05 November 2008

The 2008 Ceci Award

Penny for the Guy?

It's that time of year again; Guy Fawkes day is here, and with it comes the presentation of the annual Ceci award for the year's most significant contribution to clear thinking about identity, privacy, security, and risk.

Modern Britons often say that Guy Fawkes was "the only man ever to enter Parliament with honorable intentions"; this year's award goes to the US Army, which, with the publication of US Army Field Manual FM 3-07, has demonstrated that it's about to become the only army ever to enter conflict with honorable intentions. Here I don't mean that other armies aren't honorable; I do mean that for the first time the US Army has as an explicit goal not only "victory" but also the transformation of conflict zones into stable, peaceful states under the rule of law. FM 3-07's remarkable opening quote, from Colonel Sir William F. Butler, holds up the example of General Charles George Gordon's British Army as a force more ready to create than to destroy:

It is needless to say that Charles Gordon held a totally different view of the soldier’s proper sphere of action, and with him the building part of the soldier’s profession was far more important than the breaking part…. The nation that will insist upon drawing a broad line of demarcation between the fighting man and the thinking man is liable to find its fighting done by fools and its thinking by cowards.
In this spirit, FM 3-07 introduces the notion of "conflict transformation", which it defines as follows:
Conflict transformation focuses on converting the dynamics of conflict into processes for constructive, positive change. Conflict transformation is the process of reducing the means and motivations for violent conflict while developing more viable, peaceful alternatives for the competitive pursuit of political and socioeconomic aspirations. It aims to set the host nation on a sustainable positive trajectory where transformational processes can directly address the dynamics causing civil strife or violent conflict. It seeks to resolve the root causes of conflict and instability while building the capacity of local institutions to forge and sustain effective governance, economic development, and the rule of law.
Contrast this with the goals of our current enemy, as recited by Abu Dujan al Afghani after the Madrid train bombings:
"You love life and we love death, which gives an example of what the Prophet Muhammad said. If you don't stop your injustices, more and more blood will flow and these attacks will seem very small compared to what can occur in what you call terrorism.
Those who aim only to destroy can never defeat those who aim to create; the contrast is too stark and the choice too obvious. Winning a war against extremist terrorists should be a sure thing, and it is in the long run - but only if we offer an alternative that's not based on pure destruction. Shock and Awe failed this test; FM 3-07 passes it. Look at the focus on legitimacy:
Legitimacy is central to building trust and confidence among the people. Legitimacy is a multifaceted principle that impacts every aspect of stability operations from every conceivable perspective. Within national strategy, legitimacy is a central principle for intervention: both the legitimacy of the host nation government and the legitimacy of the mission...

The credible manner in which intervening forces conduct themselves and their operations builds legitimacy as the operation progresses. Highly professional forces are well disciplined, trained, and culturally aware. They carry with them an innate perception of legitimacy that is further strengthened by consistent performance conforming to the standards of national and international law. For military forces, a clearly defined commander’s intent and mission statement are critical to establishing the initial focus that drives the long-term legitimacy of the mission.

An army thoroughly trained in this doctrine would not have suffered the disgrace of Abu Ghraib, and its officers and men would not have countenanced waterboarding.

We are safe when we are just as well as strong. If we must use the Army, we should use it not only in a just cause but also in a just fashion. FM 3-07 provides a foundation for doing that.

Congratulations to Gen. William Caldwell, LTC Steven Leonard, and the US Army Combined Arms Doctrine Directorate on the publication of FM 3-07. As always, acceptance comments are not expected but would be most welcome.

04 November 2008

The End of Taxation

With the election cycle coming to a close here in the USA, there's lots of the usual talk about tax reform. During the campaign, Ron Paul, Mike Huckabee, and John McCain endorsed a "fair tax" - basically a flat national sales tax intended to replace the income tax; Sam Brownback and Rudy Guiliani wanted a "flat tax" - a single-rate income tax. Various candidates wanted to whittle around the edges of the tax code by repealing (or not) the estate tax, raising (or lowering) the capital gains tax, taxing (or not) carried interest, taxing (or not) carbon emissions, raising (or lowering) cigarette and gasoline taxes, and so on. And of course, Barack Obama wants to cut your taxes if you make under $200,000 - a number Joe Biden can't seem to remember. The shared consensus underlying all these proposals is that the existing tax code is neither fair nor simple - and this consensus is correct.

