Why The Income Tax Must Go

Rahm Emanuel is known in part for his adage "never let a serious crisis go to waste".  The unprecedented crisis in the United States that the coronavirus COVID-19 has brought upon us may be an opportunity to correct a glaring problem with the U.S. tax structure.

One of the corrections needed in U.S. overall philosophy that most have been made painfully aware of because of the coronavirus is the need to reduce our dependence on foreign sources of critical needs, especially on countries that have overtly stated their hostility to America. The general wisdom on the subject is that it is the greed of large corporations that has led to so much outsourcing of the goods and services that we consume. Where less than a century ago the US was the undisputed leader in production of most goods and services, today we don't even produce much of our medical or military needs. This is insane and dangerous.

The rarely mentioned factor in the impetus for the outsourcing and offshoring of production is the U.S. tax structure. In particular, the Income Tax is a huge contributor to the reason that the American Worker cannot compete with low cost foreign labor. The added costs to every product made in the USA due to income taxes paid by both the worker and the business that he works for make his product less competitive both in the domestic market and in foreign markets. Any superiority in the efficiency and productivity of the American worker is canceled by the income tax burden that must be included in the price of American goods.

There are many ways to view the undesirability of the Income Tax. On the philosophical side, the Income Tax is a tax on productivity and investment, both of which one should want to encourage, not penalize. The Income Tax is a tax on labor, not product, and thus can be viewed as penalizing the American worker relative to not only the foreign worker, but also illegal 'under the table' workers and even automation.

The costs of maintaining the infrastructure that is necessary for the free market to exist in this country is paid by the citizens of the country, but not by foreigners that participate in our markets for nothing. Instead of foreign interests paying their fair share, that cost is shouldered by U.S. citizens, primarily with the Income Tax. and in effect makes their products more expensive in both domestic and foreign markets.

Another downside of the Income Tax is the detrimental effect that it has on business economic decisions. How many times have you heard someone say "I have to consider the tax implications", or "I need a loss". This is magnified by the many special rules that the lobby driven political class has embedded in the tax code. One wonders if the productivity of American businesses wouldn't explode if the stupidities of the Income Tax were purged.

Then there is the problem of whether to tax gross or net income. It's pretty obvious that taxing gross income would be a total disaster, since anyone that was in the business of reselling a product would have to have a markup greater than the tax rate to make any net profit. But that leaves the problem of defining net income, a task beyond mere mortals, and especially those that try. And even if it could be done fairly, it requires massive bookkeeping to compute net income to tax. This bookkeeping burden further adds to the cost to the American producer.

One last indictment of the Income Tax in the U.S. Since we have a fiat currency that our unscrupulous government is inflating at a non-trivial rate, the Income Tax treats any increase in currency based value as a taxable capital gain. Return on investment in the form of interest or dividends are taxed at the marginal rate such that one must get a return of more than the inflation rate plus the tax on that fictitious gain to not be losing value. Inflation and income taxes are not compatible and the one that is worse is the Income Tax.

Instead of taxing and therefore penalizing labor and investment with the Income Tax, it makes much better sense to tax the product with a retail consumption tax. It taxes foreign products at the same rate as domestic products, thus taxing a $30,000 car made in Japan, Mexico or Detroit the same. It has the same effect on foreign goods as a tariff, without the appearance of a punitive penalty. At the same time, the exported domestic goods are not burdened with the US consumption tax and therefore are more competitive in foreign markets.

Thus in the midst of a health and economic disaster Americans have a historic opportunity to at least try to improve their government. The income tax, a treachery so heinous that it required amending the Constitution (the 16th Amendment) to be legal, could be temporarily eliminated. One could further hope that the wisdom of such an improvement was sufficiently apparent to promptly re-amend the Constitution to eliminate the possibility of it reappearing.

The 'Fair Tax' bill (H.R.25 - Fair Tax Act of 2019) does an excellent job of laying out the case for a sales tax to replace the disastrous income tax. But it's not going to happen unless the rank and file citizen becomes sufficiently convinced that it's not only a good thing, but that it's virtually required to avoid an untimely demise of the United States as the world economic leader. One of the unfortunate characteristics of the average American is that his/her response to everything is "what's in it for me". This is despicable, but it is a fact of life that must be faced. Every American needs to study the problem, convince himself that there is something in it for them (unless they're politicians or tax lawyers), and then help get the word out.

