(This item originally appeared at Forbes.com on January 11, 2016.)
“Thank goodness for Steve Forbes,” is something you hear pretty often these days. I give him personal credit for igniting the Flat Tax Revolution with his 1996 and 2000 presidential campaigns – a Revolution that, oddly enough, did not take place in the United States, but in the dozens of other countries worldwide that adopted Flat Tax reforms after 2000 and enjoyed exactly the results that Forbes promised, except better.
With his new book Reviving America: How Repealing Obamacare, Replacing the Tax Code, and Reforming the Fed Will Restore Hope and Prosperity, Forbes and his longtime collaborator Elizabeth Ames offer what I think of as a message to future generations. This is the important stuff. Don’t forget this.
These prescriptions might not seem so new. Indeed, most of the current crop of Republican presidential hopefuls have one or another variant of this plan — even including a gold-based dollar, which was really out there only a few years ago, and now is not.
When Forbes was talking about this stuff twenty years ago, he stood against people like Bob Dole and George W. Bush, establishment nonentities who did as they were told while promising the public as little as possible. And yet here we are today, with Trump, Carson or Cruz leading polls while Jeb Bush, despite major financial backing, can’t get out of the single digits.
America, despite its long degeneration, still has a core of virtue. We are still talking about major tax reform (having alas done little), while Europe destroys itself with high-tax “austerity.” The academic establishment in the United States still hasn’t got its arms around the brilliant insight – “taxes matter” – that Robert Mundell transmitted to Ronald Reagan by way of Jack Kemp, and which was later demonstrated by dozens of flax-tax-implementing governments worldwide. That’s one reason why the academics are so attached to funny money today. They have no other idea to offer.
Forbes and Ames lead with a discussion about the health care system – which really has been a catastrophe in the United States, before Obamacare, and especially after. Unfortunately, a lot of conservatives have felt compelled to defend the present (or pre-Obamacare) arrangement. I suppose they wanted to prevent some kind of wholly state-run system. Alas, this stance has long been pure self-delusion: commie-socialist France has, by standard of care, the best healthcare system in the world, and it cost 11.7% of GDP in 2013, according to the World Bank. A World Health Organization report in 2000 put the United States at #37 in terms of standard of care, just behind Costa Rica. (This was so “controversial” that the WHO never ranked healthcare systems again. Something tells me that it was not Costa Rica that complained.) The U.S.’s worst-of-the-OECD result cost 17.1% of GDP in 2013, and it is still rising.
No wonder Costa Rica has become a major destination for savvy healthcare shoppers from the U.S.
Forbes instead argues that the present U.S. system is not really a “free market,” but a monstrosity built of erroneous regulation that prevents a real market between patients and healthcare providers. Regulations have created effective cartels – 87% of the health insurance market in Alabama is dominated by one provider, for example. We all know that doctors and hospitals won’t actually say how much their services cost, which is as fundamental a violation of free market principles as you could ever invent. Forbes points out that, in small pockets of the healthcare market that fall outside the hospital/insurer cartels, such as for Lasik eye surgery, nominal prices have actually fallen considerably in the last decade. The cost of Lasik surgery has fallen from $5,000 to $2,500, while quality of service has improved. In a similar way, the price of open-heart surgery had fallen to $1,583 in India in 2013, while Bloomberg found a cost of $106,385 in the United States.
That doesn’t sound like a “free market” to me either. Something stinks badly in U.S. healthcare, and if we are going to avoid a big-government solution, we had better get started on creating a free-market one. Forbes has a number of good suggestions to start, which are generally incremental and easy to implement, but which might produce enough obvious benefits that people are emboldened to travel farther along that route.
Forbes’ flat-tax plan, which was a hopeful idea twenty years ago, now has a fantastic global track record. Alas, U.S. conservatives are still riven between the flat-tax idea and the “fair tax,” which amounts to a single sales tax. Forbes tackles this debate and outlines a number of problems with the “fair tax,” including its very high rate around 30% (computed as sales taxes normally are), to which must be added state-level sales taxes to produce a rate likely exceeding 40%.
I think the “fair tax” plan might work fine if you are trying to generate under 15% of GDP in tax revenue with it. Places like Bermuda, and other financial havens with no income taxes, use a similar system. So did the United States, before 1913, when the Federal government was entirely funded by tariffs and taxes on things like alcohol – indirect taxes similar to a sales tax – and Federal tax revenues amounted to 3% of GDP. I think it would be great if the United States could reduce its overall tax revenue needs to about 15% of GDP, like Hong Kong or China today. Then, we could have either a “fair tax” with no income taxes (like Bermuda) or a “flat tax” with no sales taxes (like Hong Kong), and likely have great results either way.
