Lawson for Congress

It started last week with the Freddie and Fannie bailout, where our Treasury ignored our national interests and bailed out foreign central banks, PIMCO, and other sophisticated investors. What was wrong with this story? Most importantly, the Treasury offered public funds to guarantee debt that has never had any government guarantee, implicit or explicit:

Read the bold print on that prospectus. Should there be any confusion here? If homeowners start falling into default and not paying their mortgages, and the rate of default exceeds Fannie’s ability to make payments to its lenders, is there any reason to believe that the holders of those mortgages should expect our Treasury to make up the difference?

As Jim Rogers notes, in the wake of our Treasury volunteering our liability for Freddie and Fannie’s debt, we are perfecting the art of welfare for the rich:

While some well-meaning Americans attempt to rationalize this bailout as a “necessary evil,” the unintended consequences are beginning to reverberate. First, our government’s destruction of Freddie and Fannie’s preferred stockholders has closed the door on preferred stock for other at-risk organizations who might have wanted to use that route in attempts to raise capital. As Denninger noted:

If you’re a bank or other financial and need to issue (or have outstanding) preferred stock, you’ve got a problem - a serious problem.  The Federal Government just declared out loud that it will declare that stock essentially worthless any time they think there’s an accounting irregularity, and they will value things as they - not GAAP - sees fit.

Here’s what happened to you if you held just one of the many series of Fannie Mae preferred (the others are all essentially identical)

How about that - $13 to $2.50 in one fell swoop.

That’s an instantaneous 80% loss.

Now think about this from the perspective of, say, Lehman.  You have a capital problem.  You’d like to go out and issue some preferred stock - essentially a junior debt issue, where you pay interest in exchange for money, and perhaps its convertible into common stock at some point in the future.

However, you have a bunch of Level III assets, which might include mortgage bonds - not Agencies, but private-label stuff and commercial real-estate backed.

As a potential buyer of these securities, are you going to take this sort of risk?  Remember, Fannie and Freddie did not file bankruptcy; even in a bankruptcy, you’d likely get something as a preferred stockholder!

But in this case you got essentially nothing as a result of an (arguably) unlawful “taking” of your ownership interest in the firm!

My opinion?  This move just destroyed all preferred stock issues going forward for financials in the United States.

Paulson attempted to argue just the opposite in his press release:

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

Right. Well-capitalized institutions. That obviously doesn’t include Lehman, which is on the chopping block this weekend.

So now what?

Well, many observers believe that this unwinding of our banking and financial system is just getting started, with damaging consequences. Representatives from the New York Fed and major banks are working this weekend to orchestrate an orderly resolution for Lehman Brothers. Such meetings sound refined and sophisticated, although the situation is best described as a giant game of “chicken,” with our banking system hanging by a thread.

If Lehman fails suddenly, it is likely that its collapse would bring down its trading partners, as well. As Roubini notes:

If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

The potential for a widespread meltdown has brought banks to the table, each eager to avoid a similar fate. However, while banks are collectively motivated by self-preservation, no one individually wants to pay scarce money for Lehman’s questionable assets. So the “chicken” comes in when the banks look (again) to the Treasury and U.S. taxpayer to guarantee their purchase, thus bailing out the system and allow the status quo to continue:

But suitors like Bank of America, worried about the risk of buying an ailing financial institution like Lehman, want the government to step in with a package similar to what was offered to J.P. Morgan when it bought Bear. Then, the federal government agreed to absorb as much as $29 billion in losses. In seeking a Lehman deal, Bank of America Chairman and Chief Executive Kenneth D. Lewis is likely to face a tough sell to investors if he doesn’t secure some federal government backing.

As of this evening, no deal has been reached. Of course, the goal will be to reach a definitive plan by Sunday evening, before Asian markets open. We wouldn’t want to upset the new owners.

What can Americans do about our current predicament?

The first thing we need to do is educate ourselves about how we arrived at this precipice. It’s taken us a long time to get to this point, but the pressures have been gradually building since our current money and banking system were established in 1913.

