Thursday, April 16, 2009

Stress test the American taxpayer and you’ll see you need a brand new generation of taxes

What the US dollar bill really should state is “In the American Taxpayer We Trust” and so the more pragmatic Americans have printed the “In God We Trust” on it.

There is no way that the current American generation, having been brought up as the consumers of last resort in the world, would now turn around and accept to be the world’s taxpayers of last resort… at least not with the current taxes… any stress-test of them would show you that.

The US government should be much more conscious of this before launching itself on a fiscal spending stimulus binge which, if allowed by the markets, will build up its public debt to a totally unsustainable level.

That said I believe the international markets are going to say NO much earlier than that, since one thing is to be searching for a safe temporary haven and another quite different to be trapped in a permanent home.

And that is why, before the US Dollar loses its AAA rating, that the US, and the world, should work hard in developing a totally new generation of taxes that can be perceived as legitimate, that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy. I have argued for the following two:

1. The Intellectual Property Right tax: Society, for many good reasons, has decided it needs to award and defend intellectual-property rights. The downside is the creation of temporary monopoly rights that can be overexploited. Also, awarding these rights impose on society the obligation to defend them, which costs money.

As it does not seem fair to assess taxes on a business venture that has to compete in the market without any kind of protection at the same rate than projects that have been awarded intellectual-property rights, there should be a special tax levied on all profits generated from intellectual-property rights.

2. The keeping the big lean tax: There is nothing wrong with a business striving to obtain a large market share but while its market share grows for all the good reasons and for the benefit of society, there is unfortunately also an accumulation of market power that can acquire monopolistic characteristics with negative results for the society. Therefore there is also a need of a tax that is of a progressive nature based entirely on market shares.