As we said earlier, what would we do if we were a small g-god and could implement one thing. It was tough to not choose the elimination of corporate taxes as the one time-one chance solution to improving the country. On the other hand, immigration solutions are easy to toss out. As the rules require that it is only one solution then the answer cannot be comprehensive reform. George Will has an uncharacteristically weak column supporting immigration reform. The growth issue about immigration is per capita GDP. If the population goes up by 100% on 1/1/15 and GDP goes up by 50% during 2015 then it is a bad deal on average for citizens. Since we rarely see the immigration argument including per capita data it seems unlikely that the impact is positive. Immigration largely a zero-sum game and that is why the dispute is so intense.
So MWG is eliminating all immigration solutions including exporting illegal aliens, stopping illegal entry, and setting magic numbers for future immigration as the one thing. Anything else is below even a small-g god. In fact, illegal entry has become so small that it is less relevant currently. An imposed solution will not get to the cultural and political agreement that is needed in this area.
Abortion is off the list too because it is the example of an imposed solution causing massive political and cultural problems. The one thing should address an area where the is some level of agreement and some level of expectations about future outcomes. Immigration and abortion are rejected because of the former and eliminating corporate taxes are eliminated because of the latter.
Sheldon Richman has a nice article on basic economics. Other than a gratuitous comment on empire that seems strangely out of place, it reminds all of us, not just the current administration, that of the effectiveness of markets in driving the economy. Government activities and government restrictions are not nearly as effective. Government activities are not effective because they never (Detroit will still be a city after bankruptcy) die. Some regulations are great but many are not. It is the knowledge problem, the regulator cannot know everything, combined with the inability to adapt to change.
The administration has come to the opposite conclusion by attacking austerity and the sequester. It will be interesting to see how the administration defines austerity and the opposing idea they are supporting.
Given my background and the interest of my students, when I discuss ethics I often come at it from an economic point of view. Thus, when a Big Four accounting firm dismissed a partner for leaking information, it was clear that he had made a bad economic choice. The partner’s loss in income, capital, and future income is not worth it.
Rita Crundwell embezzled $53 million from the city of Dixon Illinois. She got caught after 20 plus years and earned a 19 year sentence. If you knew that outcome with certainty would you take it only considering the economic aspects? Just think for a minute of what you can buy with $53 million tax free. You can use it from age 38 to age 58. Effectively, you can have anything you want for 20 years during the prime of your life and give up your dotage. As much as I dislike the New York Yankees, it is a better deal than Damn Yankees.
I’m not encouraging you to start an embezzlement scheme. I’m reminding you and me that economic analysis is often useful but not the only solution to ethical problems. Right and wrong are the real concerns. For many choices economics support right and wrong but not always. We need to be on the alert for when they diverge.
Previously, I have discussed the extent and the ethics of the Rita Crundwell’s fraud on Dixon Illinois. One interesting topic for accountants is that the accounting firm that compiled Dixon’s financial statements also did Rita’s taxes.
Now a tax preparer’s responsibility is far different than an auditor’s responsibility and both are different from a complier’s responsibility. As a taxpayer, you don’t need to worry that your tax preparer is an agent of the IRS. The tax preparer is expected to be your advocate just like your lawyer. The tax preparer, however, is expected to exercise due diligence with respect to representations made by the taxpayer. To oversimplify, that means if the taxpayer arrives in a new Lexus and claims the Earned Income Credit then the tax preparer has some additional responsibilities.
Rita had a lot of stuff including a $2 million motor home and a hobby horse breeding farm. The hobby farm especially would seem to be an area to investigate for the tax preparer. Interest of lack thereof might be an area where the tax preparer is looking to engage in tax planning. It would seem that she would substantial real estate taxes that are deductible.
We don’t know what Rita’s salary was but we know that the total amount spent by Dixon for general government after charges for services and capital expenditures was about $2.2 million. Rita’s salary might be nice but it can’t be exorbitant for a city of 16,000 people. In short, there is a question if the tax accounting firm exercised due diligence in evaluating Rita’s assertions. I’m not sure why the IRS and the state of Illinois have not charged her with tax evasion.
Kevin Williamson has a nice summary of the changes that have caused Detroit to declare bankruptcy. Another Kevin, Detroit’s emergency manager with a surname of Orr, filed for chapter 9 bankruptcy yesterday. The interesting question is how will Detroit attack bankruptcy. Chapter 9 for municipalities is different than the business chapters and it is rarely used so outcomes are uncertain.
Broadly speaking, Detroit has four places to cut: current services, current and future payments to current employees, payments to current retirees, and payments to bondholders. Since the petition identifies that services to citizens are highly unimpressive, that seems an unlikely area to cut although there might be some efficiencies. It would be a great time for Detroit to drop all services that are not critical for the core. Pensions for retirees will play out in court. Pensions and salaries for current employees will lead to a battle between the unions and the city. The Wisconsin’s Act 10 suggests that small improvements can be made. The impact of bankruptcy will be interesting. The bondholders are surely headed for a major haircut. Now because at least some of these bonds are insured the loss might be moved around but from Detroit’s point of view less money is going to the bondholders.
Another question is what will the federal government do. In the auto bankruptcies they intervened on behalf of the unions. Will the citizens of Michigan or the US be asked to bail out the Detroit unions again? My money is that the federal government will at least try to bail out the unions.