The Internet is deluged with jokes and other garbage passing from coast to coast like wildfire. Let's make use of this phenomena to pressure Congress to pass the single most important piece of legislation that's come along since the ill considered stupidity that proposed the 16th Amendment in the first place.

Aesop's Golden Goose Fable

Aesop's Fable of the goose that layed golden eggs is an ancient metaphor for why Socialism cannot work. In the fable, for those that cannot remember their Mother Goose days, a man and his wife had a goose that layed eggs of gold. This made them very wealthy, but as is the norm for humans, they were not satisfied. The wife suggested that if they cut open the goose, they could have all the eggs at once. Of course, there was not a hoard of golden eggs in the goose, and the dead goose was done laying eggs.

The Capitalist Free Market (CFM) system of economics is the real manifestation of the golden egg laying goose. Those societies that have embraced it have enjoyed the greatest increase in the standard of living of any in history. Although it is inevitable that those capitalists that represent the goose in a CFM system do enjoy relatively more 'eggs', their standard of living is only incrementally better than the poorer members of the society that are merely consuming the eggs. One need only visit the typical Walmart to see that the rank and file are not only well fed, well clothed and as healthy as their voluntary choice of lifestyle permits, but they enjoy all the smartphones, TV's and other toys that the wealthy do. The Welfare State is only possible because of the eggs produced by CFM, not in spite of it.

The current mania of the populace advocating for socialism is, relating back to Aesop's Fable, the equivalent of the wife wanting to kill the goose to get all the eggs at once. All schemes of taking from those, rich or not, that invest savings in productive enterprise, are an attempt to kill the goose to get all the eggs at once. Most of the 'wealth' that the non-investing public covets is in fact the goose that they benefit from, i.e., the capital of CFM. With a welfare system that consumes most of the eggs CFM currently produces, it is a testimony to the robustness of CFM that our standard of living is as great as it is. Make no mistake though, if you take the last egg or kill the goose, the good times end.

The fable of the goose is also a good metaphor for a point made in my earlier post Socialism CANNOT Succeed. Just as there were no eggs in the goose, there are no hoards of desired goods and services in the Capitalist's pantry. Appropriating the Capital that is the basis of CFM is the immediate end of the great standard of living we currently enjoy.

University Admissions Scandals

The breaking scandal concerning the rich 'buying' their offspring's admissions to prestigious universities has elicited two reactions against the practice. Since most of the offenses have an illegal aspect to them, there is a justifiable cry for charges to be brought against the perpetrators. To the extent that applicants test scores and accomplishments have been falsified there should be repercussions for the fraudulent acts involved. On the other hand, however, the proper reaction to the universities lowering or ignoring admission criteria based on money offered by the wealthy is a more complex problem.

The practice of giving priority to wealthy donors' children is as old as the university system itself. It is well known that considerations other than academic merit have always existed, although with all of the athletic, political, affirmative action, diversity and other factors currently in play it may well be worse now than in the past. If such advantages can be proven to violate published admission criteria on which an applicant has expended time and money only to be rejected, there ought to be a legal tort case against the school, but apparently this is rarely if ever done.

However, the point that I would like to make is related to the arguments against socialism that I posted only a little over a week ago. As I pointed out there, there is not an unused supply of goods and services lying around waiting for sale, including university admission slots. The money from the rich, whether spent by them or stolen by government, can buy available slots, but only by bumping more deserving applicants. The same money can build more universities and train more professors, but only with considerable time and at the detriment of other goods and services. Those that profess alarm and disgust at the usurpation of a few admission slots for the scions of the wealthy somehow fail to see the vastly greater problem with buying admissions for huge numbers of less wealthy (and probably less qualified) freebie seekers.

