Taxes and regulation in the US in 2014

ORMOND BEACH -- Chief Justice Oliver Wendell Holmes once famously uttered what became a Keynesian mantra. "Taxes are the price we pay for Civilization" Few bothered to point out at the time that Justice Holmes worked in academia before he moved into taxpayer funded employment off which he lived comfortably for the rest of his very long life. He died in 1935 at age 94.

What Justice Holmes failed to foresee or account for in this pithy expression were the many forms of taxation that fly under the radar, such as inflation (a tax on everyone), regulation which is imposed on business and property owners (increasing the cost of products and ownership of property), bonded indebtedness which burdens future generations by leveraging present government desires, and any number of fees for specific services originally provided for by other tax forms like property, sales and income taxes.

This essay will focus on the impact of regulation. Prof Niall Ferguson of Harvard in his excellent new book "The Great Degeneration" (How institutions decay and economies die), wrote how the gap between overregulation and no regulation has sadly been filled by a third much worse option, that is "bad regulation."

.The four most glaring modern examples being The Affordable Care Act, Dodd-Frank and Federal Reserve policies that tax all savers by crushing interest rates artificially to protect big banks. Last but not least, Social Security. The US is often compared to The Roman Empire in decline but a more appropriate comparison might be early 17th Century England under the reign of three consecutive corrupt monarchs, Elizabeth I, James I, and Charles I. Under these rulers Royal Regulation reached such pervasive heights as prescribing what types of dress were appropriate for different classes of people to wear in each season.

Later it was learned, Elizabeth received huge sums of money from the British textile industry to encourage what became known as "Sumptuary Laws" An early example of crony capitalism, though certainly not the earliest or most egregious.

In 1605, Guy Fawkes and 13 co-conspirators were arrested and tried for attempting to blow up the Parliament of James I. This became known as the Gunpowder Treason. He was labeled a terrorist but many felt then as today he was a freedom fighter protesting corrupt rulers. The corruption led to civil unrest and James successor Charles I was tried and executed for Treason in 1649.

This led to the genocidal dictatorship of Oliver Cromwell. So what can we learn from this slice of history? Lets address each of the above four subjects briefly:

1) If lowering health care costs was truly the objective of the Affordable Care Act, then it failed to address the most common causes of rising costs. Insurance companies not allowed to compete across state lines, tort reform so good doctors don't get swallowed by defensive medicine and frivolous lawsuits and the easiest fix of all, transparency in pricing? If all hospitals were required to publish their Charge masters on line then folks could see if a hospital charges $15,000 or $115,000 for a hip replacement (yes, there is that kind of disparity).

A doctor-owned facility in Oklahoma is doing just that and forcing others to follow suit. The reason there is an arms race for growth between Insurance Companies and hospitals is because of the profit potential to be reaped from these disparities. Incredibly, I couldn't even see a copy of our own local publicly supported hospital Charge master because lobbyists successfully inserted a Trade Secrets provision in State Statutes that prevents even taxpayers within their district from seeing retail charge lists. Sadly, this opaque system also laid the groundwork for government takeover of an otherwise outstanding health care system in the US. One which encouraged innovation and risk taking, but now will be constrained and rationed by unelected bureaucrats.

HHS Secy Sibelius partly addressed this issue by requiring hospitals to publish certain common procedures for comparison but why was it not part of the ACA? Going to a purely private system of health insurance that follows the individual and has restraints on policy increases, dropping policies with serious conditions that develop after the policy was purchased, and does not rely on the policy holder staying with a particular employer would go a long way to lowering health care costs without government diktats.

Advocates for the ACA justifiably proclaim we spend more than any other developed country per capita on health care, but this is a result of bad regulation rather than a failure of the private market. Bad regulation gives us the feeling of a fix but obscures things like transparency and competition that would be far more effective at lowering costs.

2) On the financial front, Dodd-Frank failed to deal with any of the inherent risks of a "Too Big to Fail" mentality. Regulation of derivatives, the government encouragement of sub prime mortgages by underpinning Fannie and Freddie, the 1999 dissolution of Glass-Stegall that separated investment banking from commercial banking. We now have six huge banks instead of eleven big ones and a Federal Reserve that is less liquid than Bear Stearns when it declared bankruptcy.

3) Quantitative easing is a grand experiment with unknown ramifications that effectively taxes savers and seniors by eviscerating interest rates in favor of big institutions while driving government debt to levels never seen in the civilized world. On the subject of wisdom, when Ben Bernake doesn't know how gold is priced (according to his own Congressional testimony), perhaps he also doesn't know when to ease off the money printing pedal. Now my comments on Social Security , sure to elicit a flood of howls from proponents of big government. 4) These proponents derided even modest attempts to privatize Social Security under George W. Bush.

I receive Social Security benefits myself and I find them helpful in bearing my other tax burdens in retirement, but if Social Security is such a great system, why isn't it voluntary?

If I had been allowed to invest my Social Security contributions in the private market instead of sending them to the Feds I'd be receiving six to eight times the benefit from those same contributions even with all the market shocks thrown in. It isn't voluntary because politicians don't want you to know this salient fact. For proof I refer you to Chile, a country that discovered the wonder of compound interest back in the 1980s after removing the socialist government of Salvador Allende.

His successor, Gen. Augusto Pinochet, although a brutal military dictator sensed a need for economic reform and brought in Milton Friedman and his “Chicago Boys” that advocated privatization of Social Security, reformation of the tax codes to encourage business and are now embarrassingly (for us) ranked ahead of the US in economic freedom.

Further evidence is provided by Fairtax advocates who remind readers of the Galveston experiment when in the early 80's the Federal Government briefly allowed voluntary participation in Social Security and Galveston, Texas along with a few others opted out and reaped huge windfalls for retired employees while not burdening taxpayers with unsustainable pension increases now being experienced by many cities across the nation like Detroit, Merced, Bakersfield and even here in Volusia County.

Of course the Feds quickly realized they would lose control of a large money pool and rescinded the order before the general public caught on. Successful Modern societies are based on a proper mix of private enterprise, property rights, the rule of law and certainty in tax and regulation policies. Right now the US is lagging behind and it shows in our fallen rankings among economically free countries according to the Fraser Institute. From a ranking of 2nd in 2000 we are now 17th based on current data.

The implementation of an unpopular Health Care Law along with an education system dominated more by union dues than by concern for educating children will accelerate this decline. Winston Churchill once said, "Americans will always do the right thing, after exhausting all other possibilities."

Let’s hope that we elect leaders of the future on the criteria of Martin Luther King Jr. On the content of their character, rather than their gender or skin color.

Ed Connor
Volusia Tax Reform
Ormond Beach, FL
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Short Bio

Ed Connor is a board member of the Volusia Tax Reform and of the Florida Taxpayers Union. He is a 1964 graduate of the University of Calif. (Berkeley) in Civil Engineering. He retired to Ormond Beach after a successful international career in design and construction of major golf course projects. He and his wife, Pam have lived in Volusia County since 1989.