One must first understand the system itself: a debt-based money system combined with fractional reserve banking. Once one understands how the system works, it becomes clear that our entire economy rests on an unstable foundation — and that the turmoil we’re experiencing is not unexpected. In fact, the system is working exactly as designed. As was noted by Robert Hemphill of the Atlanta Federal Reserve Bank in 1936:

“If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
- Robert Hemphill, Federal Reserve Bank of Atlanta.

Our money and banking system is the antithesis of a “free market” — it is a private monopoly managed for the benefit of the banking system itself. Are you surprised that inflation has been attacking American families, and that even two jobs are often insufficient to pay for gas, groceries, healthcare, and save for retirement? Are you surprised that our goverment, in attempting to “help,” has taken on a $9.6 trillion national debt with over $50 trillion in long-term liabilities that we cannot afford?

Based upon understanding the system, we shouldn’t be. Again, it’s working exactly as designed — although it’s been pushed past the limits of sustainability, and is nearing tragic absurdity.

It’s time to change the system. Congress unconstitutionally delegated control of our money to the Federal Reserve, a private central bank, in 1913. Congress can, and must, return control of our money to the people.

We had a standing-room crowd at the I.O.U.S.A. premiere in Raleigh, North Carolina this evening. Two auditoriums were sold out — both the one sponsored by our campaign, as well as the regular showing. The movie provided an excellent overview of the “fiscal cancer” that David Walker, former head of the Government Accountability Office (GAO), has been courageously discussing for the past several years. The discussion about addressing these issues, however, is just beginning — and will be much more controversial.

If you missed the movie, there are some key excerpts available on YouTube, such as David Walker’s descriptions of our four deficits:

As an example of leadership deficit, consider how Congress has been abusing the trust of our senior citizens by raiding the Social Security trust fund every year:

So how big is our “fiscal hole”? David Walker explains:

After the movie, we watched a live Town Hall discussion from Omaha, Nebraska, moderated by CNBC’s Becky Quick and featuring panelists Warren Buffett, CEO of Berkshire Hathaway; William Niskanen, chairman of the Cato Institute; Bill Novelli, CEO of AARP; Pete Peterson, senior chairman of The Blackstone Group and chairman of the Peter G. Peterson Foundation; and Dave Walker, president & CEO of the Peter G. Peterson Foundation and former U.S. Comptroller General.

The best part about the event is that we had a solidly bipartisan crowd. As such, there was room for everyone to be offended: For example, some Republicans were offended that the Clinton years were painted with such a glowing brush, as spending restraint coupled with a growing economy caused the federal debt to decrease for a change (unless you count the fact that Congress spent the Social Security surplus, of course). Some Democrats were offended by the movie’s downplaying the effects of allowing the Bush tax cuts to expire — such a step will only deal with 10% of our fiscal hole.

There is, however, bipartisan agreement on two critical points:

• We need change in Congress. The biggest applause in our theater during the Town Hall discussion was after Pete Peterson’s assertion that our founders never intended a government run by career politicians. (David Price, take note. After 22 years in Washington and accumulating a healthy Congressional pension, you are a career politician.) Bill Novelli, CEO of AARP, also received resounding applause for his comment that our two party system is “toxic”, and partisan bickering is one of the biggest impediments to meaningful dialog.
• We cannot keep doing what we are doing. Current trends for public debt, private debt, foreign trade balances, and Medicare/Social Security obligations are unsustainable.

The second point was driven home by the movie, and clearly emphasized by David Walker during the Town Hall discussion. In fact, the oddest moment of the entire evening was when Warren Buffett began his comments by complimenting the movie as well-done, and then stating he was going to provide a more optimistic “Pollyanna” perspective. He then proceeded to make the claim that our overall situation is not that serious, since our massive future obligations can be paid for through “the pie getting bigger.” In other words, we can “grow our way out” of the problem.

At that point, the theater’s cognitive dissonance was so thick you could cut it with a knife, and it was clear that a showdown was just around the corner. David Walker did not disappoint, and adroitly yet diplomatically smacked down Warren Buffett’s erroneous assertions. After noting that he has tremendous respect for Mr. Buffett, Mr. Walker reminded everyone that the projections of looming bankruptcy discussed in the film already take GDP growth into account. Assuming traditional growth rates, we cannot grow our way out of this problem. Of course, if growth does not meet projected expectations, things could be worse, and sooner.

