Thoughts on the proposed banking bailout

Quick note to the president after reading about the administration's proposal to bail out the banks (cf. New York Times summary of the proposal). This is an unreasonable transfer of money from taxpayers to the banks.

I'd like to see the program require benefiting companies to pay significantly higher tax rates over an extended period (e.g., a hundred years). These rate increases should vary with the degree to which companies participate in the bailout.

The terms should be onerous enough that only companies truly threatened by bankruptcy will apply, fixing a couple of the proposal's worst flaws:

1.) as currently formulated, anyone owning mortgage securities can participate in the auctions, even if not threatened by financial problems. This is poor targeting, and needlessly expensive for taxpayers.

2.) the movement of money seems to be one-way to the banks. We need a mechanism to recover that money (and hopefully more) if/when the banks return to profitability. Adjusting tax rates for those companies would accomplish this nicely.

How to prevent the financial contagion from recurring?

Two elements of the current crisis jump out at me:

1.) banks which are so big that their failure is perceived to carry systemic risk

I would like to see an attempt made to determine the maximum size of a financial firm beyond which it becomes "too big to fail." Let's take that maximum, divide it by two, and make the result into an inflation-adjusted size limit for our banks. Just as exchanges don't allow speculators to exceed size limits beyond which the integrity of the market would come into question, we shouldn't allow banks to exceed the size threshold beyond which they start getting an implicit -- but very expensive! -- taxpayer guarantee.

2.) the spread of securities which are traded off exchange, and for which there is no central clearinghouse

Credit default swaps (cf. New York Times article on these securities) would be the poster children for this problem, and seem to account for a lot of the fear of what would happen if a major player were to go down. There are a couple of problems with them, starting with the lack fo transparency that goes with all the private trading. The central flaw, however, is the vulnerability a security holder has to failure by his counterparty; this risk is totally eliminated if we don't permit security trading without a central clearinghouse.

This would necessarily reduce the universe of tradable securities, but I think we are all seeing the expense that the current system carries.

Making local and state income tax collection more efficient

We can cut the overhead introduced by local and state income tax collection nearly to zero by delegating this duty to the IRS across the board. The way this would work:

1.) a local jurisdiction determines some level of taxation. This level of taxation would be then
2.) converted into a fraction of the federal tax take for that jurisdiction, and then
3.) this single number would be computed and forwarded to the IRS.
4.) Then the IRS would use this fraction to compute a final multiplier for each taxpayer's obligation.

Example: the IRS collects $32 billion from Nevada for the tax year 2008. This number becomes known in April of 2009. At that time, Nevada looks at their locally authorized tax, which is $8 billion. Since 8/32 = 25%, they ask that the IRS collect an additional 25% in tax using a 1.25 multiplier. The IRS applies this multiplier to all Nevadan tax returns, and cuts a check for the $8 billion to the state.

This proposal eliminates most of the need for state and local level income tax collection bureaucracy. It would impose a relatively minor burden on the IRS of determining what state to associate income with; this is normally obvious, but would entail added complication for individuals apportioning their income to multiple states.

For individual taxpayers, this proposal would save them time by relieving them of the need to file state or local tax returns.

This proposal removes the ability of local jurisdictions to deviate from the feds in their tax policy (e.g., by making tax rates more or less progressive than the IRS, etc.). But this seems a price well worth paying to be able to eliminate all the generally redundant headaches that go with duplicating the logic and function of the IRS on the local level.

How to solve the organ donor shortage

A simple public policy proposal that strikes me as a bit of a no-brainer: let's assume everyone is an organ donor unless otherwise specified. Currently we have the opposite policy in place, and this goes against common sense and the public interest.

All the infrastructure in place currently for organ donors to make themselves known (e.g., by adding a sticker to their driver's licenses) could easily be adapted to suit people who want it known that they don't want to be donors. And for those who don't have an opinion on the matter, or who might be inclined to be donors but don't have it sufficiently together to make their opinion known? Welcome aboard the organ donor bandwagon!