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December 31, 2004

Tsunami Aid Should Be Entirely Private

UPDATE 2005-01-07 22:16:45 UTC: The Ayn Rand Institute pulled its original article (which you can still read here, and I changed the link below) and replaced it with a different one, which I discuss here.

Matt Yglesias notes the Ayn Rand Institute's opposition to public tsunami aid and is puzzled by something:

Yet, strangely, the Ayn Rand Institute aside, you don't see many libertarians and conservatives sticking up for this view, though as we all know, all it takes for evil to prosper is for good men to do nothing. So where are the libertarian bloggers on this massive injustice being perpetrated by first world governments?

We're on vacation :) but couldn't resist this one.

I'm not puzzled by a lack of conservative opposition to public tsunami aid. Conservatives are largely altruists and do not have a principled opposition to forcibly redistributing other peoples' money in pursuit of a cause they consider to be noble. They begin by conceding the moral ground to their opposition and then try to argue "but we're not as bad as you think!" It's disgusting. (For example, there's much commentary about the fact that has raised almost $9M for the American Red Cross from 120K individuals so far, and the numbers keep rising.)

The lack of libertarian opposition is indeed troubling. But I'll throw my weight (such as it is!) behind this: the Ayn Rand Institute is entirely correct. Public giving is a euphemism for forcible redistribution. That's not giving, it's taking! Property rights are not trumped by appeals of "it's for a good cause!"

I opposed public disaster aid after the Florida hurricanes and I oppose public disaster aid for the tsunami. Private giving is the only morally acceptable form of giving. (And "private" is a redundancy; non-private giving is theft, not gift.)

What are bloggers talking about, instead of the moral outrage of theft cloaked in caring? Stinginess. Conservatives rush to point out that the United States is much more generous than the $35M in announced public aid. Interestingly, one of the commenters (10:48) says that the $35M figure is all that's left in the aid budget, and that more couldn't be pledged without an act of Congress. If this is true, I unfortunately expect Congress to significantly raise that figure. Another interesting comment (10:42) is that the cost of our naval deployments to aid relief efforts is $2M-$3M per day, which isn't included in the $35M.

It's usually considered unhelpful to complain but not offer any solutions, so here goes. Currently, the US military is the only organization on earth with the logistics might to get aid from "here" to "there" in time to make a difference. I wish there was an alternative to using the military, but I don't see one. The best opportunity I see with current resources would be for the US military to be available as disaster relief mercenaries — with relief operations funded by private giving, and only insofar as these missions wouldn't create a threat to national security.

December 28, 2004

On Vacation

I'm going on vacation soon, and I'm going to be very busy until I leave, so this is your notice that I won't be blogging much (if at all) until roughly January 7th.

My how-to on MIDI rendering will have to wait until after vacation. So will my long-promised but oft-delayed article praising unearned income. Sorry, but I realized I ran out of time to get things done.

I might sneak in a post about New Year's resolutions before I go.

One noteworthy thing before I go. I got my new credit card today and promptly made a satisfying 0% purchase. "Was it a pizza?" Yes! You know me too well.

Erik, I realize this means you'll be giving me a hard time about joining the Dark Side and regularly using credit instead of cash. That's okay. After all, your car only has two doors! … I have to cut you some slack.

December 26, 2004

Ho Ho Ho

Merry Christmas to me. I've been busy. I've found a partial solution to my audio bleg, and now I'm able to render MIDIs into WAVs, with the sound of several different pianos.

It's an ugly process and I have a few piano fonts I haven't gotten to work at all yet. But I can do it and make files that sound reasonably good. (When considered distinctly from my playing ability.) I've spent basically all of my time at the piano, trying to make a recording that wasn't awful, or at the computer, experimenting with conversions.

I'll write up the process sometime over the next few days and post a tutorial.

I'll get back to blogging soon, I hope. I don't think I've been blogging significantly less than usual, but it's felt that way because I haven't been reading very much lately, either. But I'll open the ol' mailbag for a bit, even if my commentary is brief.