Importantly, the Town Hall discussion did attempt to spark some debate about how to fix these problems. Where debate did arise, however, its outcome was entirely too predictable. For example, William Niskanen, chair of the Cato Institute, proposes privatizing a portion of Social Security so that individuals can control their own retirement savings and seek higher returns than our insolvent Social Security system will provide. At the same time, he wisely counsels us to stop government bailouts — the government cannot, and should not, prevent businesses or individuals from making bad investments and losing money.

The counterpoint was provided by Bill Novelli of the AARP. He’s against privatizing Social Security — how do we prevent newly empowered savers from putting their nest egg into Freddie Mac, Fannie Mae, Bear Stearns, and Lehman Brothers stock? While Mr. Niskanen is wisely advising us to stop relying on the government to “bail us out,” how can the average American truly “save” when deposit rates don’t keep up with inflation, and beating inflation requires paying the financial services industry for the privilege of putting our savings at risk in volatile markets that have turned into casinos for the highly-leveraged and well-connected?

So how can we cut the Gordian knot? I can envision three ways to proceed:

First, we could try to address the problems within the confines of our existing money system and expected ongoing budget deficits. As David Walker pointed out, the government has no money. It can take money from you in taxes, only to provide benefits to you somewhere else. It can borrow money, but that condemns us to pay the money back, plus interest. It can print money through the Federal Reserve, but simply printing money to meet obligations didn’t work for the Weimar Republic, and isn’t working for Zimbabwe. Within our current framework, we need to cut spending, cut entitlement benefits, and raise taxes to more punitive levels.

Alternately, we could stop and immediately seek debt counseling: end deficit spending, enforce a balanced budget, and fund our entitlement programs by refinancing our existing federal debt over a longer period of time while being more intelligent about what promises we honor, to whom, and when. You can think of this as a self-imposed and somewhat-negotiated “bankruptcy plan” where we tell our creditors that the rules are changing a bit.

A well-documented plan of this type has been proposed by Texas CPA Davis Jackson. The summary videos below are worth watching:

There is a third path to consider, however, in addition to the above. Given the severity of our situation, it is worth asking some questions about our money system itself, its history, and who benefits from preserving the status quo. I was impressed that the movie provided some education as to the nature of our money system, and the role of the Federal Reserve’s monopoly in “managing” the money supply. Most importantly, the selected clip of John Stewart’s interview with Alan Greenspan provided a rare (if deeply embedded) moment of clarity:

Watch the segment from 2:25 to 4:33. John Stewart asks the key question — if we say we live in a “free market economy”, why do we need a Federal Reserve to set interest rates? Greenspan waxes poetically about the gold standard for a while, and then answers: “To the extent that there is a central bank governing the amount of money in the system, that is not a free market.”

So, then, I ask a rhetorical question that’s often at the heart of the “liberal” versus “conservative”, or “left” versus “right” debate. If our money, which is the foundation of almost every economic transaction, does not exist in a “free market” but is instead managed by a monopoly acting in its own best interest, can we claim that any part of our economy is actually free?

That question, briefly glimpsed during the movie, has been asked before. In fact, a hundred years ago the “money question” was a topic of active discussion. The following quotation is from the book High Cost of Living by Thomas Cushing Daniel, published in 1912:

I urge all voters to apply this crucial test to their representatives before supporting them.

Make them commit squarely and unequivocally to these questions. Do you believe Congress should exercise its sovereign power as provided in the Constitution of the United States to create money and regulate the value thereof and control the circulating medium in the interest of the whole people? Or do you believe this sovereign power should be transferred to Banks of Issue?

Their answers will prove conclusively whether they are with the people or against them.

Or do you believe that Banking Corporations should issue a credit substitute and through it control the money and circulating medium of exchange of the people of the United States in their own interest?

Watch your presidential candidate carefully and see that he commits himself clearly on this vital question. It will be a true test of his honesty and fitness for office. Admitted ignorance on the monetary issue should not excuse him. The subject is as old as our government, and if he does not know enough about it now to answer these test questions, he is not qualified to fill the position he aspires to, and should not ask your votes.

