Wednesday, September 17, 2008

A Government Without Taxes

I know, I just blamed the government for handing out too many bailouts. But the recent loan guarantee to AIG is very punishing--8.5% above market rate--and the Fed and Treasury may very well stand to make some money from the deal.

In my ideal world, the government would use its public status as the sole means of revenue. As in the AIG case, that involves acting like a hedge fund specializing in catastrophe arbitrage. A simple cyclical rule--buy low, sell high--could presumably yield large profits and generate a social return too. Market actors can't do this as well due to liquidity constraints. Also, property rents from energy extraction, externality taxes, and wireless spectrum auctions could contribute money as well. Maybe a war here and there that paid for itself.

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