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Lunch Hour Reading

November 29, 2011

1) WashPo’s Steven Pearlstein makes the tax fairness case for my favorite tax revolution: the progressive consumption tax. And he does it well, without even adding that it would also address, um, excess consumption.

To my mind, however, the better way to reform the tax code, and make it a bit more progressive, is to go back to an old idea — a progressive consumption tax — first proposed by Sens. Sam Nunn and Pete Domenici two decades ago and recently revived by Cornell University economist Robert Frank in his new book, “The Darwin Economy.”

A progressive consumption tax would work like the current income tax, with one big exception: Any income earned from investments would be taxed only if and when it is used to buy goods and services; investment income that is reinvested would not be taxed at all. Under such a tax regime, it would be as if all your savings were put into one big tax-free investment account, with taxes paid only when money is withdrawn. Money borrowed for purposes of consumption would also be taxed.

A progressive consumption tax would be a big step forward for a country where household savings has been woefully inadequate and borrowing for current consumption has risen to dangerous levels. And as Frank likes to point out, such a tax would also discourage the unproductive “arms races” in which the wealthy now use their money to bid up the price of scarce “positional” goods such as houses in the Hamptons, luxury cars and tuitions at elite private schools and colleges.

Of course, it’s perfectly possible under a progressive consumption tax that Warren Buffett could pay less in taxes than his secretary — but only if he were willing to live a lifestyle as modest as hers.

2) Doug Rushkoff explains how corporations came to run the world–and your life.

Peggy Nelson: The corporation is not a recent phenomenon; it goes back hundreds of years. What is the origin story of the corporation? Where did it come from, and what is it, exactly?

Douglas Rushkoff: The corporation is the result of two innovations: the creation of centralized currency, and the creation of the chartered monopoly. In the late 1300s the upper classes — the aristocrats, the people who had been feudal lords — were becoming less wealthy relative to real people. As the merchant class and people in towns were producing and doing, the relative wealth of the aristocracy was going down, and this was a problem; the aristocrats wanted to continue the system that had been working for them for the last 500 years wherein they didn’t have to “do” anything to be rich. So they hit upon the idea of passively investing in other people’s industries.

Suppose I am the monarch. I want to make money through your shipping company; how do I get you to let me invest? Well, I use what power I have as a monarch to write up a charter, which means I give you a monopoly in a certain area, and you give me 30% of the shares in the company. The chosen merchant avoids competition and gains protection from bankruptcy, while the king receives loyalty, because the merchants’ monopolies are based on keeping him in power. He doesn’t mind if a few of the merchant class are as rich as he is, as long as he is able to get still richer as a result.

But this was not the promotion of free-market capitalism. It was the promotion of monopoly, non-market capitalism. It was locking into place a set of players and a set of systems that had nothing to do with the free market. And it changed the bias of these merchants away from innovation; in other words, from “how do I innovate and maintain my competitive edge” to “how do I extract wealth from the realm that I now control?”

Bonus: It includes this Monty Python clip.

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