Traverse City Record-Eagle

December 9, 2012

Perfect distribution equals perfect state of liberty

By Harvey Luplow, Local columnist
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---- — Published in 1758, Frenchman Francois Quesnay's political economic theories are regarded by some as one of the top three products of human wisdom, writing and money being the other two. Adam Smith acknowledges the importance of Quesnay's work in his "Wealth of Nations," the primer on modern economic theory.

Quesnay's "Economic Table," the basis for his theories, creates the first analytical approach to understanding economics. The economic model he developed is a useful tool in seeking to promote and perpetuate political economic stability within and among countries, which in turn allows us to live in a civilized world and progress the human cause. It's work worthy of a posthumous Nobel prize, I would say.

Modern economic theory starts with the premise that a nation's wealth is all that is generated by all of its resources, natural and human. Quesnay's work takes the objective approach of mathematically defining how to distribute a country's wealth among the different classes in a society in a way that reflects a "perfect state of liberty for all." I interpret this perfect state of liberty as each person paying or receiving a fair share of the nation's wealth depending upon their contributions and needs at different times in their lives and considering national and individual circumstances.

In his "Tableau économique," Quesnay constructed a financial model showing how France's agriculture industry (creator of the nation's wealth in that day) could ideally distribute its products among the producers (landowners and agricultural workers) and the non-producers (merchants, skilled trades, etc.). This perfect state of liberty is then compared to the actual state of liberty to reveal how the government's restrictions, regulations and taxes create inefficiencies and frustrate what should be the objective of politics: the delivery of economic liberty for all citizens.

When I bump Quesnay's analytic economic approach up against the more modern notion of Moral Hazard, I find a base from which to approach a rationalization of our corporate income tax structure. Let me explain.

Moral hazard is a modern term that describes a situation where one with superior knowledge enters into a financial transaction to benefit themselves knowing that to do so may cause some type of harm to unknown others. An example is when banks made unwise loans to turn a quick profit for themselves and created the mortgage foreclosure crisis as a consequence. Many banks' lending practices, though legal at the time, were regarded as being a moral hazard for our citizenry.

It is a moral hazard when our politicians represent narrow interests or take less care than they should and enact taxes and regulatory policies that create net negative consequences for our country's wealth producers. By definition, tax and regulations that do not support the growth of our economy serve to forgo or waste opportunities to create national wealth. We need to avoid this moral hazard by refining the corporate tax code using Quesnay's analytical economic techniques.

With the tax code, our objective should be to generate enough revenue to meet the needs of our society, whatever that amount may be as determined via our government representatives. We should strive to set tax rates such that they do not impede economic progress (Laffer's curve) and place the tax burden in a way that reflects a perfect state of liberty for all.

The first step in this direction is to realize that only individuals feel the consequences of tax policy. While companies may be considered "persons" for limited legal reasons, it is a fiction of necessity created for use by us real folk. Using corporate status as a basis of taxation is silly.

Corporate income tax of 2% began in 1909 in reaction to the moral hazards of the day: imperfect knowledge between buyer and seller in the stock market. The federal corporate tax was created to cover the cost of government administrators collecting and reporting corporate financial information to the public so it could make knowledgeable investments. Over the years, Congress forgot about this rationale and started raising rates for general fund purposes.

Today the corporate tax rate is 35%, but only 40% of corporations pay any tax at all. Total U.S. tax revenue from all sources is about 16.5% of GDP. In 2006, corporate taxes amounted to 2.7% of GDP and then fell to 1.3% of GDP in 2010. Tax on corporations is random, antiquated and not in keeping with Quesnay's economic theories that promote national wealth creation.

Recall President Obama when he said business owners did not build their businesses. Kinder interpretations surmised that he meant we live in an interdependent society where part of our national wealth is taxed to support common interests like infrastructure necessary to conduct business. However, this perspective begs the question: where does the tax base develop to support government expenditures for the common good?

The tax base develops from the business owners that engage in economic activity. Stated simply, business owners create a tax base by running a profitable company from which they, and we as a society should, expect to receive back enough benefits to sustain and grow our businesses.

In the spirit of Quesnay, I propose creating a "balanced corporate tax scorecard" where we track the benefits enjoyed by corporations from their use of our national and state infrastructures and on the other side of the ledger we track the tax base created by these companies' activities. If a company used more than its share of infrastructure benefits, it should ante up more in taxes. Conversely, companies that paid in more than they used should be credited.

The ideal tax revenue to collect should be enough to cover the maintenance and new construction of needed infrastructure that promotes economic development of existing and new businesses. Taxes collected to support causes not directly related to creation and maintenance of U.S. businesses should come from sources other than business. Business creates wealth for our nation and it should not be hampered in any way by unrelated taxation lest we cheat ourselves and neighbors in the long term.

Business consultant Harley Luplow of Harbor Springs earned a law degree from Indiana University and a master's in business administration from Georgetown University. Luplow can be reached at 709-9000 or luplow@mail.com.