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Organizing a society to provide optimum benefits for all of its members is an intractable problem, similar in its nature to the traveling-salesman problem. The more technologically advanced the society becomes, the more intractable the problem becomes. No one entity or small group of entities can offer guidance to the societyís members in a way that leads to maximum satisfaction.
The solution has always been to allow individuals and small groups to work out their own solutions locally and then organize larger groups to prevent the smaller groups from damaging each other. Thus we obtain government, an entity intended to impose the rule of law over an entire society. Properly conceived and manifested, government does what individuals and private groups cannot or should not do and it does only what is necessary to ensure that people can pursue their own best interests without harming others or being harmed.
As technology and society become more complex, the potential for harm to consumers and workers increases. The old doctrine of caveat emptor is no longer sufficient to protect consumers from dangerous or shoddy products. Consequently we get new agencies, such as the federal Food and Drug Administration or the county Health Department (both originating near the beginning of the Twentieth Century in response to the horrors that emerged from the Industrial Revolution). Those agencies produce regulations to augment the law and ensure that businesses donít do anything that would harm people. That protection, of course, involves paperwork.
One of the great sins of civilization is bureaucracy, an evil that we inflict upon ourselves. Itís a necessary evil, certainly, but it is an evil nonetheless: it diminishes us. In particular, it takes away our time. In a sense, bureaucrats are like vampires sucking the lifeblood out of their victims, because time (measured in man-hours of effort) is, in essence, the lifeblood of a company.
Every business must devote a certain portion of some employeesí work time to hosting inspectors or filling out forms in order to verify that the company is complying with government regulations. That loss of time can involve four different levels of government - federal, state, county, and city. Worse, itís equivalent to a regressive tax: it affects small businesses more than it affects large corporations. A large corporation can simply hire the accountants, lawyers, and clerks necessary to deal with the bureaucracy and count it a minor expense. A small company run by one or two people with a handful of employees must spend proportionately more time less efficiently dealing with government and its demands and thatís production time taken away from whoever gets the task.
Small business is the foundation on which a national or state economy grows. The demand for goods and services begins with the small business. For example, a stationery store sells paper, 8-1/2 x 11 inches (suitable for insertion into a typewriter or printer) in 500-sheet reams. People buy the paper and the store gets money. In turn, the storeís purchasing department buys the reams from a company that takes large rolls of paper, cuts them into 8-1/2 x 11-inch sheets, stacks them up, and wraps them. This company sells the packaged reams in boxes to many stationers and office-supply stores and receives money. With that money the paper-packaging company buys large rolls of paper from the paper manufacturer, who sells the rolls to many users of such large quantities of paper. And on it goes, each business supporting an even larger one, all of them together constituting an economy.
Making small business as efficient as possible benefits the wider economy and helps to maximize satisfaction in the associated society. Thus we see a strong incentive to minimize bureaucratic interference with business. There are two aspects of that interference that we must address - taxes and regulations/licensing.
One woman who runs a small business once called herself an unpaid tax collector and she is correct. The need for her to calculate taxes for payment takes up a significant portion of her time and itís really not necessary.
Federal taxes consist mainly of income tax withholding and Social Security payments, neither of which the employer should have to calculate. Withholding was instituted to give money to the Treasury several months early and itís unnecessary: the practice can and should be ended. The Social Security tax can be calculated by the employee as an extra line on their annual Form 1040. The taxpayer adds the Social Security tax to their income tax and sends it to the Internal Revenue Service, which transfers the appropriate amount to the Social Security Fund and informs the Social Security Administration, which sends a receipt to the taxpayer. So much for federal taxes.
On the state level we have mainly the sales tax. Thereís also a state income tax, but thereís no withholding on it (which tells us that federal withholding is unnecessary), so we need not concern ourselves with it here. The sales tax is itself regressive: it puts a proportionately greater burden on the poor than it puts on the rich. Letís get rid of it altogether and increase the state income tax to compensate the loss of revenue. That elimination will also relieve businesses of the need to keep detailed records of sales in order to prove to the state that they have collected and paid the correct state sales tax. It also solves the problem of people buying goods over the Internet and not paying sales tax on them.
