tax

With the debates over, the presidential candidates on their last, gasping try to grasp those elusive Electoral College votes in Iowa, Colorado, Nevada, Virginia, Wisconsin, New Hampshire, or Ohio needed to put them over the top, and the polls to open in less than 48 hours, it is a bit late to be offering strategic advice to Barack Obama – advice that by all indications he would have ignored – but he could have done much worse than to cloak himself in Adam Smith’s mantle. Yes, the same Adam Smith whose profile adorns the neckties of more than a few Wall Street bankers and right wing think-tankers.

The thing is, the Adam Smith Mitt Romney and Paul Ryan and their followers claim to revere bears scant resemblance to the real Adam Smith, friend of Enlightenment philosopher David Hume and author not only of An Inquiry Into the Nature and Causes of the Wealth of Nations but also of The Theory of Moral Sentiments, which predated The Wealth of Nations by more than 15 years. “I think Adam Smith was right,” said Romney in a January debate, “and I’m going to stand and defend capitalism across this country, throughout the campaign.” In a subsequent speech at the University of Chicago, Romney proclaimed, “When the dead hand of government replaces the invisible hand of the market, economic freedom is the inevitable victim.”

Paul Ryan, better known for his enthusiasm for Ayn Rand, has also paid homage to Smith. In the introduction to his Roadmap for America’s Future: A Plan to Solve America’s Long Term Fiscal and Economic Crisis, he writes: “The Founders…understood the importance and value of free enterprise. In addition to the Declaration of Independence, the year 1776 saw the publication of Adam Smith’s treatise The Wealth of Nations, which argued in part that the ‘system of natural liberty,’ or free markets in commerce, would vastly increase national wealth.” This, at least, is empirically true, and no less than Karl Marx recognized it as such. But just as the Devil can quote scripture, so has the extreme right wing of the Republican Party (one can legitimately ask whether, today, any other wing even exists) appropriated Adam Smith as its own, by quoting his works selectively and out of context.

Adam Smith, it must be remembered, was not merely an economist but a moral philosopher, concerned not simply with economic efficiency but with social justice. As such, he wrote at length and with great eloquence about the obligations that bind us together as a society, and also about the need for free markets to be regulated. He was also a radical, mistrustful of inherited wealth and position and scathing as to the inflated self-regard of the wealthy.

Hedge-fund manager Leon Cooperman, in an open letter he sent to President Obama in late 2011, wrote of himself and his fellow billionaires, “As a group we employ many millions of taxpaying people, pay their salaries, provide them with healthcare coverage, start new companies, found new industries, create new products, fill store shelves at Christmas, and keep the wheels of commerce and progress (and indeed of government, by generating the income whose taxation funds it) moving. To frame the debate as one of rich-and-entitled versus poor-and-dispossessed is to both miss the point and further inflame an already incendiary environment.” One suspects Mr. Cooperman would have received scant sympathy from Adam Smith, who writes, in The Theory of Moral Sentiments, “This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and meand condition…is…the great and most universal cause of the corruption of our moral sentiments…. It is scarce agreeable to good morals, and even to good language, perhaps, to say, that mere wealth and greatness, abstracted from merit and virtue, deserve our respect.”

We can’t know what Adam Smith would have thought of any specific social welfare programs such as Medicaid or unemployment benefits any more than we can know which baseball team God roots for (though I’m pretty sure it’s the Red Sox). But Smith was no advocate of abandoning the less fortunate to their fate. As he wrote in Book 1 of The Wealth of Nations, “Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.”

Mitt Romney, who by all accounts gives 15% of his income to the Mormon Church and devotes a substantial amount of his time to helping co-religionists who have fallen on hard times, may think private charity from church and community is an adequate social safety net, but Adam Smith would almost certainly disagree. As he wrote in The Theory of Moral Sentiments, “The wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He is at all times willing, too, that the interest of this order or society should be sacrificed to the greater interest of the state or sovereignty, of which it is only a subordinate part. He should, therefore, be equally willing that all those inferior interests should be sacrificed to the greater interest of the universe, to the interest of that great society of all sensible and intelligent beings, of which God himself is the immediate administrator and director.”