But none of the existing proposals will fix this problem. They'll just reward the constituency of the winner of tonight's election. We'll continue to tinker unsuccessfully with the tax code until we come to grips with a fundamental issue: taxation itself is obsolete.

Wikipedia says taxes originated 5,000 years ago in Egypt. This might be right, or it might not - we probably don't actually know when taxation was invented. But we do know why it was invented. It was invented because Pharaoh was a senior executive: instead of doing work, he supervised it.

Although Pharaoh didn't cultivate a garden, he still had to eat: he had to rely on the fruits of others' labor in order to set his table. Laborers being laborers, many of those growing the fruits doubted that Pharaoh was earning his supper, so they sent rotten produce, or they sent their regrets.

And (Pharaoh being Pharaoh) when the laborers sent their regrets, Pharaoh sent his army, and his army took everything they thought Pharaoh might need to impress his dinner guests (plus a little bonus for the Captain, as I'm sure you'll understand).

In order to minimize conflict (and to keep the Captain poorer than Pharaoh!) this system of royal confiscation was eventually systematized and scheduled, so that the laborers would grow accustomed to the seizures and plan their productivity accordingly (rather than, say, getting all surpirsed and in a huff, and marching on Thebes with sharp farm implements). The result was a tax.

Pharaoh really had no alternative to taxation; he needed grain for his bread and papyrus for his scrolls and tallow for his candles, and the only way to get these things was to go to the people who had them and claim a portion.

Now flash forward 1500 years and swim the Mediterranean to Rome. The Republic, and later the Empire, found it inconvenient to scour the landscape for cattle and grain and tallow and wine every time the legions needed to be paid; the logistics were too daunting, and it was tough to remember that Severus wanted 200 candles but Quintus wanted a cow. So the Romans innovated and came up with a standard medium of exchange - salt. Salt was great stuff. It was infinitely divisible, it was small in proportion to its value, it was imperishable, and it was in lots of demand because you could use it for many useful purposes, including curing meat and hides and flavoring food. So the legions were paid a "salary" (salt ration). Quintus could use his valuable salt to make his camp rations taste better, or he could trade it to the local farmer for that cow he had his eye on.

Commodity media of exchange make taxation much easier. You don't have to see if the cow Quintus sends to the emperor is scrawny or has foot-in-mouth; all you have to do is weight the salt. So the laborers began to bring a portion of their salary to the seat of government and turn it in. They had to do this, of course, because the Republican (and later the Imperial) tax authorities couldn't just make salt - they had to collect it.

Salt is, unfortunately, somewhat tough to test for purity. And, laborers being laborers, they tended to mix the Emperor's salt with sugar, or quartz crystals, or flour, or cocaine, or any number of other things. This made it hard for the Emperor's tax collector to know when he was being cheated. The Emperor hated to be cheated, so he encouraged his tax collectors to innovate. They did so by switching from salt to metal coinage. Soft metals can be tested for purity using a touchstone. Some soft metals are also nice and rare, and they can be turned into pretty jewelry, so they have intrinsic value. And they have another property which is just irresistable to a megalomaniacal Emperor - you can stamp pictures (of, oh, let's see - the Emperor?) onto them, and those pictures are fairly hard to copy exactly and fairly hard to deface.

Putting his face on metal coinage gives the coins a property very dear to the heart of the all-powerful Emperor: he can control its supply. The laborer can't use just any old pure silver as a coin - he can only use a piece of silver with the Emerpor's very own personal face (and other symbols of authority and value) stamped on it. And the Emperor can strictly control who gets to do the stamping. Now pesky foreign potentates can't get richer than the Emperor, at least on the Emperor's own turf, because only the Emperor can create valuable currency.

