Egypt - Tax Policy for a New Economy

Just a Few Words About Tax Policy

 Don't Make the Same Mistakes We Did

Scholarly books about tax policy are so numerous that a modern pyramid could use them for a foundation.  Likewise, tax experts with credentials as long as a corporate IRS filing are perched in droves, waiting to breathe their "magic" into tax policy for governments everywhere.

Confronted by this daunting expertise, the resolutely humble MeanMesa wouldn't even consider simply "jumping into the fray" as some sort of cheaply masqueraded authority on "good taxes" and "bad taxes."  Instead, what can be offered here is a view from the "Main Street" eyes of an American who is watching "tax policy" relentlessly wrecking what could have been, otherwise, a fairly healthy economy.

And worse, those same toxic tax policies, now seemingly a permanent fixture of American life, have moved into politics -- and, they are the politics of division. 

All these would be stiff, academic matters poorly suited for a post on Egypt if we were to find ourselves in better times.  But, given the conditions of this present moment, perhaps considerations such as these turn out to be nothing less than "the burning question of the day" when it comes to mapping the path forward, that is, when it comes to defining some basic principles which will structure Egypt's new economy.

Further, rather than "flitting" all across the possible spectrum of tax matters, this post will focus on a particularly destructive "habit" which is currently plaguing the US.  All this may be relevant here because the same tax "habit" will almost inevitably begin to show up in the form of an "absolute necessary" tax policy in the halls of Egypt's new government.

The Temptation of "Tax Expenditures"

This won't be a discussion about ways in which taxes are collected.  It will be a discussion of ways in which taxes aren't collected.  

Setting aside a "marching horde" of specifics and details, we see the US in the challenging throes of a revenue crisis.  The US government is simply not collecting enough tax revenue to fund itself in the general manner expected by its citizens.  Correcting this problem, although it might seem straight forward at first, turns out to be nothing less than attempting to "milk" a stampeding herd of dairy cattle.

That is, while they are still stampeding.

For a glimpse of what we are facing here in the US, let's take a look at a few representative examples which seem to lie at the base of the problem.  For this very limited discussion, we can consider an important feature of the "many headed monster."

First, three hundred of the most profitable corporations in the US pay no tax on their corporate income, that is, not a dime.  In fact, some of these behemoths such as Exxon-Mobile -- one of the largest and most profitable corporations in the history of the entire world -- not only don't pay taxes, they actually receive annual subsidies to help them "make ends meet" because it is "so, so, so difficult" for them to do business without a little "help from their friends."

Of course, US tax law requires that such corporations pay tax on their income, on the profits they derive from doing business here.  In fact, the corporate "tax laws" in the US very conveniently include provisions that such profits be taxed at around 35%.  

"Convenient?"  Well, yes and no.

If these taxes were actually paid at this 35% "top marginal rate" the US debt would be paid out rather quickly.  There is an immense amount of money "flowing" through this particular channel of the economic process.  The "convenience" angle comes not through government or corporate financial solvency but rather through public opinion opportunities.

Even though these profitable corporations never actually pay taxes at these rates, they can continue to complain that these "theoretical" rates are among the highest in the world.  Right away, they can begin "public relations programs" arguing that these rates must be lowered even further so the resulting "burst of business opportunities" will become usher in all sorts of economic benefits.

Further, these remarkable and costly  exceptions to the US tax code are not the product of some simple "happy coincidence" or the slothful oversight of a dozing tax collector somewhere in the IRS.  Each one of them is, instead, the outcome of a carefully crafted bit of legislation from some period in the past. 

Over the years, the US Congress has quietly passed one after another of these "tax expenditures," each one initially sponsored as a "really good idea."  Once in place, these "tax expenditures" tended to become far more permanent than anyone expected.  After enjoying such illicit advantages for a few years or decades, the public relations sections of the corporate receivers were able to characterize the elimination of these "loop holes" as "tax increases."

