Wednesday, April 20, 2022

Only Tax Unprofitable Businesses

It is income tax time again. Instead of the usual rant, I have a creative alternative for you to ponder: Only taxing unprofitable businesses. That is if we are stuck on the illogical notion of taxing income per se at all. 

Loyal readers know that we shouldn't tax corporations' profits and that we should not tax incomes in general. Corporations are just fictional middlemen between owners/workers and customers. Taxing their profits or income is just an indirect (inefficient) way to tax those owners, workers, and customers without properly changing their behavior. It would be much, much better to tax businesses as they add value to the production of final goods and services through the use of capital and labor. All of this as being part of a larger scheme to tax resource use rather than resource creation. But I digress.

Let's assume we are going to tax businesses' incomes. How should we do this? 

I propose we reverse the concept and instead of taxing a share of the revenues minus expenses (when R > E) we tax a share of the expenses minus the revenues (when E > R). In other words we only tax unprofitable businesses. 

Here is the reason for the proposal. Revenues are a measure of the benefits that a business has provided. It is an estimate of what value they have brought to the world. Expenses are a measure of the costs they have taken. It is an estimate of what value they have destroyed in an attempt to add value through their business activity. If their expenses exceed their revenues in a given year, for that year at least they have detracted from society by virtue of their activity. 

Perhaps we would need a 3-year average profitability test or carryover provision of 50% of profits from year 1 to year 2 and 25% of profits from year 1 to year 3. I'm open to ideas here. That way we smooth out business cycle and idiosyncratic effects that might otherwise undesirably punish a business in a given year for circumstances beyond its control or for investments made that have long-run payoffs. But let's not lose sight of the goal: taxing firms that cannot turn a profit (i.e., don't add value to the world).

An instant objection is that this would make a startup business unduly expensive potentially stifling economic growth. Just a little understanding of how markets work invalidates this worry. Under this arrangement a tax on an annual net loss simply adds to the cost of capital. If the expected payback is sufficient, the investment will be made. Look at it this way: Is it better that resources are used with tax encouragement (deductibility) on the prospect of future economic value creation (future profitability that would then be taxed) or that resources are used while being taxed (a discouragement to frivolous investment)? The expected return is likely the same in either case*--it is just a matter of when taxes are collected and on whom the burden falls (taxing failure or taxing success). Given that taxes discourage that which is taxed, I know in principle which one I want bearing the burden.

Thus, this method has two key attributes to admire:
  1. It punishes bad investments by taxing failure.
  2. It creates an economic environment that increases the returns to good investments by not taxing success.
A side benefit is that it potentially cleans up accounting--a lot. A great deal of effort (resources) is put into doctoring the books so that a firm looks less profitable than they actually are. This leads to an additional benefit of disincentivizing expenditure that is not actually net profitable. Executive perks, luxury offices, unnecessary equipment, etc. now all carry a burden where once they earned a subsidy. 

Does this have a chance in the hell that is our tax code of coming to fruition? Of course not. And if it did, the later temptation to reverse course would be too great to assume future profits would be tax free. But it is a fun thought experiment that yields a new way to see the economic error in our current taxing ways.







*This is kind of a reverse Ricardian Equivalence whereby known taxes on losses have to be justified by expected profits in the future. As long as the tax rate on losses is not devastatingly high, in which case it would prevent any method of transferring future expected profits to the current day to finance a current tax burden, the tax that would be applied to future profits is instead realized before those profits are themselves realized. This assumption is no different than assuming current tax rates on profits are not so high as to devastate the ability for businesses to earn a profit in our current system. 

Wednesday, April 13, 2022

Biden's Transformation Into a 1970s President

It seems clear that President Biden is well on his way to achieving his obvious goal of becoming a redux of a 1970s American president. This would be some combination of Gerald Ford and Jimmy Carter.

Consider the checklist below:
  • Stumble repeatedly ✔
  • Misspeak and garble words ✔✔✔
  • Inflation ✔✔
  • Malaise 
  • Disastrously bungled Asian/Middle Eastern war retreat ✔✔
  • Extreme tensions with Russia involving their invasion of a neighboring country 
  • High oil prices 
  • Olympic boycott ✔

Still waiting on:

Deregulation...




