in higher education for our young people
8) Attach Iraq's oil revenues as compensation for our infrastructure investment and find an honorable way of this war.
9) Put all illegal immigrants on a path to citizenship and find an effective way to enforce immigration laws going forward.
10)Permit offshore drilling beyond 20 miles off the Continental shelf of the entire United States, permit exploration in Alaska's ANWR, build more refineries in the US, build more nuclear power plants, encourage and mandate energy conservation through taxation, and develop all commercially potential sources of alternative energy such as wind, solar and geothermal.

2 Comments:

Blogger Michael S. Hyatt said...

Tom,

This is a very helpful, enlightening analysis. You taught me a lot!

Thanks,

Mike

6:54 PM  
Anonymous Alan D. Harris said...

Dad,
I can see that all the economic tutelage I've given you over the years has paid off! Seriously, I only understand some of what you wrote, agree with all that I can understand, but really wish you'd blog more physics and applied science so that I could comment intelligently!
Your Loving Son,
alan

9:21 PM  

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