Asking basic questions about our money system opens up additional possibilities to advance prosperity and liberty. Most importantly, it gets us moving in a direction towards following the Constitution, and having a government that honors its commitment to serve the people as opposed to special interests.

Solving this dilemma will not be easy, but it is possible. Pete Peterson noted that despite best intentions and claims of “bipartisanship” and “compromise”, someone will be hurt as we work to address these imbalances. To advance a just and sustainable future, we need principled leaders in Washington who will advance a Constitutional government that levels the playing field, and repairs broken systems that punish average Americans for the benefit of a few.

What are your thoughts on the challenges, and potential solutions?

I’ve written before about the ridiculous and self-destructive tax code that punishes creativity and productivity. Perhaps the best evidence of our present insanity is the Internal Revenue Code’s Section 409a, which was added by Section 885 of the American Jobs Creation Act of 2004. Not ready to read all 650 pages? Here’s the summary:

To amend the Internal Revenue Code of 1986 to remove impediments in such Code and make our manufacturing, service, and high-technology businesses and workers more competitive and productive both at home and abroad.

Of course, by now you’re wondering if this legislation is actually intended to create jobs:

Like a captivating novel, the 650-page American Jobs Creation tax act headed toward President Bush’s desk will make you want to laugh, cry and scream… Will it create new jobs? “Jobs for tax professionals, yes,” says Scharin.

So today, four years later, I received a helpful reminder from my friends at Hutchison Law Group reminding their clients that the deadline for Section 409a compliance is coming up at year’s end. To quote their dispatch:

The deadline for full compliance with Section 409A of the Internal Revenue Code relating to the deferral of compensation for employees and other service providers is December 31, 2008. We do not believe that the IRS will extend this compliance deadline. Therefore, it is crucial for those companies who have delayed reviewing their compensation-related arrangements to do so promptly in order to meet the deadline.

Why is the deadline important?

1. Employee satisfaction. Employees are subject to a 20% excise tax for failure to comply with Section 409A. Since Section 409A, among other things, governs issues regarding severance and bonuses, key executives and salespersons are especially likely to be affected.
2. The Company also loses. A company that fails to comply with Section 409A will have to correct or supplement its withholdings, which may involve the payment of penalties and interest. The company may also be unable to make certain representations regarding Section 409A compliance in its financing or acquisition documents, thereby potentially losing or otherwise adversely affecting a deal. Such representations are now routinely required in these types of transactions.

What does my company need to do now?

1. Inventory and review current documents for compliance with Section 409A, including:

• Employment agreements and offer letters
• Severance agreements
• Post-employment fringe benefits
• Change of control agreements
• Advisory Board arrangements
• Consulting agreements
• Bonus and other cash incentive arrangements
• Commission plans and arrangements
• Equity plans, stock options and stock appreciation rights
• Phantom stock agreements
• Restricted stock unit plans
• Salary deferral arrangements
• Deferred compensation plans
• Supplemental retirement plans (“SERPs”)
• Tax gross-up and indemnification arrangements

Certain types of plans are generally exempt from Section 409A, including:

• Qualified retirement plans, such as 401(k) plans and pension plans
• Most group health plans
• Bona fide sick leave and vacation plans
• Disability plans
• Death benefit plans, such as group life insurance plans
• Certain medical expense reimbursement plans
• Incentive stock options meeting the requirements of Code Section 422
• Most direct grants of restricted stock

2. Consider unwritten arrangements. Review all unwritten arrangements regarding compensation to ensure compliance with Section 409A. (This means, for example, founder arrangements, back of the envelope arrangements and unwritten sales commission plans.) Employers must reduce all unwritten arrangements that are subject to Section 409A to writing by December 31, 2008.

3. Devise a plan to bring non-compliant compensation-related arrangements into compliance by December 31, 2008. In many instances, this will involve drafting or amending agreements which may require Board approval. Employee consent may also be required. It is important to start this process now so that all available amendments or revisions can be made in a timely manner.