Human vs Computer Conflicts

The two crashes of Boeing 737 Max 8 aircraft in the past year seems to be coming down to a problem of a conflict between the pilot and the on board computer system. In response to an unusual nose-up event, both the pilot and the computer change the controls to push the nose down, resulting in a over reaction. Correcting for the first over reaction by both the pilot and the computer results in a second over reaction, more extreme than the first. If the pilot does not recognize the situation and disengage the computer system, the result is loss of control and a pile of debris. The argument that the solution is more training for pilots seems specious.

A couple of years ago I became re-interested in the reasons for the crash of the Air French Airbus Flight 447 in 2009. At the time I wondered if the 'fly-by-wire' systems on the newer larger airliners was the culprit. In reading the final report on the accident, the cockpit voice record had a comment by one of the pilots on the way to their watery grave: "I don't know what it's doing". It occurred to me when reading it that the pilot was not sure whether he was fighting the aircraft or the computer. This is the fundamental problem with computer control of anything. Whether it is aircraft, cars, or anything where the computer is in control with the human also believing that he/she is also in control, a conflict can easily result in the human fighting the computer because of not being sure what the system is doing. This is especially true when the human is used to controlling a normal plane or car but is not sure what the computer is supposed to do.

As a one-time computer systems designer, it seems to me that the solution should always be that the computer system should be monitoring the human's inputs and neither cancel nor exaggerate them. In the case of the Boeing 737 Max 8, if the pilot has properly responded to the situation, the computer should be programmed to minimize any additional input to the problem. Expecting the user to correct for the computer is always an improper design, and avoiding such must be a fundamental consideration as we move to more and more computer aided systems.

Socialism CANNOT Succeed

As the tsunami of enthusiasm for socialism builds, it seems an appropriate time to try to understand why socialism is ultimately disastrous for every society that embraces it. Although the term 'socialism' is used to describe everything from a modest amount of welfare to total government control of all productive resources, metaphorically it is like cancer. Even a small tumor grows and metastasizes and ultimately kills its host. Those that embrace socialism are never satisfied until they are standing in line for a loaf of bread.

In this discussion, we will look at the problems of the 'socialism lite' that is promoted and practiced in the Western Democracies, where the government limits itself to redistribution, rather than the totalitarian version where the government owns and controls all productive resources. However, the full version is probably ultimately inevitable since, as is pointed out above, all socialism is unworkable and its proponents will resort to totalitarian control as a last ditch strategy.

Part of the lack of understanding in the U.S. of socialism's flaws is a result of the fact that economics is not taught in the public school system, and counter arguments are limited to citing historical examples and cliches such as Margaret Thatcher's “The problem with socialism is that you eventually run out of other people's money.” This quote highlights another part of the problem - arguments against socialism tend to be couched in terms of money. Unfortunately, money is an abstraction that most people, including a lot of academics, do not really understand. Those that do tend to argue in terms of nuances and jargon that mean nothing to the general public.

It is more insightful to look at socialism in terms of the actual goods and services that proponents like to promise as 'free' or provided by a socialist government. The current list includes 'free education' over and beyond the current K-12 public school system, 'free healthcare' over and above the current Medicare, Medicaid and the like, and a liturgy of other freebies that already partially exist in one form or another. But government financed K-12 education already consumes the bulk of most local governments' budgets. Government support for higher education has driven the cost of college to the point that without some financial support most people cannot afford to attend. And government involvement in healthcare has resulted in skyrocketing costs that threaten to bankrupt even the Federal Government, etc. All this seems to have been lost in the bleat for more 'freebies'. But this again presents the problem in terms of costs and money, and the pro-socialism forces just counter with their cure-all mantra - we can just tax the rich to pay for everything.

The first and foremost thing to think about in understanding why socialism can't work is to to realize that, although the government can steal the people's money, rich or poor, and can even create money out of thin air, they do not produce more goods and services. They can even steal non-money assets to redistribute, but again they cannot add to the total goods and services available. Thus goods and services that are transferred to the beneficiaries of the socialist system must be taken from the rest of the populace. There is no net benefit to the society as a whole. This inevitably must reduce the total goods and services available since few will be inclined to produce or provide if the fruits of their efforts with be stolen from them. Saying it differently, you can take away the money (from the rich) but can only take away a minimum amount of goods and services from them. It's not like they have giant stores of hard goods and services lying around.

