Why Government Should Be Run Like a Business

Just this week, an audit (PDF file) of FEMA's allocation of aid money for Katrina victims revealed millions of dollars of wasted funds, including handing out $2,000 debit cards to recipients who gave phony Social Security numbers (yet another reason why we need a National ID card, but that's neither here nor there) and paying for beachfront condos and $400/night hotel suites in New York. The GAO audit of FEMA also shows that 62.8% of the debit card funds were filed under the title "ATM/Cash", implying that the money was either put in a bank account or converted into cash to avoid having their transactions monitored.

Some people who didn't go this route made some very odd purchases with taxpayer money, including:

• .45 caliber pistol - $1,300
• Gentlemen’s club - $1,200
• Diamond engagement ring - $1,100
• 7 ATM withdrawals within one day at a gambling institution - $1,000
• Tattoo on arm - $450
• Massage parlor - $400
• Alcohol beverages - $200
• Adult erotica products - $150

This brings me to my point, which is simply this: the government, or state, is and always has been inefficiently run no matter who has been in charge. Businesses, conversely, survive only by maximizing efficiency and minimizing costs. These principles helped entrepreneurs of the late 19th and early 20th centuries become rich beyond a magnitude ever before accomplished.

By providing products at lower prices than their competitors and in greater quantities, tycoons like John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt revolutionized their respective industries. One century hence, their methods are still supremely misunderstood, and their impacts highly understated.

Back to my point, where businesses fail, government thrives. By overextending itself, government expands its influence and becomes more powerful. When a business runs losses (like a government runs deficits), it is weeded out of the marketplace by more profitable and efficient companies. When a government does the same, it simply tweaks the tax code and bolsters revenue. Does this not sound like what happens when a producer raises prices? In this situation, however, there is no competitor to force a government to run efficiently. Where there is no competition, there is no incentive.

To understand the solution to this problem of consistent inefficiency, we must study the similarities between government and business, and mold the actions of the former to meet the latter. To make it easiest to follow along, I will take a top to bottom approach. Starting at the top, we have the chairman/CEO and his/her board of directors. This is the business equivalent to the United States government's President and his cabinet. The main priority of this business body is to maximize shareholder value (aka profit). The means of accomplishing this vary, but the mission remains constant. (For a short account on the social responsibility of business, see Milton Friedman's 1970 essay on the subject.)

Profit, or a budget surplus, allows a business to expand and have a greater influence on the marketplace. Through greater capital investment, improved production methods, and labor expansion, businesses are able to lower market prices and increase supply of goods and services. A profitable government would be able to either cut taxes, give tax refunds, increase spending on specific areas, or any combination of these. But an unprofitable government can do the third at will because the first two are not compulsory. You see, while government officials can hide their disgustingly contemptuous actions behind a facade of good will. Businesses that fail to lower prices have and always will be run out of business by competitors who will do anything to achieve maximum market share and profitability through lower prices and increased efficiency.

I hope that by now you've realized the reoccurring theme in this message: lower market prices and increased efficiency allow for increased profits and market share that improve the lives of consumers and producers alike. Government, on the other hand, rarely increases efficiency, but rather creates realms of influence that either could be handled better by the private sector or SHOULD be handled by the private sector. The Department of Transportation builds roads and controls traffic lights because these actions do not generate revenue and cannot be handled profitably by the private sector. NASA explores space because, again, there is no profit in the action though it does satisfy our quench for discovery.

The similarities, however, are easy to see if one chooses to look for them. For instance, a business offers a good or service to consumers for a price. It pays wages to laborers who produce this product, and it pays executives to expedite the entire process seamlessly. The government offers goods and services in the form of public utilities and national defense in exchange for tax dollars. It pays civil service workers to perform tasks similar to that of the workers in a corporation, and it pays the three branches of government to ensure that the government's investment is protected and kept in good shape.

Here I present a solution, one that seems pretty common sense, but to the politicians it is a threat to the status quo and it scares them like nothing else. Apart from millions of pages of reforms that can be implemented in different sections of the massive federal bureaucracy, there is one action, above all, that can fix the crisis in Washington. It goes by the street name "FairTax" and the Hill name "H.R. 25; The FairTax Act". It is, simply put, a national tax on consumption of goods and services, similar to the ones implemented in Texas and Florida (the world's 10th and 15th largest economies, respectively -- h/t FairTax Book).