They are called "tax expenditures" because they are comprised, not of taxes collected then distributed to these "struggling corporations," but because they are taxes which are never collected in the first place.  

Similarities between Egypt and the US (image source)

They never go "through the books."

They amount to roughly $200 billion dollars per year.  Year after year.

What Does This Have To Do With Egypt?

Here, we must concentrate of the "really good idea" part of the US version of the phenomenon.

Egypt is already experiencing its own form of the same thing.  During the "Mubarak economy," not only did far too many "tax dollars" seem to simply disappear into the autocracy, in many cases they were simply never collected in the first place.  Anyone who had access to the government just seemed to wind up with all sorts of "special tax advantages."

In the US case, these advantages were each calculated to encourage some part of the economy in a necessary way.  They "sped up" and "lubricated" an otherwise "free market" response to some pressing problem. or desired result. 

They "encouraged" business to develop in some "vitally necessary" manner by adding the profitable benefit of the "tax expenditure" to the balance sheet.  Once the "tax expenditure" was in place, the then enhanced profit opportunities were supposed to become "great enough" to spur development and growth in the desired way.

So, what could possibly go wrong?

Theoretically, not too much.  In the "real world," of course, massive amounts of fraud and wealth redistribution began immediately.  Worse, these things not only "began," they kept going.  And, as they "kept going," more and more of the corporate profits could be directed at Congressional "campaign contributions" to "keep them going."

As the government of the new Egypt begins to form tax policy, a predictable "something" will emerge almost at once.  Some of the "otherwise tax paying" Egyptians will present themselves as some sort of "necessary exception" to the general laws for tax collections.  Their argument will be that, should they be required to pay the full tax on their enterprises, growth will be slowed and the overall economy will suffer.

This "rivulet of tax exceptions" may begin as a trickle, but in no time it will become a raging torrent.  Worse, it will provide an under carriage for Egypt's next oligarch class, folks already "waiting in the wings" for their chance to replace the old oligarch class.

Grand Pa's Advice

Although it will be important not to "throw the baby out with the bath water," MeanMesa is adding the "extreme caution" sign to these types of legislative proposals.

Absolutely, urgently unavoidably necessary "tax expenditures"

Should representatives in the new Constitutional government of Egypt seem to be passing out these "tax expenditure" favors right and left, each one validated by its immediate necessity for "jump starting" the "post-Mubarak economy," it might be time to consider some new representatives.

If the "tax expenditures" seem to be tilted too much toward being exclusive advantages to only a certain class of recipients, they should be considered suspicious.  Tax expenditures should provide benefits to all Egyptians, or they should not be passed.  The ones which are legitimate should have a concrete "sunset" provision, that is, when they are passed, their absolute end date should be part of the package.

Some tax expenditure plans really will help the Egyptian economy, but Grand Pa suggests erring on the conservative side.  Things in Egypt will begin to get better quickly, but tax expenditures only make sense when "quickly" still isn't "fast enough."

Once tax expenditures have been in place for a while, their benefactors seem to become more and more willing to do anything necessary to keep them in place.  If the new Egyptian economy racks up tax expenditure exceptions to the same extent that the US has, it will experience the same difficulties of huge debt, corporations which never pay taxes and the Egyptian equivalent of a US Congress which is beholding to its contributors and no longer interested in serving its people.

MeanMesa will continue this line of posting with an article about a "fellow traveler" to the tax expenditure idea, the "tax incentive."

Meanwhile, best wishes to the Egyptian people.

The New Egypt - What's To Be Done With the Billionaires?

Some Advice for Egypt From A Poor American

This is the first of a series of posts on economic issues following the revolution.

See also (link here): The Next 12 Months -- Egypt's Path Forward: Elections

Virtual libraries of classic economic theory are already available in both Cairo and Albuquerque.  Some have demonstrated a promising "track record," and others, given time, have exposed themselves as really, really bad ideas.  Naturally, both American pundits, anxious to make some compelling point, and  the citizens of a new, revolutionary Egypt, facing the daunting task of defining the new democracy's new economic principles,  are attracted to the overly convenient possibility of simply "adopting the names" and "shoe horning" some ready made economic ideology into the unique conditions of the place and the moment.