Taxation was still necessary with metal coinage, because, while the Emperor could make coins, he couldn't make silver - so he had to have the laborers hand in some of their coins so he could turn around and give them to the people who mined his silver and brought it back to the mint.

Now flash forward another thousand years or so. People were getting pretty flush in Europe, and carrying around big bags of metal coins was starting to be a drag. The bags were heavy, and bandits tended to notice them. Keeping the bags under your pillow at home was no solution, as it attracted unwanted visitors. Storage and transport of money, in short, was starting to cause problems. Enterprising merchants, being enterprising merchants, came up with a solution. German merchants began accepting cash deposits and issuing receipts; these receipts (which were much lighter and less conspicuous than bags of cash) could be used to reclaim the deposited amount of metal coinage - either from the merchant who issued the receipt, or from another cooperating merchant. These merchants quickly started charging for their services; they became bankers, and their receipts became a form of paper currency.

As paper currency established itself, people used it to pay their taxes. It was still necessary for the government to collect actual currency from its citizens, since the currency was tied directly to the commodities the government needed to use to build its roads, feed and equip its armies, and write and enforce its laws.

Things worked pretty much this way for a long time; until, in fact, 1975 - at which time the US Government declared that the value of the dollar would no longer be tied to the price of gold. The dollar thus became a fiat currency, which meant, essentially, that the dollar became valuable "because we say it is" rather than "because you can trade it in for a specific amount of some valuable commodity".

This is where our hero - J.S.G. Boggs - comes in. Recall that we first met Boggs way back when we were talking about Similarity vs. Identity. The question Boggs repeatedly forces us to try to answer is "what is money, and why is it valuable?" Here's Boggs on Boggs, as told to Lawrence Weschler:

"Some of the early American paper bills included engravings on the back depicting the metal coins for which the paper bills could at any moment be redeemed. On the back of the five-dollar silver certificate, put out in 1886, there was a picture of five silver dollars. If you wanted to know what a five-dollar bill represented in those days, all you had to do was look at the picture on the back. But anyway, when they started withdrawing the dollar's metal backing - when you couldn't redeem your dollars for gold and in fact were no longer even allowed to posses gold on your own except as jewelry - that's when they started putting that phrase ("In God We Trust") on the currency. When you could no longer trust in gold, they invited you to trust in God. It was like a Freudian slip." "It's all an act of faith. Nobody knows what a dollar is, what the word means, what holds the thing up, what it stands for. And that's also what my work is about. Look at these things, I try to say. They're beautiful. But what the hell are they? What do they do? How do they do it?"
In a fiat-currency system, value is "Boggsian"; there doesn't have to be any particular amount of fiat currency, because there's no absolute standard of value, because it's all fundamentally an act of faith. The basic idea (the "act of faith") behind the value of fiat currency is that the "total wealth" of a society is in some sense equal to the "total value" of all the currency the society has in circulation. If society's total wealth stays the same but the government prints enough currency to double the money supply, the value of each individual bill is cut in half. And, conversely, if society's total wealth stays the same but the banks all get together and throw a party at which they burn half of the bills in existence (a depressingly plausible scenario given recent events), the value of each of the remaining bills doubles.

Let's look at one sentence of the previous paragraph again: If society's total wealth stays the same but the government prints enough currency to double the money supply, the value of each individual bill is cut in half. Think about that carefully; what it means is that every time the government prints a dollar, it is effectively taking that dollar away from "everyone". A government which can do this doesn't need to collect taxes; it can just print the money it needs, and the appropriate amount of value is subtracted from the money you and I still have - automagically! Aristotle would hate this; it's action at a distance.

It's that simple. Taxation is no longer necessary. It's an artifact of an older time when money was made out of stuff instead of made out of ideas. As soon as enough of us realize this, we can simply close the IRS and H&R Block and the Tax Courts.

Each year, the congress can simply instruct the Bureau of Engraving and Printing to fire up the presses and fund the federal budget. This will do the same thing as collecting taxes, but it will do it in a different way: by driving up inflation. It will be, to coin a phrase, a "Boggs Tax".