Saturday, April 9, 2022

Have Your House And Rent It Too

Partial list of ways my neighbors like so, so many homeowners wish to have it both ways--despite the blatant contradictions. While many of these overlap with each other, they each are distinct.
  • They want high property values, but they also want affordability--just maybe not near them? Affordability for thee but not for me.
  • They want high property values, but they don't want "outside investors" much less "speculators!" to buy properties near them--presumably to rent them to undesirables (see below).
  • They want a thriving rental market, but they don't want anyone to rent near them.
  • They want diversity and inclusion, but they champion restrictions on development and rentals which make surrounding housing unaffordable and unavailable.
  • They want diversity and inclusion, but they wish to make choices for their neighbors thwarting their personal preferences.
  • They want the freedom to make their own choices about remodeling, etc., but they do not want an anything-goes policy for even their dearest neighbors. De gustibus non est disputandum for me; no way in hell for thee!




Monday, April 4, 2022

The Economics of Immigration in One Lesson

Or perhaps I should say in one equation properly explained . . .

Political thinking: 
    ALL THE STUFF divided by ALL THE WORKERS equals STUFF PER WORKER
The implication of this is more workers means less stuff for workers.

Economic thinking: 
    ALL THE WORKERS multiplied by STUFF PER WORKER equals ALL THE STUFF
The implication of this is more workers or more productivity means more stuff for workers.

Definitions: 
All the stuff = production, the output;
all the workers = resources, the input; 
stuff per worker = productivity, the rate at which we can produce stuff

Allowing more workers (immigration as well as the removal of barriers to entry like licensure laws and minimum wages) is clearly a net good when total output rises. 

The key to consumption is production. The key to mass consumption is mass production.*
(HT: Bryan Caplan)






*Note for minimalists, environmentalists, etc.: Don't get hung up by the term "mass" here. This does not mean "excessive". It means flourishing for the masses. Limitations on production/consumption hit the worst off first and the best off almost never.

Thursday, March 31, 2022

The Meaning of Opposite

Opposite is a loaded term. The meaning of it grows more ambiguous as the dimensions of the object to which it refers grow. 

A no-dimensional object (a point) has no opposite aside from absence (not a point). A one-dimensional object (the line A—B) has its pure reversal (B—A) as its opposite. 

Consider a higher order "object" such as driving in America. What is the opposite? It could be said that driving in England is the opposite of driving in America since Americans drive on the right while the English drive on the left. This would be true in the limited sense from the perspective of the perpendicular plane relative to the driver’s general direction, forward, through time—also forward. 

But one could also say that driving sideways is the opposite of driving as we know it. How about rather than driving through scenery that the car passes through that the car stands still and the scenery moves passing by the car was the opposite? Still another could be driving whereby you leave from your destination and arrive at your departure point. There certainly are more.

What is the point of this thought process? It is a hint at how difficult and convoluted and simply fraught any attempt to draw sharp distinctions can be. This is especially true in the realms of human action. Counterfactuals are not only challenging to find. They are nearly impossible to properly define.

Well At Least We Can Agree On This, Right?...