The temptation is again to believe that only the rich will be stolen from, but this is a fallacy. Whereas the rich may have the most 'money', they only consume a small fraction of the total goods and services available. In fact, most of their supposedly excessive wealth is actually invested in capital goods, those factories and other infrastructure that are necessary to produce the consumer goods that the bulk of the populace want and need. The rich obviously only account for a pittance of the education and healthcare services that are at the top of the socialist's 'freebie' list, so virtually all of those goods and services to be redistributed in the socialist's schemes must come from the rest of the people. Putting it differently, the impact on the available goods and services in the marketplace by the actual consumption by the rich is negligible. If any attempt is made to redistribute the capital goods part of the rich's wealth, the obvious result has to be less production and less total goods available. Once you kill the goose, there are no more golden eggs.

Returning to money arguments, let us just point out that neither taxation nor inflating the currency (creating money out of thin air) create more goods and services, as is discussed above. In fact, all such schemes are almost guaranteed to reduce the available goods and services, so any short term benefit to those hoping to gain from the 'freebies' will be very brief if not totally nonexistent. Increasing tax rates will decrease investment in capital goods as well as tax revenue, as has been demonstrated several times, and even a tax rate of 100% just guarantees that production of goods and services will cease.

Lastly, creating money to fund socialist schemes just reduces the value of existing dollar denominated savings such as bonds and CDs, and even the money under the mattress, but again does not add to the goods and services that such savings hope to buy in the future. Thus anyone who saves will find the proverbial cupboard bare when they try to cash in their savings.

Once again, the moral is clear. Socialist schemes cannot share the wealth, only the poverty. Or, in other jargon, there ain't no such thing as a free lunch.

Population Growth

(from Musings and Rants 1985-2016, Marcus Everett 2017, CKCPC3 Publishing, p173, written in 2007)

Several years ago a friend was telling me about a book she had read about the Blue Crab. The life cycle of the Blue Crab begins in bays and marshes along the East Coast from the Mid-Atlantic States to the Gulf States. The mature female can only mate during a 'shed', when she discards an old shell and before the new shell hardens. If she is fertilized during this event, under her 'apron' she will grow a large egg mass, which looks like a big orange sponge. She will then make her way to the inlet of the bay where she has been living to release her eggs into the outgoing tide.

The eggs hatch and the baby crabs spend the first half of their life at sea. When they reach about half of their adult size, they return to the bays to mature and mate. The question of interest, then, is what percentage on average of the thousands of eggs released by a female make it back to successfully mate?

Most people would guess that the percentage is small, and they would be right. But it is possible to be more precise. For a stable population, each successfully breeding female must, on average, produce exactly one successfully breeding female. If the average success rate is greater than 1, the population will grow exponentially; if the rate is less than 1 it will decrease exponentially. An average success rate of 2 would result in the population doubling every generation, a success rate of 0.5 would result in it halving every generation.

One might ask about the poor males, but as long as the survival rate of males is sufficient to fertilize a sufficient number of females, the population growth rates depend almost entirely on the success rates of the females.

The above consideration holds for any sexually reproducing species, whether it's crabs, birds, whales or humans. If the average female success rate differs from 1, the population will either grow or decay exponentially. This fact has rather profound implications for modern humanity.

For most of known human history, the long-term female success rate has been greater than 1, but only barely. Estimates of population growth over the 10,000 years before about 1700 put the average success rate, assuming 20 years for a generation, at about 1.01. This rate of success implies that each generation was about 1% larger than the previous, and that the population doubled about every 1500 years. Wars had little effect, since as was pointed out above only a sufficient number of males are required. (This fact is borne out by the baby boom after WWII - losing a half million males didn't even keep the growth rate flat!) Disasters that affect both sexes cause a short-term stutter, but usually this just makes it easier for the next generation or so to make up lost ground.