4. Devise a plan for internal controls and compliance. After all current arrangements are brought into compliance with Section 409A, it will be important to make sure that all future arrangements are compliant from the start. Therefore, processes and procedures will need to be adopted to ensure that compensation-related arrangements are reviewed for compliance prior to being used or adopted, and that any modifications or amendments to these types of arrangements are reviewed in advance for potential Section 409A consequences.

What does the above have to do with creating value for your customers, and your community?

It’s no secret that our economy is in trouble. How can we improve our current predicament?

American companies need freedom to serve their customers instead of increasingly byzantine tax codes crafted by lobbyists and special interests. Our nation’s attorneys and accountants need to help their clients on offense, instead of squandering resources defending against a government that doesn’t know when to stop.

Now are you ready to start a business? Or would you prefer to just look for a job, preferably with the government?

The price of complying with the current system is a barrier that prevents many from even trying to start or grow a business.

Yesterday afternoon I had a great discussion with Jim Babka, host of the weekly DownsizeDC Conference Call. Jim and DownsizeDC are on the forefront of the fight for good government, and I became an enthusiastic supporter after studying three of their common sense trans-partisan good government solutions (is that too many adjectives?):

• The Read the Bills Act
• The Write the Laws Act
• The One Subject at a Time Act

Here’s a quick snippet from a caller’s question on one of my favorite topics: the “royalty” we elect into government:

Click here to listen.

Here’s our full conversation (about 30 minutes):

Click here to listen.

[Splash and Dash] also illustrates a cautionary tale of how government incentives, no matter how well-intentioned, can sometimes be subverted into windfalls for the few.

We are increasingly faced with evidence that our government exists to serve lobbyists and special interests. From the recent Farm Bill, the veto for which was (maybe) overturned, to irrational government favors showered on ethanol proponents, we have created systems ripe for abuse and exploitation.

Splash and Dash is a perfect example. Thanks to the American Jobs Creation Act of 2004, your taxes and our government’s debt are paying a $1 per gallon subsidy for blended diesel that combines petroleum diesel with diesel from agricultural products such as soybeans. Now, foreign biodiesel manufacturers are exploiting this subsidy for fuel that benefits European drivers, but we’re paying the bill. Here’s how it works:

The maneuver begins with a shipload of biodiesel from, say, Malaysia, which pulls into a US port like Houston, says John Baize, an industry consultant in Falls Church, Va. Unlike domestic diesel-biodiesel blends, which typically contain from 1 to 10 percent of biodiesel, the Malaysian fuel starts off as 100 percent biodiesel, typically made from palm oil.

Then, the vessel receives from a dockside diesel supplier a “splash” of US petroleum diesel. It doesn’t take much to turn it into a diesel-biodiesel blend that is eligible for US subsidies.

If the ship holds roughly 9 million gallons, it takes only about 9,000 gallons of traditional diesel (0.1 percent of the total) to make the entire load eligible for the blenders tax credit.

The US importer of the load applies to the Internal Revenue Service for the credit – a dollar for each of the 9 million biodiesel gallons, Mr. Baize calculates. The next day the tanker can set sail – dash – for Europe. There, the US importer resells the biodiesel, taking advantage of European fuel-tax credits that, in effect, keep biodiesel prices above US prices.

You must be kidding me.

I’m not kidding, but I am realistic and a bit cynical. Government incentives, no matter how well-intentioned, will always be subverted into windfalls for the few.

Our income tax system is irreparably broken. Even though the American Jobs Creation Act was designed as a tax reform bill to reduce the burden of government, tinkering with our tax code always results in unintended consequences through interactions with our maze of special-interest-driven subsidies and favors.

I joined Bill LuMaye yesterday afternoon at 5:30, and despite my best efforts to get from northern Durham to north Raleigh in time, traffic just didn’t cooperate. So I did the first half of the show via cell phone (yes, wearing a headset), and found some kind souls in the parking lot who let me into the building and showed me to the studio during the break.

All in all, it was an enjoyable experience with a great host. A friend captured the audio file here. Enjoy!

Today I had the pleasure of meeting with most of our North Carolina Republican Congressional delegation, and additionally was welcomed to give a speech on the West lawn of the Capitol during a tax day Constitution and freedom rally.

