Government gone wild – Page 7 – The Menace of Privilege

America Speaks “National Town Meeting”

Anyone who’s been paying attention is aware that the Federal budget is out of control, unsustainable, and politicians dare not display any consensus on what to do about it. So several wealthy foundations are funding the “America Speaks” project, which seems to have focused on a fleet of 19 “town meetings” (plus a few dozen less-connected gatherings) held today. I attended Chicago’s, at Navy Pier.

The concept is at least a little bit promising. I guess we had about 600 people, assigned to tables of a dozen or so each, and we talked about how the Federal financial situation might be improved. But first we had a very loud presentation from Philadelphia. (Philadelphia is apparently standing in for Washington and New York, so we won’t suspect that political professionals and Wall Street are involved in the effort.) We were told that, yes, the deficit is a big deal(as described in this pdf). And before talking about the options for reform, we were directed to determine our values. The “values” are listed below (and on worksheet #3 of this document), along with the reasons that they make no sense at all. Continue reading America Speaks “National Town Meeting”

Debt trolls

One (of several) good arguments for eliminating, or at least drastically scaling back, patents, is the existence of patent trolls, entities whose sole business is trying to hinder the diffusion of innovation. They buy patents believed to have little value, and try to intimidate actual productive individuals or companies into licensing them. If you’re, say, a manufacturer, and a troll offers you a license for a few thousand dollars, you might just pay up to avoid the expense and risk of defending yourself.

Now, we have debt trolls. These are (per second page of this article) “well-funded, aggressive and centralized collection firms, in many cases run by attorneys, that buy up unpaid debt and use the courts to collect.” The reason it’s news is that, in Minnesota and some other states, taxpayer-funded police, jails, and courts are used to arrest the alleged debtor and collect the debt. It’s not exactly debtor’s prison, but it is going to jail because you’ve failed to pay what you (presumably) owe.

via Naked Capitalism.

California retrieves TIF funds for “education”

Faced with fiscal strains similar to ours, California legislators observed that TIF funds weren’t particularly well-used, and are taking them to fund government schools. Since Illinois TIFs are authorized by the State it seems that the State could control or limit them, and divert the funds to some more effective use (not necessarily the schools).

Of course, if this reform got serious support, I suppose the TIF authorities would promptly find it necessary to sign long-term contracts with connected developers or consultants, to be paid out of anticipated cash flows, so it might take quite a while to have any effect. And anything beyond the next election is too far away to see.

How we’re subsidizing the big banksters

This will not be news to most of us, but here’s a nice summary posted on Yahoo’s Tech Ticker. Banksters borrow from the Federal Reserve Bank at zero (or from savers at practically zero), lend to the U S Treasury at 2% or 3% (by buying U. S. Bonds), and pocket the difference. Courtesy of the taxpayers, and especially those of us who have saved. (Yeah, I know many folks don’t pay federal income taxes, but isn’t everyone entitled to a share of what the government could fund if it wasn’t paying the banksters?)

A percentage of a lot is quite a bit

Here are a couple more examples of troubles we wouldn’t have under a just economic system.

Mortgage servicers incentivized to prevent mortgage modification. Many commentators have pointed out that, if the value of a property declines below the market value, and the homeowner is unable to pay, the lender is better off agreeing to reduce the principal to an amount consistent with current values. (This is true even in the absence of any government-funded incentives.) So why does it rarely happen? It’s because lenders, apparently to conform to bizarre federal tax rules, have given up the right to modify loans. Only the mortgage servicer, an independent company (tho sometimes a subsidiary of a big bank), has the right to do that. But the mortgage servicer is paid based on a percentage of the outstanding principal, thus has no incentive to help reduce it. (Cash incentives offered under a recent federal program apparently aren’t large enough to matter.)

The geoist perspective: If land values were fully taxed, real estate prices never would have bubbled, and mortgages would cover only the cost of the house, not the cost of the land it occupies. Therefore mortgages would be smaller, perhaps rarer, and the whole problem of numerous underwater homeowners could never have occurred.

A little extra sleaze for municipal bonds. When a municipality (or, for that matter, any organization) issues bonds, they choose an underwriter who, for a fee, agrees to get all the bonds sold. The issuer may choose the underwriter by open bid or by negotiation. Academic research shows that, in the latter case, interest rates tend to be 17 to 48 basis points (hundredths of a percent) higher. So how were 85% of the $378 billion in municipal bounds issued last year underwritten? By negotiation, which seems in theory to be costing taxpayers several billion dollars over the life of these bonds. And that 85% includes 100% of bonds issues by the City of Chicago. No one familiar with local government will be surprised at the reason: “[T]he city and its aldermen want to reward those who support public officials and politically connected charities.”

