% fortune -ae paul murphy

Using tax reform to cure what ails us

In May of 1857 England's Thomas MacAulay wrote a letter to Henry Randall in which he said:

You are surprised to learn that I have not a high opinion of Mr. Jefferson, and I am a little surprised at your surprise. I am certain that I never wrote a line, and that I never, in Parliament, in conversation, or even on the hustings, - a place where it is the fashion to court the populace, - uttered a word indicating an opinion that the supreme authority in a state ought to be entrusted to the majority of citizens told by the head, in other words, to the poorest and most ignorant part of society. I have long been convinced that institutions purely democratic must, sooner or later, destroy liberty, or civilisation, or both.

In Europe, where the population is dense, the effect of such institutions would be almost instantaneous. What happened lately in France is an example. In 1848 a pure democracy was established there. During a short time there was reason to expect a general spoliation, a national bankruptcy, a new partition of the soil, a maximum of prices, a ruinous load of taxation laid on the rich for the purpose of supporting the poor in idleness. Such a system would, in twenty years, have made France as poor and barbarous as the France of the Carlovingians. Happily the danger was averted, and now there is a despotism, a silent tribune, an enslaved press. Liberty is gone: but civilisation has been saved.

I have not the smallest doubt that, if we had a purely democratic government here, the effect would be the same. Either the poor would plunder the rich, and civilisation would perish; or order and property would be saved by a strong military government, and liberty would perish. You may think that your country enjoys an exemption from these evils. I will frankly own to you that I am of a very different opinion. Your fate I believe to be certain, though it is deferred by a physical cause. As long as you have a boundless extent of fertile and unoccupied land, your labouring population will be far more at ease than the labouring population of the old world; and, while that is the case, the Jeffersonian polity may continue to exist without causing any fatal calamity. But the time will come when New England will be as thickly peopled as old England. Wages will be as low, and will fluctuate as much with you as with us. You will have your Manchesters and Birminghams; and, in those Manchesters and Birminghams, hundreds of thousands of artisans will assuredly be sometimes out of work. Then your institutions will be fairly brought to the test.

Distress every where makes the labourer mutinous and discontented, and inclines him to listen with eagerness to agitators who tell him that it is a monstrous iniquity that one man should have a million while another cannot get a full meal. In bad years there is plenty of grumbling here, and sometimes a little rioting. But it matters little. For here the sufferers are not the rulers. The supreme power is in the hands of a class, numerous indeed, but select, of an educated class, of a class which is, and knows itself to be, deeply interested in the security of property and the maintenance of order. Accordingly, the malecontents are firmly, yet gently, restrained. The bad time is got over without robbing the wealthy to relieve the indigent. The springs of national prosperity soon begin to flow again: work is plentiful: wages rise; and all is tranquillity and cheerfulness. I have seen England pass three or four times through such critical seasons as I have described. Through such seasons the United States will have to pass, in the course of the next century, if not of this. How will you pass through them. I heartily wish you a good deliverance.

But my reason and my wishes are at war; and I cannot help foreboding the worst. It is quite plain that your government will never be able to restrain a distressed and discontented majority. For with you the majority is the government, and has the rich, who are always a minority, absolutely at its mercy. The day will come when, in the State of New York, a multitude of people, none of whom has had more than half a breakfast or expects to have more than half a dinner, will chuse a legislature. Is it possible to doubt what sort of legislature will be chosen? On one side is a statesman preaching patience, respect for vested rights, strict observances of public faith. On the other is a demagogue ranting about the tyranny of capitalists and usurers, and asking why anybody should be permitted to drink Champagne and to ride in a carriage, while thousands of honest folks are in want of necessaries. Which of the two candidates is likely to be preferred by a working man who hears his children cry for more bread?

I seriously apprehend that you will, in some such season of adversity as I have described, do things which will prevent prosperity from returning; that you will act like people who should, in a year of scarcity, devour all the seed corn, and thus make the next year a year, not of scarcity, but of absolute famine. There will be, I fear, spoliation. The spoliation will increase the distress. The distress will produce fresh spoliation. There is nothing to stop you. Your constitution is all sail and no anchor. As I said before, when a society has entered on this downward progress, either civilisation or liberty must perish. Either some Caesar or Napoleon will seize the reins of government with a strong hand; or your republic will be as fearfully plundered and laid waste by barbarians in the twentieth Century as the Roman Empire was in the fifth; - with this difference, that the Huns and Vandals who ravaged the Roman Empire came from without, and that your Huns and Vandals will have been engendered within your own country by your own institutions.

(Paragraph breaks added, spelling differences preserved.)

He wrote that in 1857 and now, 160 years later, it has become impossible to deny that he was right -- the vandals have emerged, the demagogue has twice defeated the statesman, spoliation is common, and Trump's election has slowed but not stopped the plundering of the republic.

So now what? The problem MacAulay identifies is simple enough: when the voting poor lose faith in their ability to earn their way to prosperity, they'll vote for people promising to give them someone else's money -- but when government robs Peter to pay Paul, the economy tanks, and either the nation or the freedom of its citizens must perish to form a new equilibrium.

To those who believe that a few noble houses should rule the country as a matter of noblesse oblige, this is a prescription: end American exceptionalism and middle class mobility by wrecking public education, encouraging mass immigration by illiterates, destroying opportunities for smaller businesses, establishing an educational manderinate for the rich, and use regulation and government monies to freeze out businesses not controlled by the intended inheritors.

To those who believe in the American idea, that everyone is born equal and should have equal rights and equal opportunities, this is also a prescription: rebuild American freedoms by fixing education, ending crony capitalism, limiting government, and ensuring genuine impartiality in the equal application of law to all.

