U.S. should return to consumption tax
There is a great deal of talk these days about the financial industry "meltdown." Much of it is plain blather. There are three entities in the picture: 1) Congress, the group that controls the purse strings, passes the budget and establishes the various regulatory agencies; 2) those regulatory agencies as a group, many quasi-independent (the Federal Reserve, Fannie Mae, Freddy Mac, the SEC, the FDIC); and 3) the administration.
When I was young, my family was involved in banking in Illinois. There were no branch banks then. Banks "serviced" loans they made. People who invested in bank stock were liable for three times the amount they invested, so they made sure their banks made only sound loans. If a couple applied for a mortgage, only one income would be used to determine eligibility. The "rule of thumb" was that the mortgage payment should be no more than one-fourth of that one income.
The amount of the loan would be for no more than 60 or 70 percent of the value of the home; so if foreclosure became necessary, the bank could recover all the depositors' money and pay all the expenses. People buying homes today would be stunned at such "tight money."
Of the three entities involved in this mess, Congress bears the bulk of the blame. In the latter 1960s, Congress passed The Community Redevelopment Act, intended to "encourage" loans in cities to borrowers who wouldn't qualify otherwise. That law was strengthened in the mid-1970s, and in the 1980s Congress held hearings about the practice of "redlining," which attempted to locate and identify "high risk" neighborhoods. It was no secret that a large portion of these loans were rotten at the start. Banks had to pay that price to stay in business.
They hoped rising home values would enable those in over their heads to sell their homes and pay off their mortgages. Many people did that, until the recent drop in home values. This is the same situation that caught the Japanese financial industry not that long ago. Major corporations had financed their spectacular growth by borrowing on real estate, on the assumption that property values would always increase. But they didn't. When the "bubble" burst, all kinds of corporations and banks found themselves insolvent overnight.
Some say this "crisis" is a failure of the free market, but that is far from the truth. This was caused by meddling with the free market.
I keep coming back to the incentives provided by our income tax system. A tax on income encourages spending, discourages saving and investing, encourages debt, and-so-on. In the same way, we tax alcohol, gambling and tobacco, to discourage those activities. If you want people to work harder and earn more, you shouldn't tax earnings.
Our Founding Fathers gave us a consumption tax system, in which a tax is paid when you remove something from the economy for your personal use. That encourages earning and saving. Under that system, the U.S. grew and prospered like no other country before or since. They felt so strongly about this that they made a tax on income unconstitutional. In 1913 we passed the 16th Amendment to make the income tax constitutional. It started very slowly, though, and didn't come into its own until World War II, when federal payroll withholding was added. Things went downhill from there. The United States and Americans desperately need to return to a consumption tax system.
Peter G. Malone
St. Charles