Re: Financial services


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The Market Mystique

by Paul Krugman

Mar 26 (NY Times) — But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.


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One Response to Re: Financial services

  1. torjan horse says:

    Life Magazine 6 March 1950
    Ernest Havemann
    Moral for March 15: you can ‘t win
    “Even more astonishing than the sly methods tried by evaders of income tax is the way the collector always gets the last laugh.”

    The collector is such a relentless and efficient fellow – in his quiet and unobtrusive way – that he has made the US income tax one of the modern wonders of the world. Our tax system, by and large, relies on the willingness of the citizen to take the responsibility for making out a return, figuring his own assessment and paying it honestly and on time. The fact that so many citizens do all this is something that frequently amazes foreign visitors who have been taught to think of the US as a law-breaking nation. Certainly no other country except possibly Canada, which has copied a good part of the U. S. example, had ever done quite so well with quite so little policing. In some countries the income tax, although on the law books, is so generally ignored that a man who pays it is considered either stupid or ostentatious. In other countries it requires a small army of enforcers; England, for example, has more than twice as many tax people per capita as the U. S. While history seems to prove that taxes can be collected only at the point of a gun, this year the U. S. Treasury will get about US dollar(s) 18.5 billion in income taxes from people who by and large will never come face with any kind of tax man, much less a guntoting tax man, in their lives.

    This is all the more remarkable because the income tax, as a topic of general conversation, concern and consternation around March 15, is a fairly new phenomenon. The U. S. had one briefly in the Civil War, tried to restore it in 1894, had it declared unconstitutional by the Supreme Court and then established it by constitutional amendment in 1913. Up to World War II it was mostly what experts call a “rich man’s tax” – only sligthly more than three million people had to pay anything in 1938, and nobody had to pay as much as US dollar(s) 500 unless he was earning US dollar(s) 10.000 a year if a bachelor, or about US dollar(s) 12.500 a year if a married man with two children. Since 1938, of course, the tax has become the single greatest fact of U. S. financial life. It now reaches down to tap every bachelor who earns as much as US dollar(s) 675 a year, and in the upper brackets it takes away as much as US dollar(s) 77 out of every $100 the taxpayer makes. This year at least 37 million people are paying the tax; the average per taxpayer will be about US dollar(s) 500, and a few people with enormous incomes will probably pay as much as US dollar(s) 4 million each.”

    “Today the bureau has just about 20.000 men who are qualified as auditors and investigators, or one for every 1.900 taxpayers scattered over cities, towns and countryside. Yet the tax gets paid and the great bulk of the important evaders get caught. There are not enough collectors around to see all and hear all – but there are enough of them, with keen enough senses, to keep the taxpayers on their toes.

    The bureau gets a lot of help from amateur collectors – i.e., tax informers. They play the same valuable role as the stool pigeons who account for much of what passes as brilliant detective work in big- city police departements. The informer’s part in helping collect taxes is recognized by law, and the bureau had a fund to provide rewards. Last year it paid nearly a half million dollars to 97 people who helped turn in their friends or enemies. The smallest reward, US dollar(s) 25.86, went to a man who pinned a US dollar(s) 288 back tax bill on a painting and repair contractor who was neglecting to report the profits he made on materials supplied for his customers. The largest reward, US dollar(s) 47.000, went to an accountant who helped make a US dollar(s) 1.5 million back tax bill stick on a manufacturer who had been grossly understating his sales.

    The 97 rewards represent only a small fraction of the total in which informers played a part, because the bureau will not pay any fee unless the information is so detailed that it practically clinches the case without further work or investigation. Moreover many informers do not even want to be paid; the bureau gets tips every day from people who are motivated by anger, jealousy or just the desire to see justice done. It once got an anonymous letter from a man so eager to catch a suspect that he enclosed US dollar(s) 90 to help pay for an investigation. It also had a remarkable experience in which it collected US dollar(s) 19.000 from a doctor’s estate as a result of one of the slowest burns on record. The information came from the doctor’s lovelorn secretary, who had been helping tamper with his financial records for 26 years. She remained loyal even though he was married four times to four other women during this period, but when she found that he had neglected to make any provision for her in his will she considered it the last straw and got her revenge through the tax bureau.”

    “One thing that helps the revenue bureau smell out cash dealings is the fact that sooner or later most money gets to a bank. Under a law passed at the bureau’s behest all banks have been required since 1945 to report unusual cash transactions to the Treasury on a standard government form numbered TCR-1, and this means that anybody who deposits or withdraws an uncommonly large amount of cash at a bank is likely to be called on for an explanation. The device has turned up a large number of tax dodgers, including one rich lumber dealer who was literally almost scared to death by a TCR-1 form. This man, receiving a lot of overceiling bonuses during OPA days, made it a practice to take most of his receipts in cash, or convert them into cash, and hide them in a safety deposit box. One day while cashing a big check at his bank he noticed the teller filling out a printedslip, asked what it was and thus got his first knowledge of the existence of TCR-1 reports. By that time, he realized; there must be a whole pile of TCR- 1 forms bearing his name, just waiting to be acted on in a file or desk drawer somewhere in Washington. He was unable to eat or sleep; he lost weight, and before long he was actually sick. Finally he went to the collector’s office, made a full confession and counted out $225.000 from his safety deposit box to pay his back taxes.”

    “It is also a matter of the tax people’s wide and unique experience, gained by examining hundreds of thousands of these highly confidential documents, with the nation’s earning, spending and living habits. The bureau would be highly suspicious, for example, of any liquor dealer who claimed barely to break even on his business during the war boom, or of anybody who reported taking a loss on the sale of a house in the recent years of rising prices, or of a doctor or dentist who reported an income substantially lower than others in the same profession in his community. All of these things actually happen sometimes, of course, but they are the exception and the bureau likes to see them proved. Out of the returns chosen by the preliminary checkers as likely candidates for investigation, about half are usually found to contain errors, ranging from small to egregious, that reduced the tax payment below its proper level. On the basis of audits made in the 12 months ended last July, the bureau collected an extra US dollar(s) 800 million from the taxpayers.”

    “Citizens who pay their taxes honestly sometimes wonder, when they hear gossip about “beating the tax”, if they are being played for suckers. They can stop fretting. Theorists have come to the conclusion that the only completely safe way to beat the tax man is to be 1) a hermit who 2) owns a gold mine in the wilderness and 3) reburies the gold as soon as he digs it up – a self-defeating method because it amounts to never mining the gold in the first place. Short of this, about the only way a large-scale evader can avoid being fined or sent to prison in the long run is to die first or take advantage of the tax bureau’s standing offer to go in and confess all before it is too late.”

    Reply

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