Smith did not get into the specificities of tax policy, but he would probably take a dim view of subjecting the working class to higher tax rates than the 0.1 percent. Indeed, he supported progressive taxation: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”

Obama’s midsummer “You didn’t build that” comment gave Republicans the opportunity for endless riffs on the theme of self-reliant entrepreneurs building their companies and their fortunes from scratch, ignoring Obama’s point, which was true, if inelegantly expressed. Adam Smith put it better: “That the erection and maintenance of the publick works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbours &c. must require very different degrees of expence in the different periods of society, is evident without any proof. The expence of making and maintaining the publick roads of any country must evidently increase with the annual produce of the land and labour of that country, or with the quantity and weight of the goods which it becomes necessary to fetch and carry upon those roads.” He also had no problem asking the wealthy to pay a little more: “When the toll upon carriages of luxury, upon coaches, post–chaises, &c. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, waggons, &c. the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country.”

Smith supported what today we would call public-private partnerships, harnessing private capital and initiative to provide a public good such as a toll road, but he was clear on the need for such partnerships to be closely regulated to make sure the operators maintained the facilities rather than simply pocketing the proceeds. And when user fees and tolls are not sufficient to build and maintain essential infrastructure, Smith advocated a more active role for government: “When the institutions or publick works which are beneficial to the whole society, either cannot be maintained altogether, or are not maintained altogether by the contribution of such particular members of the society as are most immediately benefited by them, the deficiency must in most cases be made up by the general contribution of the whole society. The general revenue of the society, over and above defraying the expence of defending the society, and of supporting the dignity of the chief magistrate, must make up for the deficiency of many particular branches of revenue.”

Adam Smith probably would not have approved of the Dodd-Frank law regulating financial institutions, not because it represents an intolerable intrusion on free markets but because it failed to fix the principal causes of the 2008 financial crisis, leaving banks that are too big to fail, thus doing nothing to prevent future government bail-outs for losses on risky and speculative investments and trades. Smith did, however, see financial regulation as no less important than building codes:   “Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

Adam Smith probably would not be an enthusiastic supporter of President Obama. Not because Obama is a socialist, but because his signature initiatives, including Obamacare and Dodd-Frank, are weighed down with opaque language and impenetrable regulations virtually guaranteed to create uncertainty in big swathes of our economy, fail to achieve much of what they were intended to achieve, and incur costs we can’t even calculate.  Smith probably would have disapproved of direct government investments in companies like Solyndra, the solar panel manufacturer that famously evaporated along with half a billion dollars in public funds, though he almost certainly would approve of public investments in basic science. He would be likely to disapprove of mandatory corporate average fuel economy standards for cars – and subsidies for electric vehicles – instead opting for a more market-based and neutral approach such as a carbon tax, which would eliminate the need for energy subsidies of all kinds, including tax breaks for oil companies and direct subsidies and mandates for corn-based ethanol, and which would also an effective way to reduce greenhouse gas emissions. He would probably favor a much more liberal immigration policy (he wrote at some length about the need for labor mobility) to replace the idiocy of our current policies that every year send home tens of thousands of recently graduated foreign students instead of inviting them to stay here and help grow our economy.

Obama, it is true, seems to be more comfortable with some aspects of crony capitalism than with unbridled free markets, but then so does Romney. On almost every other dimension, however, Adam Smith would find Barack Obama at least slightly more supportive of his ideas than Mitt Romney and Paul Ryan, who apparently see in Adam Smith a proto-social Darwinist. I too find that Barack Obama more closely reflects Adam Smith’s view of governance than does Mitt Romney. And as an enthusiastic adherent of Adam Smith, on Tuesday I will vote to re-elect Barack Obama.

 

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Marco Rubio, the Tea Party-leaning freshman Senator from Florida, recently said something remarkably intelligent, if self-evident, which appears to elude most Washington policy makers. “We don’t need more taxes,” he said, “We need more taxpayers.”