Don sends this article about stock option accounting:

Accounting theory has not embraced "triangulation" measurement concepts. In the accounting model developed over 500 years, the trader or entity has always been regarded as the center. This view has led to one- and two-dimensional accounting conventions and standards. The outcry to expense stock options is based on an attempt to capture a triangular transaction (involving the employee, the company, and the shareholder) in a two-dimensional accounting model that is not capable of presenting it accurately. Accountants must recognize and develop new tools necessary to carry us safely beyond the horizon.

Yes. Exactly. I must comment on one aspect of the article, where it explains FASB's reasoning in favor of expensing:

No one would argue that if a company issued shares for cash, and gave the cash to an employee, then the cash given to the employee should be expensed. Now, if the same shares are instead given to an employee who sells them for cash, all parties are put in the exact same position. Therefore, the accounting should be the same. Thus, the value of the stock should be expensed.

In the past I've criticized this argument by saying that this sort of expensing is creating sham cash transactions. I can be more precise: This sort of argument confuses the balance sheet with the earnings statement. In very broad terms, the earnings statement is about transactions and the balance sheet is about assets. When the scenario shows no difference in final assets, it is the balance sheets that should be alike — not the earnings statements. If the final assets are acquired through different transactions, then the earnings statements should differ. Accounting should highlight the differences between stock or cash transactions, not obscure them!

Sarah writes to say I'm a humbug (I paraphrase) because I would get rid of religious holidays for government employees. Guilty as charged.

More seriously, figuring out what to do with holidays is a real issue. I think the scope of the problem is vastly reduced by privatization — e.g. I don't have to worry about making postal workers work on Christmas, because I'd privatize the post office. But there will still be some large number of people who wouldn't get those holidays anymore. But it occurs to me that these kinds of jobs already require people to work on holidays. Prison staff can't all take a holiday at the same time. Neither can police officers. Perhaps things wouldn't be so different, after all.

Here's a delightful story about Christmas shopping, a search for toy guns:

I was greeted by a gruff bearded man. He could smell the panic on me, like a grizzled sergeant can smell it on a soldier in his first battle. "Something I can do for you, son?"

"Yes. Please. Please, for the love of all that remains good about America, tell me that you carry toy cowboy guns. Just a couple of cowboy guns is all I'm asking for. Toys R Us doesn't have them, Wal-Mart doesn't have them . . ." My voice trailed off.

You must read it.

There's more trouble at the UN. Kofi Annan says the Darfur "plan" is "not working". (The first are scare quotes, the second are real quotes.) And the UN sex scandal in Congo is worse than I realized; there are apparently photos and videos. The journalists remarked that this scandal "threatens to become the UN's Abu Ghraib." No, let's be frank — this is much worse than Abu Ghraib. I'm listening for the cries of outrage from the same people who were so bothered by Abu Ghraib, but I'm hearing mostly crickets. I wonder why that is? Shouldn't Democrats — the self-appointed champions of the oppressed and exploited — be leading the charge? Here are the oppressed and exploited. What are you waiting for?

To end on a mirthful and seasonal note, enjoy several renditions of A Christmas Carol. These two are my favorite:

Ayn Rand: The ruggedly handsome and weirdly articulate Ebeneezer Scrooge is a successful executive held back by the corrupt morality of a society that hates success and fails to understand the value of selfishness. So Scrooge explains that value in a 272-page soliloquy. Deep down, Scrooge's enemies know that he is right, but they resent him out of a sense of their own inferiority. Several hot sex scenes and unlikely monologues later, Scrooge triumphs over all adversity — except a really mean review by Whittaker Chambers. Meanwhile, Tiny Tim croaks. Socialized medicine is to blame.

Yes, yes!