Although MeanMesa has no particular appetite for competing with the likes of Keynes and Marx in promoting some poor fitting economic theory from a decade or a century ago, there may be some benefit to be gained from a very "pedestrian" comparison of Egypt's new possibilities with a few of the American mis-steps currently vexing our own nation.  Like warts on a baby, these political-economic constructs have insinuated themselves into our US domestic ideas with a troubling durability, a difficult permanence now being revealed as we are faced with the task of "undoing" them.

As far as any validating credentials might go, MeanMesa openly admits to the following two:

1. An income from US national Social Security which is significantly below what is defined as the "poverty level" here in the United States, and,

2. An abiding interest in observing the economic realities of the US as they are, that is, often in contradiction with what they are commonly accepted to be when  compared to the unexamined, traditional social myths in the minds of Americans.

So, rather than propping up any pretension to be lecturing to a hall filled with economics graduate students, let's look at a few "tips" which might prove to be more akin to a friendly chat with one's grandfather.

A final, introductory note:  The little graphic effort in Arabic, 

scattered through this post, is meant to mean "extreme caution."  Admittedly, MeanMesa's fluency in Arabic has suffered a slow death from decades of non-use, so please forgive any unintentional translation problems.  It's the thought that counts.

Some "Not So Academic" Thoughts From Grand Pa

Let's look at a few "thought points" which seem to come to mind.  Remember, these are things to consider, not "instructions" about what to do.  The "what to do" question is an Egyptian one which has no legitimate place on a zany little foreign blog.

Class War May Smell Delicious, but...

It doesn't require an endless sea of compassion to understand why Egyptians might have an appetite for outright class warfare against the oligarchs who have enjoyed "every business privilege" possible during the recent autocracy.  Just like the US, Egypt has a "bumper crop" of well fed billionaires.  This bunch causes just as much mischief here as they do in Cairo.

At first glance, it seems to be the incredible wealth these oligarchs have amassed which has caused the problem.  Of course, the wealth is part of the question, but the even worse effect of having such gangs running loose for so long has to do with opportunity.  They have not only schemed to control immense illicit  wealth, they have also schemed to protect those "wealth producing" mechanisms by scheming to protect their illicit opportunity to make even more.

"Illicit opportunity?"  Yes.  Legitimate wealth comes, in a general over view, from innovation, invention and efficiency.  Illegitimate wealth may include bits and pieces of these qualities, but in a larger scheme, it actually profits because it "games the system."  In the US this means that when "research and invention" money is diverted to "campaign contributions," the "return on the investment" becomes extremely attractive.  Egyptians already know this story -- in spades.

After a while, no market remains able to "correct" itself while buried in layers of such corruption.  The benefactors become so established that competition becomes impossible.  Billionaires, corporations and oligarchs like it that way.

Although Egypt has been in this feudal economic state for so long that it may seem normal to many, it is a mistake to think this way.   Dreaming is not optional. Egyptians are just as industrious and ambitious as any one else.  When this mind set is placed to one side, when the feudal hierarchy is replaced with a "level playing field," prosperity becomes an everyday, normal expectation -- for everyone willing to try.

Come on.

Isn't that a bit "flowery" as predictions go?  Nope.  Both Egyptians and the rest of the world will be shocked at how fast and how deeply prosperity can spread if things are done well.  The MeanMesa phrase which comes to mind is prosperity like "spring dandelions in a cabbage patch!"

 Guillotines, Regulation and Tax Policy

Guillotines

So, how can Egypt get from the "Mubarak" economy to something that actually works for the "rest" of Egypt?

 Although the French Revolution's guillotines may seem attractive, when cooler heads prevail much better alternatives emerge.  Mobs looting mansions and street corner lynchings might seem like a good idea, but there are better choices with better future outcomes -- and, not outcomes just for the billionaires, either. Outcomes for Egypt.