Achieve the latter and both civilization and liberty will prosper; fail,and tens of thousands will die as cities burn and the American experiment gives way to another European style pretend democracy in which only the very rich have real control over their own lives.

But how? We're pretty far along MacAulay's highway to hell -- when he wrote: "on one side is a statesman preaching patience, respect for vested rights, strict observances of public faith. On the other is a demagogue ranting about the tyranny of capitalists and usurers," he might as well have been talking about Romney and McCain versus Obama.

Well, I have an idea -- a little odd and wildly optimistic, but bear with me: there's a way to end the degradation by setting Paul to robbing Paul; thus breaking the democratic coalition while leaving Peter free to grow the economy and so provide the opportunities needed to bring today's underclass into the mainstream of American life.

In a free market, if you borrow from a bank you'll pay a lower interest rate if you work for Harvard University then if you work for Joe the Plumber -- and that's because lender experience shows that if a bank has two customers with similar credit histories and earning about the same amounts, the one whose employer can draw on large endowments or the public treasury is significantly less likely to default than the one working for a small business. Left to themselves lenders price this risk difference into their loan agreements, charging the small business employee a bit more in annual interest than the educator or civil servant.

In practice lending is constrained by regulation but, on average, someone working for a government or quasi government agency whose ability to meet payroll is considered nearly certain will receive preferential treatment relative to another with the same skills and credit history but an employer whose ability to pay is considered uncertain. At today's rates, for example, a plumber working for uncle Joe might expect to pay about $116 per month per $100,000 in secured debt more than he would if employed in exactly the same role by Harvard University.

As a group democrats have long chosen to see the higher equity requirements and interest rates that go with reduced income security as unfair penalties -- in fact Carter's Community Re-investment Act and subsequent democrat efforts creating the vulnerabilities demonstrated during the 2008 financial crisis in part reflect their long term collective efforts to force bankers to act against actuarial reality by offering lower rates to higher risk customers.

The nation saving opportunity, however, is in seeing this glass half full: in seeing the difference not as a penalty paid by small business and entreprenuerial employees, but as an unearned benefit acrueing to those employed by government, quasi-government entities, or big corporations -- because benefits, especially unearned benefits, can be taxed and most of the people who get most of their income from highly secure sources like trust funds and government, vote democrat and may be assumed to favor efforts to level the playing field by raising taxes on unearned income.

Imposing a steeply progressive tax on unearned benefits arising from the security of income puts Paul to robbing Paul - taking that $116 from the tenured Harvard employee through the tax system funds the programs the individual probably voted for while leveling the playing field for everyone, makes room for across the board cuts in other taxation, and gives Peter new incentives to expand the national resource base. As a result such a tax would cause the Paulian coalition to first fracture and then dissipate as new opportunities allow many Paulists to become Peters -- and eventually paulist response to the new tax would redress the democratic balance to allow both civilization and liberty to prosper.

Embedding risk avoidance at the core of the tax system may seem like a new and radical idea, but it is not -- in fact, it merely extends and applies rationales already deeply embedded in the deductions and allowances side of the tax system to the assessment and tax payable side. It's also fairly easy to do: credit agencies already rate nearly all employers and investment funds.

More theoretically, using the tax system to monetize the risk reduction provided citizens by government aligns the business of government with capital markets theory and should have the long term effect of turning taxpayers into government services consumers whose choices determine, as they should in any free market, what they get for their money.

Notice too that the income security tax meets the goals both sides argued for, and presumably voted for, in the last few federal elections:

  1. Conservatives, particularly working class people and entrepreneurs, get what they want and largely voted for: across the board tax cuts.

    1. More significantly, embedding risk at the heart of the tax system will provide incentives for investment managers to move the money under their control away from non-producing assets like treasuries and blue chips, and into higher risk, higher productivity, investments in businesses making and selling competitive products and services - - thus producing what conservatives want most: more jobs, more innovation, the re-assertion of world leadership in business and technology, and dramatic increases in the value of personal educational investments in science, engineering, or business.

    2. At the same time, however, government growth will be halted -- and government's role in the economy correspondingly reduced over time -- because efforts, whether by Congress or unions, to increase the role of government will have negative consequences for those proposing the changes. Parts of that are obvious: the cost of government debt will rise relative to the cost of private sector debt and Paulists will not long vote for programs imposing new costs on Paulists; but some parts are more subtle: efforts to raise take home pay, pensions, or other entitlements for government employees or dependents will trigger tax bracket creep among beneficiaries and thus limit benefits for those near the bottom of the scale while imposing negative net returns on the leaders and decision makers near the top.

  2. Democrats, particularly the very rich, academics, civil servants, and welfare recipients, also get what they want and largely advocated for: significant new taxes.

Bottom line? Look at Obama's time in office as MacAulay would have and what you see is very rich democrats working to consolidate power by expanding the pool of non producers, using regulation and politically directed funding to increase the advantage older, established, businesses have over start-ups, and buying votes from the non producers by promising to have the state rob republicans on their behalf -- and that's a process which the country cannot long survive.

The present proposal puts an end to it in a very simple, very logical way: in the short term the income security tax targets democrats, not republicans, and Paul will not long vote to rob Paul; in the middle term the incentives to risk will lead to actions raising productivity and innovation across the entire economy to new levels; and, in the long term the alignment of government funding with financial market basics will lead to much greater clarity about government's legitimate objectives and aspirations.

Questions? Comments? Suggested fixes? murph at winface com, please

Paul Murphy wrote and published The Unix Guide to Defenestration. Murphy is a 25-year veteran of the I.T. consulting industry, specializing in Unix and Unix-related management issues.