Volume 10, Issue 31
Prior to the COVID 19 pandemic, the world’s economy had reached 90% integration in certain industries. Tax planning by corporations initiating a supply chain component in one part of the world, assembling a product in another part of the world, and distributing it for retail sale in yet another region of the world, required multi-year planning for capital tax management. The U.S. tax code is very complicated. It is layer upon layer of piecemeal actions taken by Congress to solve short term problems without consideration for long term implications. The idea of the tax code is that a billion-dollar corporation may pay little or no tax in one year due to accelerated depreciation, retained earnings, or one-time losses. In a succeeding year, they may pay recapture costs pursuant to profit sharing or dividend yields. The concept is that, averaged out over the years, they will pay the corporate per year tax rate prescribed by the participating sovereign.
The “Reduce Inflation Act” imposes a 15% minimum tax on billion-dollar corporations that goes into immediate effect next year. For corporations playing by the rules expecting to take losses next year, yet having to pay a 15% penalty for being a billion-dollar corporation, is, in one sense, confiscation of wealth. Progressives don’t care how complicated the tax system is or what is required to navigate a multi-faceted world taxing system. They only see a large corporation handling substantial amounts of turnover of currency and dictate that corporations must pay a minimum percent. That percent, by the way, is arbitrary. It’s not based on anything other than their need to pay subsidies for climate change. Subsidies that are unproven in results, speculative in theory, and not yet deemed desirable by the public. If citizens choose not to pursue the subsidies, the numbers fall apart, and the deficits become extraordinary. In a communist system, citizens would be commanded to participate in the incentives. Progressives have no idea what the appeal of their programs will be to the public. Yet, they state their participation as a foregone conclusion in their calculations.
A socialistic economic system and a free enterprise economic system can never be merged into the same economic equation. One must dominate the other. Free enterprise necessitates the freedom for citizens to do long term capital management planning and execute personal choices in pursuit of happiness. Socialism necessitates citizens committing their labor and capital to a totalitarian plan based upon government dictates for needs and outcomes rather than on the free economic choices of citizens or the unrestricted profits of their endeavors.
We have as a living example of this non-merging doctrine the Chinese modern economic system. Deng Xiaoping in 1991 initiated what he termed a hybrid free enterprise system calling it Chinese capitalism. The concept was based upon a communistic five-year state plan with elements of free enterprise at the local level in dealing with international trade. Money supply was determined to meet state economic dictates, not the needs, desires, or demands of the people. The Central Bank to this day does not know exactly the accurate velocity of funds statistics required for management of the money supply. The entire concept was flawed from the start and is now reaping the harvest of a distorted and incompatible pricing system. If there was any credence to the stability of the Chinese communist hybrid capitalistic model, then their currency would be tradable in a free-floating exchange rate with some other currency in the world. It is not. Transactions in the yuan can be executed, but it requires the backup of an exit strategy for underwriting by the dollar somewhere in the supply chain.
The five-room puzzle illustrated above is an example of a task looking for a solution that, on its face, appears simple but, in fact, is impossible. The challenge is to draw a single continuous line starting from any point breaking all line segments without crossing any line twice. It cannot be accomplished. I remember as a child trying to disprove this axiom. It was my first lesson in respecting rules and accepting axioms as absolute.
Renowned economist Dr. Milton Friedman once famously said, “Just like in physics, for every force in nature there is an equal and opposite reaction. And so it is in economics.” With government intervention, people will change their habits. Businesses will change their investments. Consumers will seek alternatives. Friedman used the illustration of an inflated balloon. You can press your finger into the balloon on one side and one of two things will happen. The balloon will expand and change shape subject to the pressure. Or, a weak spot in the balloon will be exposed and a bubble will protrude. In other words, nothing stays the same once the outside force or intervening event in the system is introduced.
Progressives think they can impose a 15% minimum tax, applying an outside intervening force to the economic balloon, and nothing else will change. They ignore the axiom of the five-room puzzle. Such a solution does not exist and the expected results will not be achieved.
The answer is not to manipulate or distort the system by unreasonable, ineffective government policy. The answer is to let free enterprise go. Turn it loose. And then tax it for programs deemed worthy by the democratic process of the citizens. People need help at times. The streets need to be paved. Health care needs to provided. Children need to be educated. The climate needs to be respected. The elderly need a comfortable retirement. And so on…. Tell the people what the needs are and let them decide how they want to fund it.
Why do politicians have such a difficult time telling the Truth? Even the Washington Post opined this week that the new economic package passed by the Senate is anything but a “deficit reduction plan.” The Truth is that some economic incentives may have merit. Explain to the people that we are recovering from a once-in-a-century pandemic, that we’re going to have to work our way out of this together. Tax the system straight up to subsidize the needs. Don’t distort the system seeking an Eulerian path that doesn’t exist. It is impossible to dictate outcomes by denying the axioms of absolute economic principles.
The government of United States of America manages the foundation of the world’s economic system. Mismanaging our money supply by expanding it too much causes inflation worldwide, not just at home. Imposing drastic measures short term on an integrated world system can have cataclysmic global economic results.
If the definition of insanity often attributed to Albert Einstein is, doing the same thing over and over again and expecting a different result, then believing in an Eulerian path for a solution that is proven not to exist, and continuing to defy recognizing the axiom of the enigma puzzle, is living in an insane, surrealistic world.
My name is Marc Nuttle and this is what I believe.
What do you believe?