Because of the revolution, those "better choices" have now become real possibilities and should be strongly considered.  However, this is mentioned here because the "other side" is extremely well practiced in subverting such attempts.  The "founders" of a New Egypt have to be very careful to keep these ideas front and center as they gradually form the new economic structure for the country.

It's not only the money which must be removed from the pockets of these billionaires, it is their illicit stranglehold on opportunity.

However, as we concentrate on the money, we can divide the question into two parts:

The immediately obvious cases of criminal enterprises -- blatant corruption, bribery, extortion and the like -- acts which can be investigated and prosecuted under existing law.  Retroactive or post dated laws are probably going to create more dissent than convictions would be worth in money or in justice.

The future plans to continue the same style of criminal acts as soon as illicit influence can once again be restored in the new government.  These crimes were only profitable before when they could be conducted "under the cover" of the government.  The folks who benefited from them are already planning a "come back" as soon as they can be made "safe" again.

On this second matter, the "poker game" of representational democracy begins.  Will the people elected to the new government succumb to the inevitable assault by these "old captains of industry" when the "quiet money" begins to flow again?  This is the "terror of the moment" when it comes to getting and maintaining a democracy right where this same crowd used to call the shots.

Regulation

In the US, citizens gradually lost sight of this responsibility for constant vigilance.  While the US electorate wasn't paying enough attention to matters in Washington, D.C., American billionaires gradually insinuated themselves deeply into the Congress and, in one recent case, the Presidency itself.  Assumptions about the trustworthiness of US federal regulatory agencies turned out to be incorrect.  Assumptions about the idealism and democratic commitments of public officials turned out to be equally unfounded.

The New Egypt faces this same threat, only with even more grave consequences.  In the US, voters still had the idea that these wrongs could be corrected.  However, in post revolution Egypt, this development can shake the faith of everyday Egyptians that a trustworthy government is even a possibility.

Much of this can be resolved as the new government begins to pass laws which both regulate the business interests and make the activities -- and bank accounts -- of elected representatives absolutely transparent.  Grand pa's advice is to "beat this horse to death," that is, err on the side of over regulation and transparency rather than on the side of less.

"Sunshine is the best soap to remove stains."  Last time MeanMesa looked, Egypt now has plenty of sunshine -- more than ever.  Very few valuable things must be done in the dark.  Also, very few of the legitimate things that a government must do are so complicated or sensitive that the people can't be told about them.  All about them.

It's always easier to relax regulations on businesses and legislators than it is to increase them.  The reason it's easier is because these regulations usually only  increase after everyone realizes that they weren't strict enough the way they used to be.  

This idea also applies to what we call "lobbyists" in the US.  At the time of this posting, lobbyists and special interest groups are practically in charge of the day to day decisions of the both US and state governments.  It is a serious mistake to assume that these same types of "influence salesmen" won't be clustered around Egypt's new government the very same day the doors are first opened for business.

Be ready for them.  No candidate should be able to win an election without a convincing promise to fight against this.

Tax Policy

Carefully enforced tax policies represent the best on-going guarantee that the billionaires won't simply take over again.  Here we can present a bit of US history.

Right now, the US is under a mountain of national debt.  Once a few thousand "reasons" and "culprits" are stripped out of the mess, the conclusion is simple:  the country was simply not collecting enough taxes.  The tax rates for corporations and billionaires went down, and down, and down -- to their lowest rates in half a century now -- thanks to the influence these folks had in the Congress.

We Americans are now supposed to be astonished that the country doesn't take in enough money to pay its own way without borrowing.  A central feature of this is straight out corruption, but that idea may need to be broken down into a few other, smaller parts.  MeanMesa intends to address those in another post.

The point here which pertains to the new Egyptian government is Grand Pa's advice to keep taxes simple and uniform.  A progressive scale where the tax rate increases as income does is probably something to consider, but perhaps the most important idea is that everybody pays their share.