The agenda included Sen. Elizabeth Dole, Rep. Robin Hayes, and Rep. Ron Paul (all fellow Duke alumni), Rep. Virginia Foxx, Rep. Walter Jones, Rep. Howard Coble, and Rep. Sue Myrick. My meeting with Rep. Myrick was interrupted by a House vote and a subsequent Minority Whip meeting, but we had an excellent time discussing healthcare with her assistant Sarah Hale. I also had a great discussion on taxation and monetary policy with Brandon Renz, Legislative Director for Rep. Foxx. He’s a strong FairTax supporter, and we both look forward to the day when April 15th is just another beautiful spring day across the country!

Tomorrow I’ll try to reconnect with Reps. Myrick and McHenry, and also look forward to meeting another physician legislator, Rep. Paul Broun from Georgia. Rep. Broun is another conservative Republican committed to upholding the ideals of our Constitution, and I had a great time meeting his staff this afternoon.

It was a packed day, with lots of great conversations. I’ve included a few pictures below. They are indeed worth a thousand words:

So what did I think of Washington? Honestly, it’s a big, crowded place. While it was enjoyable to meet so many people, I was blown away by the sheer number of folks waiting in line to lobby our elected representatives. As shown by the picture below, we must change this dynamic. We simply can’t afford Washington as a place where people go to request funds and influence in areas where the Constitution never intended the federal government to operate:

My experience as an entrepreneur gave me a passion for economic freedom. Our country and prosperity are threatened by a federal government and tax system that favor corporate and special interests over creativity, entrepreneurship, and family businesses. In terms of taxation, administrative requirements, and regulatory burdens, it has never been so difficult to start and grow a business.

I’m not a politician, and have taken a different path to running for office. I graduated from engineering and then medical school at Duke University, and started surgery residency in 2000. While in surgery training, however, I saw an opportunity to solve a problem that made it difficult to care for my patients — I was spending way too much time hunting and gathering my patients’ information in various charts and disconnected electronic systems. So some colleagues and I started a software company in 2001 to address this problem, and deliver this critical information to the physician on a cell phone or BlackBerry.

Growing this medical software company over the next five years was an amazing education. It was always a struggle, but always rewarding. The best lessons from starting a business are learning what it means to create real value for customers, and how necessary it is to know and care about your customer to succeed in the marketplace. How long has it been since you walked into a business and were greeted by someone who was truly glad to see you? I’ll bet if you’ve had that experience, the person helping you was an owner, and not just an employee.

Don’t get me wrong, there’s nothing wrong with having a job, and being an employee. We need lots of employees. But we also need a lot more owners. That doesn’t just mean sole owners, or majority owners, but we need more businesses staffed by folks who truly have a stake in the game, and who understand that their actions directly impact the survival and growth of their company, and the happiness of its customers.

Eventually, a large multinational corporation acquired our young and growing software company. There are great people in this organization, but after a few months in the new environment, I began to realize that something was different. The intensity was still there, but it was largely directed inward — how do we prepare the budget? How do we get the funding? How do we get this position approved? Who can even approve it? You see, systems within large corporate environments are so vast and complicated that maintaining a focus on the customer and market is extremely difficult. Inevitably, service and customer satisfaction suffer as a result.

So if a company treats its customers poorly, how does it stay in business? One way is to hire a lobbyist to get money from government, instead of just from customers. That’s the worst form of welfare: corporate welfare. Another way is to use complicated tax and regulatory codes to shelter income and prevent competition, thus harvesting false economies of scale. Finally, the customer needs to have a choice to go somewhere else! But in an environment where corporate welfare, punitive taxation, and overwhelming regulation favor large incumbent corporations, who is going to start a new business to compete with these behemoths?

The answer is that you, and everyone, should have that opportunity. Furthermore, you shouldn’t have to wade through reams of forms and deal with a punitive federal tax and regulatory apparatus that makes any mistake an excuse to put you out of business. Assuming you honor your commitments and don’t hurt anyone else or their property, only your customers should have the power to put you out of business. And when you treat your customers well, something amazing will happen — they’ll actually help you grow your business!