The problem is that, over the last 200 years, the industrial revolution together with modern medicine and agriculture has greatly increased the survival rate and therefore the potential female success rate. I say potential rate, since some cultures have voluntarily reduced the rate even below 1. China, in fact, has recently implemented a one child per couple rule which, together with a cultural bias against female offspring, has apparently resulted in an effective female success rate of something like 0.4. This is a drastically low rate, and will result in economic and social chaos in even one generation if not eased. A more reasonable target might be one female child per couple.

Unfortunately, much of the third world is reproducing at a rate significantly greater than one. The world population growth rate is currently such that the population has been doubling about every 35 years. If we assume a 20-year generation, this is an average success rate of about 1.5, or in other words each generation is about 50% larger than the previous. The third world rate must be considerably higher than this since the industrial nations (minus certain minority groups) now have rates lower than 1. If the human density on the planet were still insignificantly small, this might be a good thing. However, we are already depleting our natural resources such as fossil fuels, water, oceanic fish stocks and everything else you can think of. Our waterways are polluted, our air is polluted, and there MAY be some increase in global warming over and above the interglacial effect due to human activity such as deforestation and production of excess carbon dioxide and methane.

What is depressing is that, although there seem to be unlimited cries for more laws against SUVs, coal fired power plants, etc., there is never a discussion or even a suggestion about reducing the human population. Doing so would not only help solve all these problems, but may well be the only long-term solution. No laws and no amount of technology can long compensate for the current rate of exponential growth of the human population on Earth. We must control our numbers or face the inevitable catastrophic reduction that reality will impose upon us. This fact especially must become a part of any intelligent discussions about subjects such as global warming, as well as contraception and abortion.

It should also be noted that, although the human female success rate is considerably greater than 1, the blue crab is obviously suffering a current female success rate significantly below 1. The friend that I referred to above recently paid over $60 a DOZEN for jumbo crabs at a restaurant near Baltimore. H. L. Mencken would be aghast.

Global Warming Realities

The subject of Global Warming, like most of the currently-in-vogue environmental issues, creates lots of hype and dogma, lots of politics, and very little serious discussion. Although many of the more vocal pundits claim scientific backing, the fact is that the scientific community is as divided on the issue as the rest of the populace, and the actual facts in evidence are ambiguous as to what conclusions can be drawn from them.

One fact that the scientific community is in agreement on is that we are currently at the warm end of what is referred to as an 'interglacial' warming period. These interglacials have happened periodically over many millions of years, but most of the intervening time is spent in 'ice ages'. The current average temperature is definitely above the average temperature over millions of years, but not out of line with temperatures at the end of previous interglacials.

A mathematical principle known as 'regression to the mean' is a fancy statement of the fact that, all other factors being equal, the direction a change in a variable (global temperature in this case) is most likely to take is toward the long term mean value. This would seem to indicate that what we should worry more about is not global warming, but global cooling. Sooner or later whatever drives the long-term ice age vs. interglacial cycle is going to send the temperature down and it may well be beyond human tinkering to stop it. However, it also may be a thousand years before such events unfold.

Be that as it may, there is no doubt that human impact on our home planet is non-trivial. Although there is little likelihood that there will be a runaway greenhouse effect and Earth will end up another Venus, sooner or later (probably sooner) we are going to precipitate some sort of ecological crisis or catastrophe. Neither Al Gore nor I know exactly what this will be or when it will happen, but new laws about carbon dioxide emissions are not going to solve the problem. The problem is not SUVs, coal fired generating plants or eating meat. The problem is plain and simple - there are too many people on the planet and the numbers are increasing exponentially. No amount of new laws, new technology or donations to 'save the environment' Funds will solve the problem. The human species must regulate its numbers or nature is going to do it for us.

What is particularly distressing is that reducing the population is never discussed as a solution to solving such problems. Instead we are constantly bombarded with campaigns to ‘save the children’, cure AIDS, increase health services to developing nations, etc. Although these proposals are commendable, increasing the population by reducing diseases, famines and wars and in addition increasing the standard of living of the third world is a guaranteed strategy for disaster. If increases in survival rates are not more than matched by decreases in reproduction rates we are only dooming everyone to disaster.