The Libertarian Party: It's pretty much the same as the Ayn Rand version, but about halfway through the story, we learn that Scrooge is an alcoholic wife-swapping embezzling weirdo who's wanted for back child support payments in several states. Even readers sympathetic to the Libertarian story throw up their hands in disgust and grudgingly seek out the Republican version.


December 22, 2004

Church and State at Christmas

There's been quite a public brouhaha this year about church and state and the religious vs. secular holiday season. It happens every year around this time, but this year it feels unusually aggressive. People aren't lamenting, they're angry.

And where there's dispute, your Cap'n is eager to take sides. As usual, both camps will be quick to distance themselves from him.

Last year I said a little about the holiday. This year it isn't the holiday that interests me. It's the whole "separation of church and state" kerfluffle.

The Constitution says "no religious Test shall ever be required as a Qualification to any Office" (Article VI) and that "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;" (Amendment I). That's it. By a plain reading, this simply bound the hands of Congress. Then Amendment XIV extended it to the States. Does a city's Christmas decorations constitute a "law respecting an establishment of religion"? I don't think so. But I'm not a legal scholar, and I understand many of the Founding Fathers endorsed a wider than literal interpretation of the text.

So let's forget about the actual law. Let's talk about theory instead. What principle should guide interactions between church and state? In a word, don't.

Any approach of government toward the realm of ideas is a cause for concern. Government is force. Ideas are reason. These two are are fundamentally immiscible. It's fine for government to recognize religion (or more broadly, ideology) but it absolutely must not endorse it. I'm uncomfortable even with the notion of government endorsing the ideas contained in (and elaborated from) its founding documents, although that's the most plausible exception.

Government should not be involved in education. At all. Not in the slightest degree. The only difference between religion and other categories of belief is faith; but I do not consider the method by which an idea is accepted to be relevant here. Government should not endorse ideology, period. The separation of school and state is a cause I morally and financially support.

Our currency should not say "In God We Trust" — that's a violation of the separation of ideology and state. (And, yes, it offends some atheists, in exactly the same way that "In No God We Trust" would offend some theists. Government shouldn't offend, it should be neutral and should simply protect the rights of its citizens.) The Pledge of Allegiance shouldn't be recited at all; the government has no business promoting allegiance, especially to a mere symbol. The whole thing is offensive, not merely the 1954 addition of "under God".

There shouldn't be any state-recognized ideological holidays, and certainly no government decoration for them. Shrink the public sphere and grow the private sphere. Private businesses and private schools are welcome to have religious holidays and to celebrate them however they please. Government should stay away.

Whenever I look at church/state problems, I don't see a stress between church and state. I see a state that's overreached its legitimate purpose and gone into ideology. If the state would pull back, the problem would go away.

December 20, 2004

Vioxx Needed

I asked my sister to write about how the Vioxx withdrawl impacts her.

I've suffered with arthritis since I was an infant. At the time I was one of the youngest ever diagnosed with Juvenile Onset Polyarticular Rheumatoid Arthritis. Over the years the doctors have put me on medication after medication in an attempt to ease the pain and slow the progression of the arthritis as it destroyed my joints. Into my adulthood and after years of being on Naproxen (an NSAID) my stomach simply couldn't take it anymore. With the risk of a bleeding ulcer creeping near, my Rheumatologist switched me to Vioxx (A COX-2 inhibitor). This drug has been my salvation. Not only was I able to get by with half the normal adult dose, I only had to take the pill once a day and it didn't bother my stomach at all.

Then out of the blue one morning I get up and all over the news I hear about Vioxx being recalled due to potential side effects on the heart. I was devastated and called my doctor right away. The only two options suggested at that time were Celebrex and Bextra. Both are sulfonamides, and I am very allergic to those types of drugs, so I can't take them. So after my doctor had a few days to research other medication alternatives I was given Voltaren. This drug is a NSAID and while it didn't upset my stomach it did nothing to ease the arthritis pain. After a week of barely being able to move I couldn't take it anymore. Next I tried Sulindac. This is also a NSAID and while it also didn't affect my stomach it did make my heart race and I felt very dizzy and short of breath within hours of the first dose. That was also the last dose I took. So I was back to Vioxx and feeling more normal after a few days.

