Monday, February 14, 2011

A Better Solution than Budget Cutting

President Obama's proposed that we cut roughly one trillion dollars of spending each year from the federal budget. That's going to cause an enormous amount of pain for honest people just barely making ends meet, as well as exacerbate our already painfully slow economic recovery. There is a much better solution to our problems and it amazes me that our leaders are unable to see it.

The black market or underground economy is estimated to be larger than a trillion dollars; possibly as much as double that much (eight to ten percent of our gross domestic product--and even larger in most other nations). Now suppose we could heavily tax that activity. Then we wouldn't have to reduce spending as much, and could make crime a lot less profitable as well. It has all sorts of nice side effects too, like creating a huge disincentive to illegal immigration, all forms of vice, and even theft. Right now, a dollar stolen will buy more goods than a dollar earned honestly. That's a terrible state of affairs. Why don't we reverse that and make sure that a dollar earned buys more than one that is stolen?

It's relatively easy to do because there is nothing you can do with money (no matter how you get it) except to eventually spend it. Even putting it into the bank, or stock market, is a form of spending it. And if you don't spend it, it will evaporate slowly anyhow--we call that process inflation.

One way to accomplish this is to create a new kind of tax that only applies to money earned via the black market. There are a lot of different ways to do that. The easiest is probably a very high national sales tax, like 100%. It's easy because we already have the infrastructure at almost every point of sale to calculate it. Suppose that for every dollar of income that you reported, the government gave you a dollar's worth of national sales tax credit. Then no one who could report their income would ever have to pay that sales tax because having the dollar to spend also meant they'd have a dollar of credit too. But people working here illegally, or acquiring their income in ways that cannot be reported would not have the credit. Thus criminals would effectively be taxed at the rate of 50%--higher than anyone earning their money legally.

There are even better ways too, but they're not as easy to implement. The best way I can imagine wouldn't just solve the problem of taxing the black market, but would also protect us from exploitation by the people we do business with, help our doctors maintain our health, protect us from identity theft, and give us all a whole new source of revenue by allowing us to sell our consumption data (rather than allow banks and credit card companies to sell it without our consent and keep the proceeds themselves.) Effectively it's a universal transactor which is an entity that stands between us and the people we do business with. Only the universal transactor would actually know who we are. We pay it, then it pays our creditors ensuring that they cannot lose or sell information about us.

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