However, for as long as we want to have tax revenues more in the neighborhood of 28% of GDP, we will need something like both a “fair tax” and a “flat tax.” Actually, things are already set up along these lines today. Sales taxes are administered entirely by states. Income taxes are the focus of Federal taxation. Thus, we could have a flat tax at the Federal level, while the “fair tax” becomes a state-level policy, eliminating all state-level income taxes and various junk taxes. (Property taxes would still fund municipal governments.)
Forbes’ third pillar of prosperity is Stable Money, which in practical terms means a dollar whose value is linked to gold. This is how the United States actually ran its monetary affairs from 1789 to 1971, along the way creating the wealthiest society the world had ever seen, and populating a continent originally claimed by France and Spain. You would think that historical lessons couldn’t get much more obvious, but Funny Money is thick in the air these days, as we all know.
“The Federal Reserve may be the closest thing we have to a Soviet-style central planning bureaucracy.” Instead, Forbes says, we should adhere to the traditional ideal of money as a stable unit of measure – in this case, a measure of monetary value, similar in nature to measures of weight or volume. Mirroring the arguments that George Gilder expressed in his 2015 book A 21st Century Case for Gold: a New Information Theory of Money, Forbes argues that “a fluctuating dollar corrupts the price system driving the economy.”
“Prices are how markets communicate to producers and consumers. They tell producers which goods and services are needed, and which aren’t. … When the Fed artificially manipulates the dollar, this system of communication becomes distorted. … The result is misallocation of capital and wasted investment …” Forbes argues.
Of course this is exactly what all the Funny Money advocates love best about it. All of their academic papers over the past eighty years amount to guesses as to how you can “corrupt the price system driving the economy” to produce whatever short-term effect happens to be popular at that time.
Once you decide that Stable Money – the principle that the United States adhered to for nearly two centuries before 1971 – is the ideal to which you aspire, everything else is engineering details. We already know, from many centuries of experience, that a gold standard (tying the value of the currency to gold) is the best way to achieve this in practical terms; one that actually works a lot better, in practice, than maybe you might think it would. It works well enough that nobody has found a better way. Also, nobody needed to find a better way: The end of the gold standard era, in 1971, came after two of the most prosperous decades in U.S. and global history, just as the end of the “Classical” gold standard came to an end, in 1914, after a similar era of global prosperity. There was no problem that needed to be fixed.
Forbes comes from what I’ve called the “pragmatist” tradition. His monetary reform proposal keeps the existing Federal Reserve-managed dollar (no “End the Fed”), but explicitly allows other currency issuers to operate (“free banking”), and eliminates all taxes and regulations impeding the use of gold and silver as money. Federal Reserve Notes would be convertible to gold bullion on demand, and a relatively small reserve of bullion (to be replenished whenever necessary) would be kept for that purpose. The dollar’s value would be managed primarily via open-market operations in debt securities, much as was the case with central banks in the pre-1914 era. It is a sophisticated proposal that would be easy to implement, and reflects Forbes’ understanding of all the various options available in these technical matters. (Forbes makes generous mention of my own books, including Gold: the Monetary Polaris (2013), which focuses on technical operating procedures.)
Forbes has almost single-handedly set the example of expertise and leadership on this topic, happy to stare down the legions of academics who, as it soon becomes apparent, don’t really know what they are talking about.
Low Taxes and Stable Money were the founding principles of the United States. The Constitution of 1789 states that money shall consist of gold and silver. Income taxes were illegal until 1913. With all the encrustations that have built up since then, we also need reforms of regulations and spending programs, with healthcare high on the agenda. Today, these ideals have been passed down among a relatively small group of people, such as Forbes, his predecessors such as Jack Kemp, and a younger generation such as Rand Paul or Ted Cruz. These principles still don’t get much appreciation from academics, the media, or institutions populated by academics such as the IMF, which are still blowing up one country after another with high taxes and unstable money.
I shudder to think of what things would be like without people to carry on this core knowledge. Governments would careen between “austerity” and “stimulus,” causing wreckage both ways, which they would attempt (unsuccessfully) to solve with various applications of Funny Money which never have the results intended. Actually, that is a rough description of the normal state of affairs today, but at least there remains hope that things could be better. If more people shared Forbes’ vision of capitalism as it is supposed to be — a fountain of prosperity and abundance, the foundation of liberty — that hope could become reality.