Now I hear that Celebrex is being looked at for possible heart problems as Vioxx was. I'm sorry but this is just ridiculous. If Vioxx works for me and I know the potential risks then I should be allowed to get it!

Celebrex hasn't been pulled (yet), but if it is, we'll have lost another very valuable drug.

Yes, there are a large number of anti-inflammatory drugs. But not all people can substitute one for another. My sister doesn't have a good alternative to Vioxx. Despite the cardiovascular risks, it's by far the best drug for her. We wish Merck had not withdrawn it totally, and don't have a good plan for the day her current supply runs out.

December 19, 2004

Taking Advantage of Credit Cards

I know my shtick is economics, not personal finance, but humor me.

Credit cards. The kings of junk mail and telemarketing. Always a new offer. I'm one of the dwindling people that prefer cash to credit cards, for several reasons: Cash is private. Merchants pay fees on credit card payments. Cash is often faster — no waiting for a signature.

I use credit cards for online purchases and for some automatic billing (e.g. Dish Network) and for almost nothing else. When I get a credit card offer in the mail I usually throw it away very quickly. When I get a telemarketing call I tell them I wouldn't use their card anyway.

It's important to at least glance at the terms.

Sometimes my existing credit card companies will send me checks, so I could (say) make a mortgage payment on my credit card. Sometimes they're treated as cash advances; those are worse than worthless. Sometimes they're treated as purchases; I wouldn't use those either. Sometimes they come with a low fixed rate; those are interesting, but I toss them also. Once in a while they offer 0%, and those are very interesting. Last year I almost played the spread by using one of those checks to open a Certificate of Deposit at the bank. I didn't, because there were fees on the checks that would have consumed the majority of the interest I would have earned in the short (6mo) period the balance would be at 0%. A contributing factor was that I would have had to stop using that credit card during the period, because payments are always applied to the lowest-interest portion of the balance first. (I had some automatic billing on the card I would have had to move.)

I recently got an offer I couldn't find anything wrong with, and I'm taking advantage of it. A shiny new credit card with a one-year 0% rate on balance transfers and purchases, and no balance transfer fees. Now that's a card I can use… for everything, piling right up to the credit limit, for a whole year. And then I'll pay it off all at once and never be out a penny of interest.

It came at a good time; I had just made a large purchase on a credit card but the statement hadn't arrived yet, so I'll take advantage of the free balance transfer. I'll also move all my automatic billing over to it. I don't think I'll use my other credit cards at all, for a whole year. (Except maybe for airline tickets; I'll have to compare the perks on the new card vs. an old one.)

I'll go to the bank soon and set up a one-year CD for the amount of the card's credit limit and earn over 2% on money I'm borrowing at 0%. I'll come out several hundred dollars ahead. The beautiful ironic twist in this is that the company providing the credit card is my bank. They're going to loan me money and pay me for the privilege. ;)

UPDATE 2004-12-19 22:24:22 UTC: Greed is more powerful than irony. I found a different bank paying 2.9% on a one-year CD, so I went with them, as much as I would have enjoyed telling this story to the employees at my bank's branch office.

On the technology side, it's remarkable (… hence this remark) that I opened both accounts — credit card and CD — on the internet, over the weekend, without any need to wait for normal business hours. It's all in the hands of the Post Office now, to deliver the credit card to me and my check to the bank.

December 18, 2004

FASB Requires Option Expensing

FASB has decided that companies must expense stock options awarded to employees.

I've written about the issue of stock option expensing many times in the past, so I feel obligated to comment. (Also, I was asked…)

I have been and remain strongly opposed to stock option expensing. The cost of options is borne by existing shareholders, not the company itself. The company and its owners are separate entities and should not be conflated.