This is axiomatic for anyone trying to reform tax systems and increase government revenue, which I have done in a number of countries in Africa and Asia. In most of these countries, as well as in places like Greece and Italy, most people (and companies) do not pay taxes, at least not officially. Tax administrations are both inefficient and corrupt; if you’re lucky you will never attract the attention of the taxman, and if you’re not, a bribe – possibly significant, but almost certainly less than your true tax liability – will do the trick. And when garbage piles up in the streets and public money vanishes into the pockets of corrupt politicians and bureaucrats, it is natural for citizens to decide government is not worth whatever taxes they are supposed to pay.  In most of these countries, it is foreign individuals and corporations, who lack the proper connections, who are not steeped in the arcane rules of the game, and who try to obey the law, who shoulder much of the tax burden. The cell phone company, the brewery, and the oil and mining companies – and their foreign employees – are easy and highly visible targets, and governments never tire of trying to change the rules, imposing new taxes or demanding a share of the company.

The United States, of course, is not Nigeria or Greece. As hard as it may be to follow the letter of the law when the tax code runs to 10,000 pages, most people and companies try their best, exploiting whatever advantages they and their accountants can find, but rarely committing any deliberate infractions, cash payments to the guys who help carry your furniture up to the second floor apartment notwithstanding. The IRS is too effective, and the penalties too great, for most of us to chance it. And, at least until now, most Americans have thought that paying taxes is one’s duty as a citizen. [click to continue…]

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Economics is not quantum physics. The mathematics may be abstruse in either case, featuring equations which, having run out of Greek letters, resort to smiley faces and other symbols to designate variables. But whereas quantum physics is so hard that even its practitioners don’t entirely grasp it – Nobel Prize-winning physicist Richard Feynman said, “I think I can safely say that nobody understands quantum mechanics”there is nothing terribly difficult about the concepts underlying economics, even if there is spirited disagreement over some of them.

This is why the profound idiocy infecting American fiscal and economic policies is so disheartening. Either our elected and appointed officials and candidates for high office are completely ignorant of the most basic economic principles or they are lying in an effort to win political favor. I’m not sure which explanation is more frightening. Former Minnesota Governor Tim Pawlenty, considered one of the more moderate and “grown up” candidates for the 2012 Republican Presidential nomination, last week came out with his economic plan, which Financial Times columnist Clive Crook called “an idiotic farrago…stunning in its vapidity.”    If anything, Crook is too kind. [click to continue…]

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Benjamin Franklin said, “Of two things you can be certain: death and taxes.” What was true in the 18th century is somewhat less so in 21st century America, at least where taxes are concerned. On this day, April 15, when most Americans are either submitting their annual tax returns or struggling to request extensions of the deadline, it is appropriate to consider the current state of taxation. It is widely reported that 47 percent of Americans pay no federal income tax, a number that has increased dramatically under the Bush and Obama presidencies. Yes, the members of this 47 percent remain subject to withholding for Social Security (pension) and Medicare (post-retirement health care) contributions, but they are exempt from personal income taxes. This obviously increases the burden on those who do pay taxes, but a far more important consequence is the establishment of a more or less permanent class of people who feel free to demand ever-more generous services from government knowing that someone else will pick up the tab. As a people we have already grown used to fighting wars in which other people will serve and die in our place, and we now have a society in which the demand for services is increasingly disconnected from any notion of responsibility to pay for them. This can’t help but erode the notion of what it means to be a citizen. [click to continue…]

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Yesterday I listened to an interview  on National Public Radio with David Kaplan, editorial director of an organization called the Center for Public Integrity, which has just come out with a report on the illegal trade in tobacco which, according to Mr. Kaplan, is the world’s most-smuggled legal product.

It’s a fascinating story of a trade worth as much as $100 billion annually – representing an estimated 12 percent of total cigarette sales – with a global reach and organizational sophistication worthy of any multinational corporation or illegal drug cartel. [click to continue…]

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