By John Mattingly
Throughout our history, conditions and perceptions have affected several events with unexpected consequences, including:
1. Incorruptible Peasants, aka Land Barons. When the U.S. opened up the Western United States to homesteading, the intent was to stimulate the Jeffersonian “incorruptible peasants” by granting them 160 acres – or 320 acres to a peasant and his wife, thus creating a landed peasant class, unique to the U.S. Going west from Washington D.C. out to the 100th meridian, which is approximately the Colorado-Kansas border, 320 acres was, for the most part, an economic unit for a peasant. The ground was fertile enough, and received enough natural moisture to sustain an incorruptible operation.
West of that meridian, however, conditions weren’t so favorable. Many peasants came into Arizona, Colorado, Nevada, Utah, and only to find that 160 acres wouldn’t even sustain the mule team that pulled their wagon westward.
John Wesley Powell came west in the late 1800s and determined that west of the 100th Meridian, an economic unit grew to an astounding 2,560 acres. Nobody in Washington believed him, or wanted to entertain the recommendation that west of the 100th Meridian homesteaders should get a bigger piece of ground if they were to make it.
The unexpected consequence of ignoring Powell’s recommendation was that west of the 100th Meridian, a kind of natural selection took place in the land market, in which the peasants failed and their homesteads were aggregated into gigantic ranches by opportunistic individuals who, in some cases, were as corrupt as they were ruthless.
For example, the XIT ranch was about three million acres, the biggest ranch in U.S. history. Many ranches were half a million acres and the more modest of the small ranches covered about 200,000 acres. Today, the King Ranch is about 825,000 acres.
Had Powell been heeded, it’s possible the West would have in fact been developed by the landed peasant class in units of a couple thousand acres, but because of political shortsightedness, the Homestead Act actually resulted in the formation of huge ranches that made Powell’s 2,560 acre units look small.
2. Same Sex Marriage, aka Shortcut Corporate Merger. While it’s absurd to get excited about this subject while the human species is in a tailspin, the folks on both sides of the conversation seem to have forgotten that marriage not only unites two bodies, it unites two bodies of property. Until somewhere around the Renaissance, marriage in Europe was merely a mechanism for joining two estates for mutual advantage among nobles. Love was not a necessary factor.
Anyone who’s been through a divorce knows that marriage is as much about property as is it about people. I heard recently that the divorce rate is down all across the U.S. because property values are so low that two people wanting to go their separate ways can’t get out from under their depressed property. With no buyers (or no buyers at a price greater than the existing debt) couples are shackled together with their upside-down house, business, vehicles, and other possessions. A harsh lesson in how much marriage is really about the joining of two bodies of property.
The unexpected consequence of legalizing same- sex marriage is, of course, a gigantic potential boon to corporate America. Imagine, for example, the marriage of Steven Jobs and Bill Gates, uniting two of the world’s biggest corporations. While that isn’t likely to happen, what is very likely is that two major, same-sex stockholders of two corporations seeking to merge, can simply get married and unite the two corporations without a speck of SEC anti-trust scrutiny.
This is made possible by the fact that a marriage contract instantly unites two bodies of property, as if by a magic wand. The same-sex partners don’t even have to have a public ceremony. All they need is a marriage license. Absent a pre-nuptual agreement, what was formerly two, becomes one. Once the Republicans, the capitalistic Christians, and the rest of corporate America catch on to the advantages of marriage as a business arrangement, there will likely be a push to legalize polygamy.
With polygamy legalized, corporations can engage in multiple marriages and build multi-national entities quickly and free of regulations. Should this happen, we’ll likely see late night infomercials with some fuzzy-haired fellow offering us a book for just $9.99 that provides a step-by-step program for incorporating, then marrying other corporations in China, India, and Europe to form a sprawling nexus of same sex business partners.
3. Bankruptcy, aka Tax Evasion. In the neighborhood where I grew up in the 1950s, bankruptcy wasn’t common, but those who took it brought certain shame on their name and family. I recall my parents speaking of a bankrupt neighbor in nearly the same tones they used to talk about criminals. Of course, in those days, divorce was also shameful. Today, both divorce and bankruptcy are fairly common. Not exactly ho-hum affairs, but free of much of the stigma that used to be associated with them.