Switching to a Boggs Tax would have a lot of good effects:

  1. A Boggs Tax taxes wealth. It does not tax income, or economic activity, or personal behavior - which is good because taxing any of these always discriminates against some groups and in favor of others. Because it can't be sheltered against (see below), it taxes the very wealthy much more heavily than the current system does.
  2. It requires no expense to collect. The government simply prints the money it needs. There is no tax return preparation, no Internal Revenue Service, no audit, and no court proceeding.
  3. There is no way to shelter against a Boggs Tax - every dollar in existence is automatically taxed. Whether a dollar sits in the Cayman Islands, or in the bank, or in a municipal bond, or in a corporate stock certificate, or in a mattress, the tax is applied to that dollar as if by magic. A Boggs Tax taxes dollars held overseas just as effectively as those held at home, it taxes dollars held secretly by criminals just as effectively as those held by honest taxpaying citizens, it taxes the "underground" (cash) economy just as effectively as the official economy, and, as a special bonus, it even taxes counterfeit North Korean $100 superbills just as effectively as red-white-and blue US Bureau of Engraving and Printing honest-to-goodness real $100 bills.
  4. There is only one public-policy argument where before there were two. Today we have to talk about who we will take money from and who we will give it to. Under a Boggs tax, we only have to decide who to give it to - since it's taken from every dollar automatically.

There are a couple of arguments against a Boggs tax; it seems to me that the three most important are these:

  1. While a Boggs Tax is radically more progressive than today's tax code at the top end of the wealth scale, it's much more regressive at the bottom end - it taxes the meagre wealth of the poor at the same rate as it taxes the rich. But there's no real problem here; simple annual subsidies to the poor can relieve their burden, and as a bonus, all government's activities are focused on distributing money (which makes people happy) rather than confiscating it (which makes them angry), so the quality of the average citizen's interactions with government improves.
  2. There is evidence to suggest that high inflation makes economies unstable, so a system which operates by increasing inflation might have bad economic effects. I'm not an economist, and I have no desire to play one on TV, so I'll leave this one, for the most part, to the professionals. But I will observe that we already pay an economic cost for our current tax system; operating the IRS and the tax courts, and requiring every citizen to burn a day (or a week) of productive time or pay an accountant to prepare tax returns is a real cost to the economy. Paying this cost produces nothing of value; it's pure economic friction. My guess is that the inflation incurred by a Boggs Tax would be smaller than the total of tax receipts plus collection friction, so the Boggs Tax would have a net positive effect on productivity.
  3. The third objection is the biggie: using inflation to collect taxes guarantees that the value of a dollar held as an investment decreases over time. This means that the dollar's value as a reserve currency is diminished, and it also means that dollar-denominated investments operate at a disadvantage compared to investments in currencies which do not inflate. Again the details of how this would affect the real economy have to be left to economists, but again there's a counter-argument: if a Boggs Tax makes the economy as a whole more efficient (and I hypothesize that it should), inflation due to causes other than taxation might decline - and the overall rate of inflation might not be extreme compared to other economies. Calculating how much inflation the Boggs Tax would create seems tricky. The CIA World Factbook gives a figure of $2.73 Trillion for the US Federal budget. This is the numerator in the inflation calculation, but the denominator is slipperier. It's not GDP (which according to the same source was $13.84 Trillion dollars in 2007) - because GDP only measures newly created wealth for a year. The denominator also doesn't seem to be M2 (the total money supply of the nation, which according to Wikipedia was about $7 Trillion in 2005). The correct denominator is something like "total dollar-denominated wealth in the world"; I can't find a statistical source for this, but it's evidently quite big; according to Wikipedia again, the total wealth of US households and nonprofit organizations (which doesn't count corporate wealth or dollar-denominated assets held overseas) was about $60 Trillion in 2007. If we're very conservative and simply double the US personal wealth number to $120 Trillion, this gives us a figure of about 4% annual inflation for using a Boggs Tax to fund the current US Federal budget - not trivial, but not crippling either.
I don't imagine the administration we elect today will switch the US to a Boggs Tax, at least not in its first term. But I do think a Boggs Tax is coming; traditional taxation is just too twentieth-century to survive in an information economy.