I also believe that sophisticated investors will not be impacted by the expensing requirement, because they will be able to simply back out the bogus expense as they evaluate a company. (Many of the arguments of the anti-expensing crowd, such as that investors or industries would be hurt, are embarrassingly bad.)

FASB has decided that options should be expensed, but it has not specified the method by which to expense them. This is very poor. All the expensing methods have problems, which is admitted even by expensing proponents. Companies will have to choose among bad alternatives. Worse, Sarbanes-Oxley (among the worst laws Bush signed into law) requires that CEOs and CFOs certify the accuracy of financial reports and makes them personally criminally liable for inaccuracies. If they believe, as I do, that expensing is bad accounting, they're in a Catch-22: If they sign it, they're lying — but if they don't sign it, they're breaking the law. That isn't right.

(No nitpicking; yes, I'm assuming that the SEC will make FASB's recommendation a requirement, although that hasn't happened yet.)

If I was a CFO, and I had to expense options, here's how I'd do it. (This draws from the last of my earlier links.) I would expense options at the time they are exercised, not at the time they are granted, and I would do it by inventing two sham transactions: First, a cash payment to the employee for the spot price minus the strike price of the options. Second, the purchase by the employee of newly-issued shares for the full spot price. The result will be a cash expense ($spot-$strike) on the earnings statement and an increase in the company's assets ($spot) on the balance sheet. I regard the cash expense as entirely fake, and the portion of the asset increase beyond the strike price as also fake.

In the end, that would recreate the actual effect of exercised stock options: stock dilution to existing shareholders and an increase in the company's assets ($strike) … and the sham expense and sham asset increase, both equal to ($spot-$strike).

Yes, it's lying. But that's what FASB wants.

When I proofread this, I found and fixed a serious error. Take my expensing method with a grain of salt, I haven't spent much time thinking about it yet.

December 15, 2004

Audio Blegging

I need help. <rimshot>

But seriously, I'm in a pickle. Help me, I'm stuck in a giant pickle! <rimshot>

Ahem. I finished learning how to play some music a while ago and I've made a decent-quality MIDI recording.

I want to burn it to CD. You might think that's easy … it's not. I don't have a wavetable soundcard. I want to do it in software. There's only one instrument, a piano. But I've spent hours searching, downloading and installing software, discovering it doesn't do what I want or is too confusing to use, and getting annoyed.

I've tried software that turned out to be for creating loops. I've tried software that is missing essential configuration files. I've tried software that says you have to acquire other files first, but doesn't tell you where to get them. It's ridiculous.

Can someone point me to some software and some documentation? Nothing complicated. I want to do one thing: make an audio CD from a MIDI of a piano performance. I do not want to embark on a months-long journey of discovery about the intricacies of digital audio and synthesis. I want to spend about ten minutes on this. I want to push a button and have it work. Why is this so hard?

Explain it to me as you would a child.

It doesn't have to be free. I'll pay real money for something that works. But after my experience so far I'm extremely wary of buying before trying; up to this point I've had nothing but lemon-flavored software. The best I've done has been to produce a totally silent .wav of the correct length. I haven't even gotten to the point of worrying about the synthesis quality. Sigh.

December 13, 2004

Auto Incentives

I'm in the market for a new car. I've been saying that for a year already and haven't bought one yet, but let's ignore that and play along for a while.

As a Buick Regal driver ("you drive an old people car!?" — average age 68!) I'm looking at the new LaCrosse, which replaces the Regal. GM recently started advertising the vehicle on television, which miffed me a bit because (1) I gave them my contact information on their website months ago, inviting them to market directly to me, but they never did and (2) the Chevrolet commercials from last January were much better.

Having never purchased a new car before, I need to figure out all these crazy incentives, and since I'm going to do the math anyway I might as well post it as a public service.