Businesses that grow by satisfying their customers should be the engine of our economy. Right now, however, our GDP is 70% consumer spending. It’s time to change our direction with leadership that understands the difference between getting jobs, and creating jobs.

Note: I have reconsidered my support for the FairTax in our inflationary environment. When wages are stagnant and prices are rising, a national sales tax provides a tax hike with every increase in your grocery or gas bill. The FairTax might be a great start in an environment of stable prices, but we can’t afford the FairTax with UnfairMoney. There is simply no substitute for reducing the size and cost of our federal government. Read more here.

If you want less of something, tax it. If you want more of something, don’t tax it.

When you consider that simple rule, the foolishness of our federal income tax system is immediately apparent. In an increasingly competitive global economy, do we want more productivity, income for our families, and better jobs being created? Absolutely. So why do we tax our productivity with obscenely complicated income, capital gains, and estate taxes?

If we want to restore our economic freedom as Americans, we need to start saving, investing, and producing — and not just run up our credit card bills through consumer spending. So since we want more productivity, income for our families, and new jobs, we need to stop taxing our income. But how do we fund government? Simple — let’s tax spending, instead of income.

It just so happens that there is an excellent, well-researched plan in Congress right now that will eliminate the IRS and make our nation much more competitive. It’s called the FairTax, and it taxes consumption of new goods and services at a uniform rate of 23% “of the gross payments for the taxable property or service”. That equates to a 30% rate as most Americans understand sales tax (see discussion below). Here are the high points:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

The FairTax:

• Enables workers to keep their entire paycheck
• Enables retirees to keep their entire pension
• Reimburses the tax on purchases of basic necessities
• Allows American products to compete fairly
• Brings transparency and accountability to tax policy
• Ensures Social Security and Medicare funding
• Closes all loopholes and brings fairness to taxation
• Abolishes the IRS

A key element of the FairTax is its concept of a “prebate”. Using estimates of poverty-line income for households of different sizes, the FairTax offers Americans the opportunity to receive a “prebate” (so-called because it comes at the beginning of each month, in preparation for expenses you will have) to cover the cost of the consumption tax for the folks at or below the poverty line. Everyone is eligible to receive the prebate if you register, and it does not depend on income — only the size of your household. Obviously, if you are spending more, the prebate won’t mean as much to you — but if you are just getting started to build a financial future, the prebate will eliminate the burden of federal taxation entirely.

So what’s not to love? Well, as a great as the FairTax is, it’s not a panacea. It still requires that you sign a government form to certify your household’s size if you desire the prebate. That’s somewhat invasive, but not nearly as invasive as reporting your income and experiencing the misery of payroll deductions every paycheck. Just think — keeping all your paycheck! Not reporting your tips! Starting a business without needing to worry about payroll deductions!

The bigger limitation is that the FairTax doesn’t address the bigger problem of federal government spending. Having a better tax system that’s “revenue neutral” is great, but when the current revenue levels still leave us adding to a $9.1 trillion national debt every year, we still have deeper problems. In 2006, income taxes brought in about $2.2 trillion in revenue. But that didn’t stop our federal government from spending over $3 trillion. Try that a few times in your own household — you won’t like the results.

As Americans, we must realize that it’s up to us to create value, and that we can’t depend on the federal government, or even employment by paternalistic corporations, for the illusion of “financial security”. We must eliminate the wasteful subsidies and corporate welfare that give politically-connected corporations huge advantages over new entrepreneurial ventures and family businesses. In doing so, we will create a nation with more owners, instead of just employees, and the explosion in small businesses creating good jobs will reduce the need for federally-funded social services.

That powerful, positive combination will reduce the size and scope of the federal government, allowing us to reduce the FairTax’s rate from the 23% required to replace our current tax revenue. While a 23% FairTax could have replaced 2006’s $2.2 trillion tax revenue, if we could just scale our federal spending back to the $2 trillion required in 2000, we wouldn’t even need all 23%.

In the final analysis, what’s most important is our nation’s economic direction, not our position. Even though we’re in a bad position right now, we can start moving in a better direction, and quickly, by implementing the FairTax. That’s why I strongly support it, and I encourage every other American citizen to learn more about it and do the same.