Later On

A blog written for those whose interests more or less match mine.

Transferring your taxes to the wealthy

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The Bush administration has shown us, over and over, how the money paid by taxpayers is immediately funneled to Big Business: the no-bid, open-ended contracts, like those given to Halliburton, KMR, Blackwater, et al.—with immunity for any wrong-doing (homicide, gang rape, theft) as an added bonus.

David Cay Johnston has now written a book on this practice: Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). From a review:

The penetrating anecdotes carefully researched by Johnston and his team of reporters make this a compelling look at just how the game can be altered to serve the wishes of the well-connected few. The author reveals how homeowners’ title insurance is larded with unnecessary costs for home buyers, how government subsidies prop up a posh golf course in Oregon, and even how Warren Buffett’s GEICO insurance company got $100 million in subsidies for a $40 million call center. In one chapter he argues that home alarm companies benefit from a hidden subsidy, too; what they’re ultimately selling is a service—police response—that they pay nothing to provide. Worse, he says, the thousands of false alarms actually make communities less safe, since the cops handling them aren’t out on the beat deterring real crimes.

Particularly galling to Johnston is that some industries dipped into the government trough at a time—1980 to the present—when the vast majority of Americans’ share of national income declined slightly, while it skyrocketed for those at the very top. The rich, as they say, get richer. Johnston argues that government is to blame.

Another example, even more galling: when the big banks or hedge funds or mortgage funds start to fail because the managers were greedy, stupid, crooked, or all three, the government rushes to give them your tax money to keep them in business—provided that they’re big enough. (Motto: “Save the wealthy, the rest can go to hell.”) BusinessWeek has an interesting article on that very topic: “Too Big to Fail“, which includes this passage:

Gary H. Stern, president of the Federal Reserve Bank of Minneapolis and author of Too Big to Fail: The Hazards of Bank Bailouts, says that the seeds of today’s woes may well have taken root during previous interventions. He believes the banks would have curbed some of their bad lending practices and risky subprime investment decisions if they didn’t have implicit guarantees of a government safety net. It’s not unlike what Federal Reserve Chairman Ben S. Bernanke said about bailouts back in April when he pronounced that bank investors “must be…persuaded that they will experience significant losses in the event of failure.” Otherwise, he said, it’s all too easy for bank executives to waste money on bad loans.

The problem is that banks are paying nothing (zero, bupkis, nada) for this coverage: they can gamble (cheat, steal) freely knowing that they have insurance to cover their mistakes, and the insurance is free to them, though costly to us. Why not charge the banks a hefty tax/fee, based in part on paying back bailouts over the past 20 years? As bailouts become uncommon, the fee drops (though never to zero). This would give the industry some incentive to avoid the need for bailouts—those companies that run a clean game would pressure the government not to bail out the companies that fail.

Written by Leisureguy

26 January 2008 at 10:54 am

Posted in Business, Government

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