Mike Gravel’s campaign economic advisor making waves

This week, Businessweek has an article about Larry Kotlikoff, a Boston University economics professor and economic advisor to former Senator Mike Gravel during his 2008 presidential campaign.  Among other things, the economist is a supporter of a national sales tax to replace the income tax, a position which Gravel adopted.  Kotlikoff has a book coming out on February 22, called Jimmy Stewart is Dead, in which he advocates for a complete restructuring of financial regulations.  Businesweek explains:

In Kotlikoff’s scenario, banks would be shorn of their risk-taking functions. A deposit would be pooled with other deposits in a new kind of mutual fund, equivalent to a stock mutual fund but with all the money held in plain old cash so there’s no chance of not getting it back (though it could still lose value to inflation). That eliminates any reason for a panicky bank run. Mutual funds would supply loans, too. Already, companies raise money by issuing bonds, which are bought by fixed- income mutual funds on behalf of investors. Kotlikoff says loans could work the same way: Mutual funds would pool investors’ money and use it to make loans to vetted borrowers. That would cut banks out of the picture, except as go-betweens. The advantage is that if certain borrowers didn’t repay, there would be no systemic, global-economy-threatening crisis, like the ones that can occur when one bank goes down and drags others with it. Instead, the worst that could happen is that investors who funded a particular loan would lose part or all of their investment. Insurers couldn’t go bust, either, because they would no longer be on the hook for paying claims. People who wanted insurance would simply pool their money for a certain period, and those with verified claims would divvy up whatever was in the pot at the period’s end.

One side benefit: Kotlikoff says 100-plus regulatory agencies could be disbanded because financial firms would no longer have other people’s money to play with. They would be replaced with a single Federal Financial Authority whose main job would be to verify data supplied by would-be borrowers, such as income statements and the value of collateral.

At this point in history, it is being described as an unlikely scenario.  But there is hope for Kotlikoff’s vision.

Bank lobbyists, meanwhile, don’t even want to entertain the idea. The American Bankers Assn. declined multiple requests for interviews on the Kotlikoff plan. No member of Congress has taken up limited-purpose banking as a personal crusade.

Still, seemingly impossible schemes have become reality before. MIT’s Johnson likens now to around 1900, when the smart money said John D. Rockefeller’s immense Standard Oil trust was impregnable. Then came trust-busting President Theodore Roosevelt and muckraking journalist Ida Tarbell. By 1911 the Supreme Court had broken Standard Oil into 34 companies. Predicts Johnson, who has his own book on financial reform coming out soon: “The same thing is going to happen with regard to massive, too-big-to-fail banks.”

3 thoughts on “Mike Gravel’s campaign economic advisor making waves

  1. lynne

    Along with Prof. Kotlikoff, Elizabeth Warren and Joseph Stiglitz would be excellent replacements for Geitner and Summers. They were blowing the whistle while G & S were facilitating the mess.

    Also don’t know if this came thru before…
    I saw that you mentioned Senator Mike Gravel. Did you know that his “go against the grain” philosophy is well featured in the Academy Award nominated film “Most Dangerous Man”?

    I hope you get a chance to see the film and comment about it. It is as riveting as any Matt Damon spy caper and extremely relevant with our current war policy.

  2. GoodIdea

    We should repeal all taxes on income and property at all levels of government.

    We could replace all taxes with a national sales tax, consitutionally capped at 10% and shared by all levels of government: Federal, State and Local.

    Property tax are the most evil of all taxes, especially land taxes, but also improvements and personal property, and cause the worst and most damaging economic distortions. Being only local or state level taxes and not a federal tax just means that property haven’t had the IRS to make them worse, nor the appetite of the federal monster to increase their level.

    Income taxes are the most hated of taxes because of the IRS and the tax levels. Income taxes are the second worst form of taxation and also cause massive economic dislocations.

    Consumption based taxes are the least harmful, and may be tolerable in a one tax environment held to a maximum of 10% in the aggregate.

    Libertarians should pursue this economic plan as a step towards liberty and a chance to mend our broken economy.

    Of course, all taxes violate Libertarian principles, but, as an incremental step, abolition of all taxes and replacing them with a 10% capped sales tax, funding all levels of government, would be a good first step.

  3. Brian Holtz

    The reason economists say that a tax on land value is the “least bad” tax is that such taxes have no deadweight loss. Any tax on production or exchanges or movable assets causes economic inefficiency. A tax on these things causes a deadweight loss (i.e. allocative inefficiency) because people who would have more marginal benefit than marginal cost are not buying the good or service — just as a subsidy induces people to buy who impose more marginal cost than their marginal benefit. However, this effect of taxation does not happen when the supply of the taxed good is perfectly inelastic, as is the supply of land — more precisely, the surface area of the Earth. Sites cannot flee or evade taxation, and the available amount of them is not reduced when they are taxed. (When a tax is not on a good but rather on a “bad”, like pollution or congestion, it’s the very absence of the tax that causes allocative inefficiency, because external costs are not internalized.)

    Taxing land value is not only more efficient than taxing production or exchanges, but it is also less intrusive. All the government needs to know is who owns each plot of land and how much the unimproved land is worth. Appraisers and insurers make such calculations routinely, and one variant would have each land-holder self-assess as long as he’s willing to take any offer over his assessed value. There’s no need to audit anyone’s behavior, as with taxes on income/production/exchanges. You don’t even need to visit the site or look over the fence, as you do with taxes on land improvements or square footage. For illiquid landholders, taxes could accumulate as a lien against the property, capped at its market value, so nobody need ever be taxed off the land they hold.

    Land value taxes are naturally local, and so encourage Tiebout Sorting. If the the local mix of government services is too high (or too low) for your taste, or if they aren’t a good value for the LVT rate financing them, then you can vote with your feet. By contrast, income and sales taxes tend to get centralized at the state or even national level, because (unlike land) income and sales can flee to lower-tax jurisdictions. (New Hampshire is among the most free states, and gets the highest percentage of government revenue from property taxes. California finances its high government spending with high centralized state income taxes that rose after Prop 13 restricted local property taxes in 1978.)

    LVT retrieves the extra land value created by public services — streets, pipes, levees, police, parks. This creates pressure to defund public services that do not actually add value in the free market for land.

    LVT turns out to closely model how consensual private communities tend to govern themselves. Malls, business parks, hotels, condominiums, homeowners associations — all tend to “tax” their tenants not according to profits or revenues or inventory or improvements, but mostly by site value (for which square footage is often a good proxy).

    LVT imposes a built-in ceiling on government revenue. Critics of land value taxation claim it wouldn’t raise enough revenue because ground rent is allegedly only a small fraction of GDP. That sounds like a good thing to me. If government revenue is restricted by definition to ground rent and fees for polluting/congesting/depleting the commons, then government cannot be nearly as big as when it is allowed to tax labor, production, exchanges, and all resulting products. Once you have taxation of people’s labor and exchanges and produced assets, there is no limit to what the government can take from you.

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