Friday, March 20, 2009

Weapons of Tax Destruction

We’ve been down this road before, but things are different this time. The last time Congress sought to institute a retro-active tax (1993), they needed one final vote to do it. So appalled by the gall of elected officials to turn the Constitution on its head, the very next election America showed the door to the Congresswoman who placed the decided vote.

Things are different this time. All America stands athwart with the AIG bonuses – legal contracts and other such annoyances aside. The electorate led by that bastion of purity, the Washington DC-based media – have thus proclaimed: “Gambling! There’s gambling in this casino!” And with that, they call for the heads of folks – be they incompetent or merely unlucky – who were, ultimately, just doing their jobs.

If Nancy Pelosi’s bill becomes law – and the tea leaves suggest it will – Congress will have created the ultimate Weapon of Tax Destruction. Worse, it may take more than one election cycle for the economy to recover from the ensuing chaos. Why? Things are different this time. Yesterday, half of the Republicans – a party that once bravely stood together behind Newt Gingrich in 1993 – crossed the principled divide and went native, joining with glee Pelosi and her band of Democrats.

Let’s look at the brief history of regulatory reform in the financial services industry over just the last 20 years or so. First, the government increases FDIC insurance in the 1980s, thus allowing banks free play with the House’s money. Bang! We’ve got the S&L crisis. Next, but for a few rogue traders (remember the “evil greed of Wall Street” mantra in the early 1990s) the government decided to severely restrict the personal trading activities of all mutual fund traders. So, what did the best traders do? They left the regulated mutual fund industry and, as a result, the unregulated hedge fund industry blossomed. And we all know where that led to.

I could go on, but if you made it this far, you already know the rest of the story. Things are different this time, but the results won’t be. Punitive tax rates – whether retroactive or not – destroy the incentive of creative people. Our economy’s a mess right now. Sure, creative people helped create this mess (but not without the help of – and maybe due to – a whole lot of other less creative people), but it will take those same kind of creative people to get us out of this mess. Washington’s villianization of this crowd, while playing to the animal instinct of the voting horde, irresponsibly puts the future of our nation at risk for the sake of a few populist poll points.

I have no misplaced sympathy for the banks who thought they could deal with the Great Satan. They deserve what they get. And the soon-to-be-overtaxed overpaid employees also deserve what they get – not for being overpaid, but for continuing to work in a company that sells its soul to the devil. Too bad. Wrong decision. So it goes…

Just like all those kindly homebuyers who thought they could borrow more than they could afford. Too bad. Wrong decision. So it goes…

But, what to do, what to do… That is the question.

Stay tuned for our next installment: Three Effortless Ways to Go Galt.

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