On the county, township, and city level we have sales taxes and property taxes. Those taxes pay for the government services most directly used by people - police, firefighting, and street maintenance being the primary ones.
Property taxes can be the cruelest. Imagine some poor soul who works hard most of his life to buy a nice home for his retirement only to discover that when his income declines after retirement the property taxes force him out of his home. The obvious solution makes residential property exempt from taxation: the principle upon which we base that solution requires that only flowing wealth and not standing wealth be taxed.
That solution leaves commercial property taxable. If we are going to tax commercial property (and that includes rental property), then we should not base the tax on the value of the property (standing wealth), but on the wealth that flows through the property, the income that the property owner gains from the commercial activity on their property. The tax would be assessed annually or quarterly and rely on a number that the property owner calculates anyway, so it does not have to represent an onerous burden.
As with the state sales taxes, local sales taxes are regressive. But without sales taxes how can counties and cities bring in enough money to pay for the services that they provide? Itís an especially vexing problem because the reconfigured property taxes are essentially sales taxes. However, the reconfigured property taxes may be sufficient if the government doesnít engage in unnecessary spending (as for sports arenas or stadia that the sports teams could pay for themselves).
Regulation and licensing can suck a tremendous amount of time out of a businessís schedule. The problem doesnít come so much from an assumption of ignorance, of business owners not knowing what to do: ignorance can be abated through simple publications, if only single-page flyers. No, the fundamental source of regulation and licensing and the bureaucracy that produces them is a lack of trust.
The mistrust of business people is very old and is based on a simple fact of human nature. Running a business exposes one to the temptation to indulge the deadly sins of avarice and sloth. Museums contain letters, written in cuneiform on clay tablets, in which Sumerians and Babylonians complain of being cheated by merchants and craftsmen. The Romans gave us the doctrine of caveat emptor (Let the buyer beware!), which implies a need for vigilance in commercial transactions. Today products are so complex, so numerous, and made so far from consumers that no one can reasonably know whether they are good or harmful or can reasonably hold the producers accountable. Thus we have government regulation, keeping the producers of goods and services honest.
But regulation requires that business owners (or their employees) fill out forms, which confirm that the business is complying with the regulations. Form-filling takes time that could be used more productively. Canít we eliminate it? Why not simply make all companies fully liable for any damage that they or their products do to people or property and let the courts punish companies that cause harm?
That is essentially how our society ran prior to the beginning of the Twentieth Century. That system didnít work well in the past (which is why we have government agencies regulating business today), so it likely wonít work well now. Itís also bad for businesses, because it leaves the ownersí liability undefined and, therefore, ambiguous. No, regulation is necessary to a smoothly running commerce in which everyone is protected from harm.
As noted, regulationís primary benefit to business lies in its defining and limiting liability. Regulation is like the immune system in our bodies: when it works properly it keeps our society healthy, but when it goes wrong or becomes overactive it becomes a disease itself. We need some mechanism that will prevent regulation from becoming a disease.
Penalization provides a natural brake on human activity, so all we need is to devise a system that rewards appropriate regulation and penalizes over-regulation. We need to regulate the regulators.
First, do no harm. Wrongly attributed to the Hippocratic Oath that medical students swear in order to become Doctors of Medicine, it is, nonetheless, an excellent doctrine for everyone to follow. Indeed, getting people to adhere to that doctrine is basically what regulation is all about. It properly applies to the regulators as well as to the regulated.
Harm consists of any deprivation of what belongs to people by natural right. Time is ours by natural right; certainly the time needed to earn a living is part of that right. True, we sacrifice some of our time in order to live in a society under law, but that sacrifice must be kept to a minimum if that society is to thrive. The trick that we want the regulators to perform is to prevent businesses from harming anyone and do so without harming the business.
What to regulate and how much to regulate it forms a topic too wide and complex to fit into this short essay. Suffice it to say that the main problem in that topic is that of determining an incentive that ensures that the regulators do their jobs and do them well. Human nature and human weakness play an important role in causing the problem, so they must also play a role in solving it.
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