Friday, December 2, 2011

"GERMANY LOVES EUROPE, BUT NOT THE EURO"

Wolfgang Ishinger, ex-deputy foreign minister of Germany, published and op-ed article in the October 12, 2011 edition of The New York Times in which he argues that for prime minister Angela Merkel to convince her countrymen on saving the Euro, the arguments must be couched in the importance to Germany of preserving the European union, rather than placing emphasis on saving the Euro. Most Germans, according to Mr. Ishinger, never liked the Euro in the first place and wish they had the German Mark back.

They should be careful, lest their wish comes true.

The whole Euro project was built on flimsy foundations from the very beginning, and its current travails should come as no surprise.  A common currency joining disparate nations, languages and cultures without common and enforceable fiscal policies cannot and will not work smoothly, neither in theory nor in practice.

Sure, there was at the outset a mutual undertaking of fiscal prudence, where any member state running budget deficits in excess of 3% of GDP would be subject to substantial fines.  And who were the first ones to ditch this undertaking?  You guessed it - Germany and France, the two largest members of the club which used their clout to avoid any further talk of the stiff penalties which they themselves originally insisted on.

And - say the Germans - why should we now, after having pinched and saved and made sacrifices to keep our wage levels competitive, have to pay for the indiscipline of others?  Well, one answer which comes to mind is that Germany is conceivably the only European nation that has had any real benefit from the Euro.

Where do you think the German Mark exchange rate would have been these days, and what do you think it would have done to the competitive position of German exports, the main engine of the nation's prosperity?

Sure, a stable Euro and the possibility of borrowing cheaply unlimited amounts of money gave Greece, Spain, Portugal and Ireland a temporary high, until the financial markets woke up to the fact that - hey! - we may not get any of that money back. Now these and other Euro club members are stuck with the unenviable - not to say impossible - task of deflating their economies and living standards back to pre-Euro levels, and in the process hurting the German economy by their Euro-associates not being able to afford their products anymore.  After all, Europe is by far Germany's main export market.

Germany, stop whining and start fixing.  If or when the Euro falls apart, you will be the biggest loser.

FUNDING THE U.S. FEDERAL GOVERNMENT

The debates around the Federal budget deficit and what to do with it is a classical case of not seeing the forest for all the trees.  Let us start with a broad structural framework and stop getting lost among all the single issues and opinions that are out there.

United States federal government expenditures currently amount to about 25% of GDP.

I would consider this a reasonable long term target level, but one not necessarily that easy to stay within given increasing health care cost and pension obligation trends.  Nevertheless, by making necessary long term structural adjustments to the expenditures side of the equation, 25% should be a reasonable target to aim for and stick with.

In current 2011 dollars, we are thus talking about an annual funding requirement of approximately $4.0 trillion.

Here is how I would propose to raise the money.

FEDERAL PERSONAL INCOME TAX
Income tax should be payable on all personal income, whether on salaries, wages, interest or capital gains, levied at a rate of 30% on the nation's top 10% income group.  In accordance with 2010 Internal Revenue Service data, the income split point for this group was $113,800, and the group reported income of $3.9 trillion. Thus, this tax rate would raise about $1.2 trillion.

Incidentally, the top 10% income group in 2010 already paid 70% of all federal income tax revenue under the current tax code, but at an average effective rate of only 18.7%.

Those below the income split point of $113,800, but above $33,100, would pay 15%, which would raise a further $0.5 trillion.  Earners below $33,100 would pay no income tax.

There would be no exemptions or deductions, other than on capital gains from the sale of a primary residence.  The income tax declaration form would be a one-page document.

PAYROLL TAXES
Federal payroll taxes would be abolished, stimulating job creation and diminishing the fiscal and bureaucratic burden on small businesses which overwhelmingly are the nation's main job creators, as well as reducing the need for federal control and enforcement bureaucracies.

CORPORATE FEDERAL INCOME TAX
Corporations would no longer pay federal income tax, under the philosophy that income should be taxed only as received by the individual shareholder in the form of dividends or capital gains on sale of their shares.

Although business lobbies carp about the 35% nominal federal corporate income tax rate being among the world's highest, the naked fact is that U.S. corporations - particularly the larger ones able to hire sophisticated and expensive tax accountants - actually pay little or no income tax to the federal government.

So let us stop this whole charade.  I know the idea would not be welcome with the lobbying, legal and accounting professions, where dribbling the federal corporate tax code is an important source of income. On the other hand, and what is more important, it would presumably induce U.S. corporations to conduct their business at home rather than overseas.

FINANCIAL TRANSACTIONS TAX
The aggregate value of all annual financial transactions in the United States currently amount to some $750 trillion.  A one third of one percent tax on these would raise close to $2.5 trillion.

This 0.33% levy would be collected on your behalf by financial institutions every time monies leave your account, being that personal or corporate, regardless purpose or destination of funds.

Such a levy would not be regressive,  it would be easy to collect, administer and control, and to boot discourage a certain amount of entirely unproductive financial churning caused by the trends towards "financialization" of the economy.

IN CONCLUSION
So there we are:  With a few simple and straight+forward strokes we have raised the $4 trillion needed by the federal government to do what it needs to do, with a bit to spare.

We also have in the process eliminated several thousand pages of tax code, reduced the work load on Congress so that they may hopefully find more constructive things to do and, admittedly, also robbed a comfortable livelihood from several thousand legal and tax specialists.

The economically better off among the citizenry would be paying a fair and affordable share of their incomes in taxes, and corporate America no longer would have an excuse for failing to invest at home because the federal government is in their way.

It's not that complicated, is it?