The top 300 US corporations in the US paid no income taxes this year.  Zero.

Although this didn't happen overnight, it still happened.  The new Egyptian government enjoys a rare opportunity to prevent a similar thing.

As mentioned before, tax policy includes lots of details, but MeanMesa will look at the biggest issues when we revisit this topic.  Nonetheless, now is the time to start carefully considering how these laws will be written once the Constitutional process takes control of the country.

So, do some "big picture" thinking while the country prepares to start governing itself.  Until then, best wishes from MeanMesa!

Looking for the "Egyptian Model" -- From Cairo to Cuba?

The corporate American media always rushes to "late breaking events" with an over weight flock of "similarities."  The coverage of events on Egypt is no exception.

Not surprisingly, "hot on the tails" of these proffered, profound similarities rush forth the caveats, that is, all the contradicting details which make the seconds old similarity somewhat, well, less similar.  So, as MeanMesa wiles away these cold New Mexico afternoons glued to the radio for the latest news from the Nile, the geezer's thoughts began to wander a bit.  What about all these conveniently suspicious "similarities?"  

Of course, it's no big shock that the media "paint shop" is rolling stories through at a breakneck pace, converting every barely dry Studebaker from Communist "red" to Hezbollah "green" for the next terrifying scoop.  Come on, if you have to extract 24 hours of "news" coverage per day from the "little dab" of populist action boiling out around the globe, a few tricks of the trade will keep the toothpaste commercials coming.

So, as MeanMesa, filled with angst over all these tedious and tormented  "similarities," thinks of some way to add a little something new to the mix, the reconciling advantages of age seep into the picture.  MeanMesa watched the revolution in Cuba as it was unfolding all those years ago.  More importantly perhaps, MeanMesa can recall with unsettling clarity the media treatment of those heady days in Havana.

First, however, just a few notes concerning the "before and after" conditions of the island, and, not some drooling string of historical research, but instead the casual recollections of the "story" which was being fed to domestic consumers here.

Castro, 1959 (image source)

The old US supported dictator of Cuba was a man named Batista.  He had plenty of meat handed backing from official US sources, but he also enjoyed a very fulfilling association with the US Mafia.  The thugs and gangsters from the largest US crime families were in total control of the luxury "vacation hotels" which ringed Cuba's Caribbean coast.

A frothy, fun filled Mob Disney Land (image source)

Very oily, dangerously over weight, 1950's Americans could holiday on the island where they would find plenty of beautiful Cuban girls eager to please them.  If you can imagine the "social setting" in a Baghdad nightclub when Sadam's sons were in attendance, you would be on the right track.  The island was in a perpetual state of economic catastrophe where a handful of incredibly rich, elite locals had essentially all the money and everyone else worked for them.

This calamitous inequality extended beyond the hotel circuit.  Most of the agricultural property on the island belonged to a only a few "wealthy land owners" with checkered pasts beginning in the colonial (even more colonial) earlier days.

The mobsters, already able to exert significant influence on American institutions such as the media and the Senate, actually considered Fidel Castro to be somewhat a "step up" from Batista as far as "profitability" went.  Their idea was that Fidel's agrarian roots would make him less demanding when it came to taking his "cut" of the immense vacation money flowing along the beaches.

As a consequence, the American media of the day dutifully villainized Batista while profiling Castro as a "breath of fresh air" who could "correct" the avarice of the previous government.  Make no mistake here.  Batista was famous for ripping the arms and legs from recalcitrant Cubans whenever his "bosses" on the US East Coast commanded.  The mob's problem with him was that Batista's greed was hampering the "beneficial development" of the already ossified, two class local system.

Read the entire 1959 Guardian UK story here.