A friend of mine, who is in a business where he is susceptible to people taking what he now calls by the abbreviation, “BK,” went so far as to call today’s bankruptcy process “a turnstile,” in which debtors appear, offer slim evidence of hardship, and walk out the door free of debt.
When someone who owes you money “takes a chapter,” it usually isn’t good. Much as this can be disruptive to a personal financial situation, the unexpected consequence of the current, “reformed” BK laws is, well, tax evasion. That is, the Big Loser in a BK is actually federal and state governments.
Say a person owes $500,000 to various creditors and files for Chapter 7, liquidation bankruptcy. Typically, the bankrupt person keeps their residence, vehicles, and up to $25,000 of personal property. Meanwhile, the full debt of $500,000 is discharged, meaning that it’s wiped away. It no longer exists. The creditors must simply write it off.
The ignored consequence here is that the creditors in this example get a total of $500,000 in itemized deductions from their gross adjusted income, under the line item of bad debts. The creditors thus pay less federal and state income taxes.
The bankrupt, meanwhile, does not have to declare the debt elimination as “income,” even though it is in every sense of the word. The creditors lent $500,000 to the now bankrupt person or entity, the money was spent, and now it neither has to be paid back nor accounted for as income from a tax standpoint.
So, state and federal governments lose twice on an opportunity to collect taxes: once from the loss of taxable income that would have been coming in from the now bankrupt person or entity, and again, when the creditors take that loss as an itemized deduction.
With the thousands of “turnstile” bankruptcies being taken these days, without much social or moral stigma attached, this has to be a contributing factor to the current shortfall that state and federal governments are seeing in tax revenues.
Admittedly, the variables in a BK are numerous. Some creditors are secured by assets that eventually can be sold, but typically at a substantial loss. Other creditors are unsecured and simply write off the debt on their taxes while the secured creditors probably write off only a percentage.
Nevertheless, recent estimates of a seven trillion dollar loss in asset values in the U.S. over the last two years causes one to wonder how much of that loss was associated with bankruptcies. Even if only a quarter of the losses went through the BK turnstile, our government treasuries are losing out on revenues that would fund several more years of international adventurism in the Middle East.
A couple of reforms would be in order that could adjust incentives and increase needed tax revenues. First, filing for bankruptcy should not result in non-taxable debt forgiveness. When a debt is discharged in bankruptcy, the bankrupt person or entity should still be liable for the taxable income that resulted from the debt forgiveness. This would reverse the current incentive structure which encourages bankruptcy at the first hint of economic difficulty, to a more considered analysis of the costs and benefits of filing for BK versus a workout agreement and/or other negotiated settlement.
Second, the tax code should narrow the parameters under which a bad debt from a BK can qualify as an itemized deduction. The current standard actually creates an incentive for creditors not to fight or challenge a BK because the cost of doing so may only be good money after bad, and once the itemized deduction is factored in as benefit, a BK isn’t all bad for the creditor. If the standard for itemizing the bad debt from a BK is narrowed, creditors will be incentivized to engage more diligence in seeking to dismiss BK filings, and some of these will be successful, as the current turnstile standard allows many people to go through with very little evidence of actual necessity.
For example, under the current standard, a person filing for BK can do it in the latter part of the year, and thus must only produce a tax return for the previous year, which means creditors are seeing the bankrupt’s documented financial condition as much as a full year in arrears. As proof of current necessity, the BK filer has only to produce a spreadsheet for the last six months showing income and expenses, which are verified only by their word. For a creditor to challenge or check the accuracy of the spreadsheet, the creditor must bear the full expense of an adversarial proceeding in court, using discovery, witnesses, and possibly a private investigator, all of which runs the risk of being good money after bad, and worse. If the creditor is unsuccessful in proving inaccuracies, the creditor must pay the attorney fees of the debtor, an additional incentive to allow the debtor to slip through the turnstile without much scrutiny.
If real bankruptcy reform isn’t forthcoming as the U.S. goes through a necessary reduction in standard of living, BK will be used more and more as a preference rather than a necessity, radically reducing tax revenues and thus creating a negative feedback loop in the economy that will only hasten economic decline. Unless, of course, Congress legalizes polygamy and all of us peasants can go multi-national and become too big to fail.
John Mattingly cultivates prose, among other things, and was most recently seen near Creede.