Here is a partial list of some things people commonly get wrong (by my judgment at least) yet believe in them with strong conviction and desire. Therefore, these are just a few examples of times when I disagree with conventional wisdom. 
  • Veterans are always human, sometimes (but rarely) heroes. I wonder how much mental anguish in veterans is caused by either an imposter syndrome (these people think I did something I did not do) or a guilt complex (these people don't know what ugly things I endured and perhaps contributed to). Veterans deserve reverence and sympathy, but we do a grave disservice to them when we dismissively and robotically admire them.
  • Localized industrial policy is very bad. This includes tax-increment financing (TIF), direct subsidy, government/private partnerships, and other favored-interest actions. The local darling in my neck of the woods is M.A.P.S. Like so many cases of local industrial policy, it suffers from a server case of Bastiat's "what is seen and what is unseen--just look at all the shiny things! There are two crucial and high hurdles for these public (i.e., taxpayer-funded) endeavors to overcome before we can believe in them: 1) there must be a clear market failure preventing entrepreneurs from seeing and acting to realize the positive gains to be had, and 2) the government must be able to identify and execute on these supposed investment opportunities.
  • There should be no government licensure for employment (especially law and medicine--those in particular are too important and nuanced to leave up to central planning). I've got strong economic and principle-based arguments against licensure while those supporting it typically rely on that it feels good and that an idealized government can correct a hypothesized problem (not even a market failure mind you). Yet my view is political poison because it takes the unpopular tactic of addressing people's fear through passive action rather than blatant pandering.
  • Edward Snowden is an American patriot and hero.
  • Almost all acts of state-level aggression (AKA, war) should be met with minimal retaliation if not appeasement and forbearance. This certainly cuts against human nature, but most secondary reactions in response to violent hostility are counterproductive. They make the world a worse place--overall, on net, all things considered. My follow up right there is not my attempt to qualify my view. Rather I am saying I am considering all the supposed benefits people offer as to why vengeance shall be mine! . . . we must stand up to belligerent aggressors. Too often the cost is not worth the cure, and the actions taken in response are just closing the barn door after the horse has bolted. The most I can say in defense of the typical defender of retaliation (too much play on words?) is that if one wants to maintain the world closer to how it is at the cost of how much better it could be, then fight every fire with fire. It is very hard to truly hold territory and control a people. And this difficulty grows more and more as human society advances. Initial victories for would-be rulers become short lived if not pyrrhic. The constant eye-for-an-eye, tooth-for-a-tooth state of the world keeps us in a local maximum, struggling to escape to higher peaks. I think Bryan Caplan says it well.
  • The following should all be legal with minimal to no interference from government: prostitution, recreational drugs, performance enhancing drugs, selling/buying organs, prediction markets, actual gambling (games of chance rather than skill), and basically everything else under the sun of If you can do it for free…. The list is what makes this item fully counter-conventional--very few will defend all of these items.
  • The motto “Safety First!” is basically nonsense. It amounts to trite virtue signaling. If it is your “highest priority”, then you are incompetent. It is simply not possible for this to be a goal. It is a constraint. Fortunately most of the time when used it is just there to help the naïve and fearful to be a bit braver. In this sense it is innocuous as far as a noble lie can be. But for God’s sake can we grow up and stop saying it or accepting it as a substitute for meaningful signal?

Things the major tribes actually do unfortunately agree upon: 

  • There is lots of speech that needs to be censored (e.g., hateful speech, disruptive speech, unpleasant speech).
  • We need to fund the police such that we have a strong and powerful police state
  • Government can and should solve the "problem" of big tech.
  • A safe world and a safe America requires a overwhelmingly strong, uber-engaged, and extensively involved U.S. military.
  • American farmers are a sacred group who need constant support especially to maintain the status quo. They should enjoy private profits and be afforded extensive social insurance against losses. 
  • The welfare and education and indoctrination of the young is a state concern and needs strong state intervention. Parents should only be left up to their own desires when those desires fully correspond to the state's interests (defined separately by the two biggest tribes, of course). 
  • Incumbent firms and industries need and deserve deference if not extra support. It is wrong that they might be challenged by newcomers and new approaches. 


Wednesday, March 30, 2022

The Progression of Air Travel Security Theater

It is as if the powers that be are playing an ever-escalating game of what can we make them do next

When I was a kid it was just speech codes: don’t say “bomb” or “gun” or you might be detained and searched. Maybe not allowed to fly that day. 

After 9/11 it was: “let’s take away their liquids, move the entry barrier back and search them good and hard before entering, not allow anything sharp, and of course let’s profile them until they call foul and then let’s pick on the most obviously innocent to prove we don’t profile.”

“Now what?” I can hear them eagerly ask. Then the shoes came off. “And let’s make them basically get strip-searched (remotely) while holding up their hands in the ‘don’t shoot’ position.” 

And of course with COVID it is: “let’s make them wear masks . . . forever?” 

It will stop when we stop letting the most fearful and the most fanciful fears drive all policy decisions.


Related: The Great Antidote - Gary Leff on Airline Bailouts and Travel. Pay attention to where he describes American air firms as being basically extensions of the federal government. The technical term is fascism.