Cuban dictator flees

· Rebels demand own man as President
· Havana mobs riot

• Alistair Cooke
• The Guardian, Friday 2 January 1959 16.01 GMT
• Article history
President Fulgencio Batista of Cuba, who threatened two days ago to take the field and bolster the morale of his men; changed his mind last night and abdicated.
He stayed in Havana long enough to proclaim a great Government victory in the Battle of Santa Clara and then hopped a place for the Dominican Republic leaving behind a junta which the rebels refuse to recognise.
He took with him his chief military aides and put his eldest son and 53 other military leaders on a plane to Jacksonville, Florida. Ten of Batista's personal secret service officers arrived today in Miami, and yet another flight carrying most of the Batista Cabinet and their families landed in New Orleans. Batista's two youngest sons had flown to Idlewild earlier on what was called a "sightseeing tour".

There were widely reported but unconfirmed stories that the rebels had captured Batista's yacht with 300 tons of gold ingots from the Cuban Treasury.  The final collapse of the old government had resulted in a traditional slaughter of particularly "bad actors" here and there around the island, but it was clear that the great majority of Cubans were firmly on the side of the revolutionaries.

Media-wise, the nobility of Castro declined almost immediately.  MeanMesa visitors will recall that January of 1959 saw reactionary elements such as the John Birch Society (founded by the same suspicious oligarchs, for example the Koch brothers, who are, even today, attempting to color the news from abroad for their interests)  as quite legitimate national voices in the struggle against the "Godless Communists" in the old Soviet Union.

When it became obvious that the new Cuban leader was not greedily anxious to continue the mobbish "sweet deals" Americans were accustomed to under the old regime, Castro became, as it was said in those days, a "Stalinist Nightmare."  Not prone to being overly embarrassed for temporarily reporting an unauthorized "up is down" story line, the 1950's American media simply switched a few adjectives and continued with new, altered headlines.

Those headlines, along with mountains of other contemporary Cold War crap, are the foundation of what many modern Americans still think about the Cubans.  Worse, they listen to Cubans living in Florida and think that they are primarily concerned with "freedom and democracy" on the island when, actually, they are mostly just anxious to regain the titles to their old hotels and plantations.

Now, the "similarities" to Egypt.

In terms of "investment portfolios," Mubarak and Batista have a lot in common.  Mr. Mubarak and his close band of cronies have already  literally looted every 16 cent Egyptian pound in the unfortunate country which was not anchored below a pyramid.  MeanMesa assumes that, although no yacht will be involved, the electronic transfer process will amount to roughly the same thing.

Mubarak's Bust will probably not be added to Abu Simbel

After all, the problem of the "missing pounds," suspiciously similar to what we are facing here at home, is at the root of the primary complaint of the protesters in Cairo's streets.  When all the "growth money" is cynically split between well connected outside enterprises and the country's executive committee, the resulting disastrous economy shouldn't surprise anyone.

But even this outrage does not squarely address the matter of the "similarities."

The exact, predominant "similarity" on the table is about the rebellion.  Oh sure, the American media has been generally positive about the nature of these insurgents, with the carefully groomed exception of the Muslim Brotherhood, of course.  However, MeanMesa is wondering about the prospects of a future demonization along the lines of what happened in Cuba. 

Our national and cultural expectations run along the lines of the flag raising at Iwo Jima, when we might better prepare ourselves for future possibilities with a closer examination of Cuba.  The horrible outrage presented in the press as Castro's nobility became more and more soiled never quite accepted the reality of the situation.  

Cuba -- like Egypt -- may not conform to our shallow American dream of unbridled democracy after the changes.  On the other hand, Egypt -- like Cuba -- may surprise us when we honestly confront the fact that conditions have improved in astonishing ways when they were finally directed by those who live there.  Perfect, of course not, but better.  

Along the way, we may also conclude that our own country is far from perfect for many of the same reasons which plagued the old Egypt or the pre-revolution Cuba.  Is anyone in the world short on oligarchs?  There are getting to be  a few extras who would probably be glad to move in a take over.  Anyone who might fins the Egyptian oligarchs acceptably palatable can move on to the next level and try out some American ones.