I was having a very spirited conversation with a friend the other day over the whole financial crisis we find ourselves steeped in at the moment. During the discussion he mentioned that he didn't like having the government tell people how they spend their money, ie. taxes. After our we finished our conversation I thought about the comment for a while.
The way I view taxes may be different than most. I view taxes as my fee that I pay to be an American and to enjoy all the rights and privleges of this great country. But beyond that I view taxes not as the government telling me how to spend my money but rather as incentivizing or deincentivizing me to spend/invest my money in a way that is beneficial to the economy as a whole, ie. home interest deductions, child tax credits, depreciation on business equipment, and other such items.
I think corporate America could go a long way in incorporating the same philosophy towards incentives for their employees. Let's take the financial institutions as an example.
If the folks on Wall St. had incentives that were based on different metrics rather than just sales maybe we wouldn't have decisions being made both at the top and at the trading desks that are not in the best interest of the shareholders or the company as a whole. If the folks who were selling the subprime loans and mortgage backed securities had a tiered commission structure that deincentivized them to sell these investment products over higher grade instruments maybe we wouldn't be in this mess. Maybe if they received less of a commission on these type of products, (because they were very risky not only to the investors but the financial institutions themselves), the brokers might not have pushed these products as hard. Maybe if they were incentivized to sell "A" paper loans more greatly over these junk products we wouldn't be in this mess.
And the government could have gone a long way too in deincentivizing those type of risky loans as well by requiring the banks and financial institutions to be greater collateralized on such loans ie. far greater cash reserves for every sub prime loan issued. Maybe then we wouldn't be in this mess.
I hear talk of eliminating capital gains taxes as a way to stimulate the economy. Again, I would look to incentives and disincentives. How about no capital gains taxes on long term investments (those held over one year from purchase date to sell date) and a 33% or higher capital gains tax for investments held 30 days or less. This would help reduce the amount of pure speculation (ie. day trading, short selling and the like) that occurs in the markets and which, as we saw last summer with the spike in oil prices, can be detrimental to the economy as a whole.
Our tax code is designed to encourage us to circulate our earnings into the economy in the manner most beneficial to the economy as a whole. Let's hope the corporate titans look to it as a way to run their businesses in a manner that is beneficial to all involved. Not just their bill folds.
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