The geoist perspective: Most public debts are issued to benefit the underwriters and bond purchasers. At best, the funds are used for improvements that increase land values. Therefore, capital investments should be paid thru a tax on land values. If the landowner who benefits hasn’t enough cash to pay her share, she may need to borrow privately to cover it, but the general public should not be liable. If the improvement does not increase land rents enough to justify its cost, then it is not worth doing.

Much more information about both of these outrages is provided in the source articles, which you should read unless it would make your head explode.

Terms & Conditions: Souls for Sale

For just one day (April 1, of course) a UK merchant added to their terms and conditions which every on-line purchaser is required to accept:

…you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul. Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification…we reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act.

Purchasers were offered an opt-out checkbox, but apparently only 12% checked it.

Of course nobody reads the terms and conditions. (Actually, I have met one person who claims to; I didn’t ask him whether he had actually purchased anything on-line.) On more than one occasion I’ve found the link to terms and conditions didn’t work, or made no sense, have notified the vendor and usually received an updated link or a correction.

Free “enterprise” at work

It’s true that census confidentiality is imperfect and could be used to compromise civil liberties, but I can’t imagine any way that it could be used to steal one’s identity (especially if one is cautious enough not to provide name information on the form). IRS, that’s a different matter. Anyway, Equifax has found another way to sell their protection racket. If it’s “only $4.95” for the first month, how much is it thereafter?

If our rulers wanted to reduce medical costs…

…there are two things they would do.

First, they’d eliminate taxation on income earned by persons who are providers or consumers of medical services. No income tax, no payroll tax, no tax on buildings, no sales tax, nothing (pdf). Huge drop in medical costs, along with an increased income available to pay them. Of course this change would increase land rents, as all enterprises would suddenly be much more productive. These rents, or the analogous land values, would be taxed instead, to provide whatever governmental revenue is needed.

Second thing they would do is to reduce patent protection on medical drugs and appliances. I don’t know that it needs to be eliminated, but probably the 20-year term should be shortened to, say 10 years. Preferably this should apply to existing patents, but at a minimum future patents would be restricted. This would reduce drug and equipment prices, as more generics could become available. Many analysts believe patents are more of an obstacle than an encouragement to innovation. Even if that is incorrect, it seems that most new drugs are hardly essential, and are profitable only because so many consumers have no choice about paying for them. Is there one person who would have died if some new expensive patented drug didn’t exist? Of course, but there are many people who die because they can’t afford adequate medical services.

Of course, even if the above two actions reduce medical costs 90%, there will still be someone with a rare and serious illness, costing $2 million to treat. Reducing the cost to $200,000 is great progress, but not everyone has $200,000. So, once taxes on productive activity are abolished and patents are reformed, I have no problem with government using some of the revenue from collecting the land rent to fund treatment which if privately paid would lead to financial catastrophe.

Tort reform and medical costs

Just noting for myself that there have been some apparently competent studies of the effect “tort reform” could have on medical costs.

The direct cost of malpractice insurance premiums and court verdicts, plus the cost of defensive medicine, together account for less than 2 percent of overall health-care spending.

Vague ideas about the income tax

Many of us have a vague idea that the income tax is more or less “progressive,” meaning that those with higher incomes pay a larger share of income than those with smaller incomes. Of course there are some unfair loopholes, but on the whole these people would like to see the income tax cover a greater share of government revenues. Of course, those of us who actually look at how taxes work know that the income tax makes no sense at all, and is only very vaguely related to income.

In fact, a new-to-me report shows that among the richest (top quintile of income), effective average tax rates range from less than 3.8% (for the cleverest 10% of these affluent taxpayers) to 18.6% (for the most tax-burdened tenth of this group). For the “middle class” (third quintile), the range is from -4.5% (meaning that refundable tax credits exceed otherwise-taxable income) to 9%. (Exactly what definition of income applies here is not clear; it’s based on the “Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-4),” which I haven’t examined.)

Of course this weirdness is the result of many “loopholes” and special provisions. In theory it would be possible to eliminate them and come up with a simpler tax, but in front of each loophole stands a lobbyist (and/or a legislator favored by a lobbyist). U S Senators Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire) have introduced S-3018, which will do away with many(pdf) (but not all(pdf)) of these provisions.

The mortgage interest deduction stays, which maintains a subsidy for real estate speculation. The deduction for corporate-paid interest would be limited to the amount in excess of inflation, which appears to mean that a corporation, upon issuing fixed-rate bonds, would have no way to know in advance how much interest they’ll be able to deduct. Perhaps this will encourage inflation-indexed bonds? Also, it is not clear what the effect would be if we enter an (unlikely) deflationary period.

I see this as simply one more illustration that the tax on earned income (including revenue from investments in real capital) is a hopeless mess. A tax on privilege (or, what is effectively similar, on the income from privilege) would be much more straightforward and encourage balanced economic growth. Unfortunately, those who hold privilege have great resources to fund lobbyists and other professionals to block to adoption of such a tax.

ht Forbes via Yglesias (indirectly from Felix Salmon)