In what twisted way does an income tax (flat, lump sum, progressive, regressive, etc.) make sense? Would you, as a CEO of a large corporation, suggest to your board a new business model that included taking a portion of your workers' paychecks and using it to buy capital or to provide for these same workers? All the while, mind you, there would still be prices on the goods and services you are selling. Under our current tax system, apart from the tens and hundreds of billions of dollars gathered from business (i.e. capital gains), investment (i.e. dividends) and payroll taxes (i.e. Social Security and Medicare), the income tax is by far the most Marxist federal law on the books. In fact, according to The FairTax Book, the income tax system in America satisfies one-fifth of Marx's goals from The Communist Manifesto.

Unlike this system, which ultimately penalizes hard work and rewards laziness, the FairTax destroys the current system and brings forth from the ashes a truly voluntary system of taxation. In the form of a truly profitable business, the government would tax only goods and services in order to generate revenue. Workers would be free to take home 100% of their paychecks and businesses would be free to lower prices thanks to a huge tax break since their forced matching of payroll taxes and forfeiture of corporate taxes would be no more.

Here is a great reason why the various taxes we are currently subject to need to be abolished. The income tax is obvious; it penalizes labor and hard work while the welfare state gives this money to those who choose not to work. Payroll taxes contribute to the elderly who should've been working and investing for over 40-50 years by the time they began receiving Social Security checks. Corporate taxes simply add costs to a business and eventually are converted into higher market prices. Investment taxes dissuade people from investing, if only slightly it is still a negative. And lastly, the estate (or "death") tax, which takes around 40% (the United States has the second highest estate tax rate in the world) of a moderately to filthy rich person's estate when they die and attempt to bequeath their assets to the next generation (there is a spousal exemption under current law).

Can you imagine what gains could be made with an additional (for the sake of simplicity) 25% on our paychecks? Here is a simple example to show what could be earned. Take a middle-management type in a typical private sector corporation. This person earns a decent wage that results in a yearly salary of around $75,000 after taxes. With two weeks of vacation, this person works 50 weeks in a year, therefore earning $1,500 every week. Let's say this person gets a paycheck every other Friday that amounts to roughly $3,000. If the FairTax is implemented, this person immediately sees his paycheck rise from $3,000 to $4,000. Perhaps this person is a savvy investor and takes this extra $1,000 and puts it into a diversified mutual fund account earning 15% every year. After the first year under the new tax system, all the money this person once forfeited in withholding to various taxes is now earning 15%. The total value of this person's account after one year (50 weeks) is $28,750 for a gain of $3,750. That's $3,750 that nobody would have ever seen under the prior tax system, and $25,000 more that this person never would have seen thanks to the withholding system.

Taxation is currently one of the most inefficient ways of generating revenue. The current tax system wastes over $500 billion which is lost in simply complying with the massive tax code (which is a pretty heft piece of work). The FairTax Act is about 125 pages long in PDF format and covers just about every angle. Now I'm sure it's not perfect, but then again, is there anything in Washington that is? This mindset doesn't bode well with the idealists in society, but what society ever became great by going from bad to perfect, evil to angelic? There are always steps to be taken, short strides that bring improvement while leaving room to go further.

One who would try to make the world perfect would inevitably hasten its downfall. Stalin and Hitler tried to go this route and became known as two of the most evil men of the 20th century. Small-scale central planners, like Robert Owen with his vision for New Harmony, always saw their utopian societies "inexplicably" crumble like a house of cards. The reason for this is simple; when the foundation is weak, a structure is easily brought down. Utopian societies may be healthy to all outside appearances, but like a festering disease boiling under the skin, it could burst into chaos at any moment from the simplest of triggers. In New Harmony's case it was man's innate desire to be independent, and so it is in all societies.

In summation, there is one way to fix government's inbred problems more so than others, and that is through the destruction of the most horrendously inefficient government agency this nation has ever seen: the IRS. It won't bring an end to all problems, but it will make the road to their solutions much less arduous.

Freedom has been, is, and will remain to be the best way to improve a troubled society. In our case, freedom must be given a chance in the tax system. Until the day when that system arrives, we will be forever bound to a tyrannical government that drains our lifeblood and gives us a line-item detailed view how, right there on our pay stub.