The LaCrosse incentives (for the Western U.S.) are… confusing. The generic GM incentives page breaks it down a bit better. Between the two of them, I hesitantly conclude that the real offers are between:

  • 0% financing (36mo) and $1000 "GMAC Bonus"
  • $2000 with an unknown breakdown between "Bonus Cash" and "GMAC Bonus"

I think the "GMAC Bonus" applies only when financing through GMAC. However, I'm not interested in financing a vehicle unless I could do it at 0%; otherwise I'd be inclined to buy it outright and wouldn't get that bonus. Assuming the second offer breaks down as $1000 "Bonus Cash" and $1000 "GMAC Bonus", my options are between 0% financing and $1000 off, or buying outright and $1000 off. This one's easy — I'll take the 0%, thanks, and let my savings earn interest.

Confident that it cannot possibly be this straightforward, I want to solve for the general case, so I can go in armed with a calculator and get the best deal no matter what the details are. I'm also curious to know exactly how much benefit there is to 0% financing given my meager understanding of the incentives. Gather around, children, this is why we study mathematics in school. Let's define some variables:

  • p = price of vehicle before incentives ($)
  • d = discount if buying outright ($)
  • s = interest rate earned on savings (%)
  • r = interest rate if financing (%)
  • t = term of financing (years)
  • o = down payment if financing ($)
  • x = discount if financing ($) applied to principal
  • y = loan fees ($) rolled into loan

Assume my savings is equal to p. If I buy outright, I pay (p-d) and earn interest on the remaining d of my savings. If I finance, I need to keep simultaneous track of the balances of both the loan and my savings. Every month each is adjusted for both the car payment and the interest on the respective accounts. The loan is for (p-o-x+y) over t years at r% while my savings (p-o) earns s% and is drawn from over t years to make the loan payments. The option I should choose is the one that maximizes my savings balance at the end of the term.

The payment amount for a loan is (P(1+r)nr)/((1+r)n-1). In my terms, and for monthly payments, ((p-o-x+y)(1+r/12)t*12r/12)/((1+r/12)t*12-1).

The amount of my savings balance if I finance is (p-o)(1+s/12)t*12 - payment(((1+s/12)t*12-1)/(s/12)). If I buy outright, it's d(1+s/12)t*12.

That's the general solution. Now I'll plug in a few values I know.

  • p = $32820 (Sticker price with gobs of options; a worst-case figure)
  • s = 5% (I'd actually use my savings to pay principal on my 5% mortgage)
  • r = 0%
  • t = 3 years
  • d, o, x, y = unknown

At a 0% interest rate we immediately hit a divide-by-zero problem in the general equation. No matter, 0% is the straightforward case where we don't need fancy math. If I finance, the monthly payment would be (32820-o-x+y)/36 and my final savings balance would be (32820-o)1.1615-(payment*38.7534).

If I buy outright, my final savings balance would be d*1.1615.

If I make reasonable assumptions of d=$1000, o=$5000, x=$1000, y=$268.20 (1% of the loan amount), I'm looking at monthly payments of $752.45 and a financing final savings balance of $3152.16. Buying outright, my balance would be $1161.47. Over three years, I'm $1990.69 better off — that's over $50/mo!

(However, my actual benefit would be lower. I couldn't actually put all the savings into my mortgage because my current discretionary income wouldn't cover the car payments. I'd have to keep some savings in the bank to draw from, earning … let me see … 0.9%. But those details are beyond the scope of my purpose here.)

There you have it, kids. Through the Wonders of Math™, I have quantified the benefit of 0% financing over buying outright, and have the tools to quickly make comparisons of this nature under different conditions — viz., for different vehicles, incentives, interest rates, and loan durations.

Math. It's like money in the bank.

Somebody cut me a check for public service.

UPDATE 2004-12-13 07:33:30 UTC: Added the link about the average age of a Buick owner being 68. Am I not in the Buick demographic, or am I forty years ahead of my time? :)

December 09, 2004

Problem in the Fair Tax Act

I read the Fair Tax Act of 2003 (H.R.25).

Okay, I read the first couple sections, then realized how long it was, and skimmed the rest. My purpose in this was to see how well it addressed my general concerns about a consumption tax. But it was a very fast read, so take this with two grains of salt.

In general, it's pretty good. It comprehends the difference between productive and consumption expenditures, including the taxation of services (which I forgot to mention in my earlier article). It provides for a tax credit for business purchases that were taxed at retail but economically should have been. It understands mixed-use (business and consumption) of property. It ensures the tax on any item will be collected exactly once. It says purchases for investment purposes will not be taxed, but I'm not clear on how the determination will be made.

I'm nothing like a tax expert, or a legislator, but color me impressed by it. Except for one glaring thing. It hugely screws up the transition from income to sales tax, allowing double taxation. Here I pause to be slightly embarrassed, because I didn't say anything at all about the transition in my earlier article. I wasn't thinking about that aspect of the matter yet.

Dollars that you hold in cash (or, say, in a bank account) are dollars that have already had income tax applied. It would not be correct to tax those dollars again with a sales tax. That would be double taxation.

In general, this applies to non-cash assets also. And I don't know how to fix it. Give people a sales tax credit based on their net worth (excluding pre-tax accounts) at the time the sales tax goes into effect? That sounds, um, complicated. There are cash-flow problems for the government, too — by moving from income to sales, it collects tax "later", so how is it going to fund operations until such time as everyone spends through their net-worth-based tax credit?

I also couldn't figure out if education (tuition) was exempt from the tax or not. It shouldn't be. But I couldn't decipher Title II section 201 subsection 2(a)(14)(B)(ii)(IV). If you can do it, good for you, and please let me know. :)

December 06, 2004

Opera Supports RSS Feeds!

I upgraded my web browser (I use Opera) a few weeks ago and just today discovered that it has an integrated newsfeed (RSS) reader!

I noticed this in a rather roundabout way. I was investigating some Perl uninitialized variable warnings that started showing up this month, and sure enough I had made an off-by-one error in a month calculation. Months are 01-12, my array was 00-11, you get the idea.

It turns out the bug was in my RSS generation, so I've been marking everything with the wrong month ever since I started doing RSS. Oops. But the point is that after fixing the bug I had an occasion to click on my own RSS link (it's the blue "RSS" box over on the sidebar…) and when I did, Opera automatically subscribed me to my own newsfeed.

An RSS entry suddenly showed up in my e-mail status box, and sure enough, there's a Newsfeeds section in the organizer. Color me impressed. I never got into the trend of reading blogs via RSS because I didn't want to bother with installing software for it. Now that particular problem has vanished.

I only publish excerpts, not full articles, via RSS. And the text doesn't look quite right because it doesn't fetch my style sheet. But there's always a link to the real post, so RSS would be a handy way to at least know when I've posted something new. (I'm not doing anything in RSS for updates to older posts, though.)

December 05, 2004

More on Consumption Tax

Okay, after I wrote about a consumption tax in the abstract, I started searching around to figure out what the Actual Plan is supposed to be.

It's the Fair Tax Act of 2003 (H.R.25).

I haven't read the legislation itself, but I've picked up the gist of it from reading around.

I haven't been very successful searching for cogent arguments against it. … I was going to link to a couple and point out what was wrong with them, but I started doing it and then decided I just don't care to complete the task. If I find something that is worth reading, I'll link to that, instead. That way I'm not wasting my time writing about the bad ones, or yours in reading them.

Leukemia Pill

What a headline: Leukemia pill has 86 percent remission rate

The new drug, made by Bristol-Myers Squibb put 86 percent of patients who tried it into remission — meaning signs of their cancer disappeared, the researchers said.

Thank you, Bristol-Myers Squibb. I hope this drug continues to prove safe in clinical trials and that you bring it to market and make a killing pile of money on it.

Random Thoughts on a Consumption Tax

I haven't thought about a consumption tax comprehensively. But I have some things that are worth saying even if they're incomplete and ill-organized. (You see, I was thinking about it in the shower, and if I don't write it down, I'll forget…)

I don't like any taxes. But from an economic standpoint, I have to prefer taxes on consumption over taxes on income. Income taxes reduce the incentive to work, and taxes on investment income reduce the incentive to invest. Both of these are powerful brakes on economic growth. A consumption tax also reduces economic growth, but primarily because the government wastes money, not by damaging incentives.

I haven't read anything approaching a specific proposal for how the tax system of the United States might be replaced with a consumption tax. But I worry about how many ways it could be done badly. I'm normally not a better-the-devil-you-know kind of person, but it would be very easy to screw up the implementation and make it a terrible mess. (Even worse than the income tax? You've got me there. Even a botched consumption tax could wind up better than what we're living with today.)

Economically, a consumption tax means a tax on consumption expenditures — all purchases that are not made for the purpose of making money. If you buy nails to hang a painting in your home, that is a consumption expenditure. If a business buys nails for use in constructing a boat it will subsequently sell, that is not a consumption expenditure.

I worry that the consumption tax has been floated as a national sales tax -- sales tax ≠ consumption tax. The nails purchased by the boat-building company are productively consumed, consumed for the purpose of making money, so they are a productive expenditure and should not be subject to a consumption tax. If a national sales tax were used, would it have exemptions for productive expenditures? How would it be administered — would purchasers be required to prove how the purchase will be used?

If a sales tax doesn't have an exemption for productive expenditures, it will create an economic incentive for potentially wasteful vertical integration of companies as a way to avoid the need to buy basic supplies at retail (where they would be taxed).

Investments should also be exempt from a consumption tax. But here the line becomes unclear. A gold bar is clearly an investment and shouldn't be taxed. But what about jewelry? Numismatic coins? Expensive paintings? When do these things become more consumption goods and less investments? And who decides?

What about goods that go through many hands, such as a used car? Would its sale be taxed only when it was sold as new, or would it be taxed again when it as sold as used? It should be taxed only once, because the tax is supposed to cover the entire consumptive value of the good. Taxing it multiple times would be distortionary by making later transactions more expensive, and would also double-tax the (remaining) consumptive value of the good. However, a car rental company's used fleet vehicle should be taxed if it is ever sold to the public. But not if it's sold to a business. Does a system that tries to incorporate all this sound complicated, yet?

There will be enormous political pressure for exemptions that shouldn't exist. Food, medical expenses, and real estate are either so important or so expensive that politicians will be heavily pressured to make them tax-exempt. A true consumption tax should cover these things. Owner-occupied housing is, economically speaking, a consumption good -- because it's purchased for purposes other than making money. Housing is particularly interesting, because investment properties should not be taxed (I can hear the screams of unfairness already!) and because its character can change over time: If rents are too low, the owner might decide to live there instead of renting it, changing what had originally been a productive expenditure into a consumption expenditure. How would that be taxed? One obvious idea is to adjust the tax for depreciation. But what of the reverse situation, where a home becomes an investment property when the owner moves out but doesn't sell? They've paid too much tax; do they get a rebate?

Again, I haven't read any specific proposals. But there are a lot of ways to screw it up. Let's be cautious.

December 02, 2004

Unplanned Break

Sorry for the recent unannounced interruption in blogging. I was sick, and understandably didn't feel like blogging. It would be convenient if I knew in advance when I was going to get sick, so I could write a quick "I'm going to be sick" post, but I don't expect germs to alter their nature for the sake of my convenience.

I'm feeling much better now. Not back to 100%, but enough to blog again. I updated my UN condemnation in response to some reader mail, and am working on a post in praise of "unearned" income. If Bush's "replace the tax system with a national sales tax" trial balloon catches any wind [kite, not balloon? - ed.] I'll probably write about that too.

Tiny Island