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The Lighthouse is the weekly email newsletter of the Independent Institute.
Subscribe now, or browse Back Issues.

Volume 9, Issue 53: December 31, 2007

  1. The Case for Insurer-Issued Driver Licenses
  2. Wartime Origins of Modern Income-Tax Withholding
  3. Argentina’s Mirage
  4. The Myth of Resource Exhaustibility

1) The Case for Insurer-Issued Driver Licenses

As a group, unlicensed and uninsured motor vehicle drivers present a significant safety risk to the rest of us. Uninsured drivers are five times more likely to be involved in fatal crashes, according to a recent study. State agencies do a poor job at making sure drivers are insured and drive responsibly. Fortunately, there’s a promising alternative that merits serious consideration: allowing private insurance companies to license drivers.

Allowing private insurance companies to license drivers would help improve safety because insurers would have stronger incentives to make sure that drivers are licensed, insured, and accountable, according to transportation economist Gabriel Roth, editor of Street Smart: Competition, Entrepreneurship, and the Future of Roads. In addition, insurer-issued licenses would bypass a key objection to issuing driver licenses to illegal immigrants—the fear that (state-issued) driver licenses would allow illegal immigrants to acquire voting rights, social services, and other benefits earmarked to citizens and legal residents. Insurer-issued licenses need not come with the same perqs that are currently bundled with state-issued licenses.

“Issuing driving licenses to illegal immigrants should not be the source of so much controversy,” writes Roth in a new op-ed. “It can be dealt with by creating alternative licensing options that place the responsibility fairly and squarely where it belongs: in the hands of the responsible insurers.”

“Let Insurers Issue Driving Licenses to Illegal Immigrants,” by Gabriel Roth (St. Paul Pioneer Press, 12/27/07) Spanish Translation

Street Smart: Competition, Entrepreneurship, and the Future of Roads, edited by Gabriel Roth, foreword by Mary E. Peters, U.S. Secretary of Transportation

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2) Wartime Origins of Modern Income-Tax Withholding

In unusually candid language, the U.S. Treasury Department notes on its website that the withholding of federal income taxes “reduced the transparency of the [federal income] tax, which made it easier to raise taxes in the future.” How did the federal government come to possess such an effective means of acquiring tax revenue?

Although withholding has been in continuous effect since 1943, when a young and self-admittedly naïve Milton Friedman helped design the current system for withholding federal income taxes to fund World War II, the first withholding measures in the United States came decades earlier, explains Independent Institute Senior Fellow Robert Higgs in a new article for The Freeman.

Withholding was first imposed on the wages and salaries of federal employees to help the Union raise funds to fight the Confederacy during the War Between the States. Federal salaries were made exempt in 1864, and the war-spawned income tax was repealed in 1872. Federal income-tax withholding was imposed more broadly after the Sixteenth Amendment was ratified in 1913, but too many employers complained, so Congress eliminated withholding in 1917. When withholding was reintroduced in 1943, its success (from the federal government’s viewpoint) was soon apparent. Writes Higgs: “In 1945, 50 million individual income-tax returns were filed, and the filers owed more than $19 billion, or almost 20 times the amount that Americans had coughed up for this tax just five years earlier.”

“Wartime Origins of Modern Income-Tax Withholding,” by Robert Higgs (The Freeman, November 2007) Spanish Translation

Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government, by Robert Higgs

More by Robert Higgs

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3) Argentina’s Mirage

Argentina’s economy may seem prosperous on the outside, but on the inside it is quickly rotting, according to Alvaro Vargas Llosa, director of the Independent Institute’s Center on Global Prosperity. Foreign direct investment has fallen about 30 percent in the past three years, and the annual inflation rate is higher than government officials acknowledge—many estimate it to be 20 percent. Despite an abundance of energy resources, government price controls are creating an ever-widening gap between supply and demand. The country’s political institutions are also deteriorating.

Unfortunately, Argentina’s new president, Cristina Fernandez, is unlikely to reverse the cause of these trends—the populist policies of her husband, former president Nestor Kirchner. “Following a long Peronist tradition, the Kirchners have concentrated unhealthy amounts of power in their hands—part of the reason why Fernandez won the recent presidential election so easily,” writes Vargas Llosa.

“They have changed the structure of the Magistrate Council, thereby taking control of the judiciary. They also control the political apparatus of Buenos Aires province, which accounts for a very large chunk of the national vote. Fernandez is now intending to establish a corporatist model by which economic and social laws will be negotiated with groups that supposedly represent civil society, but are really part of the Peronist clientele.”

“Argentina’s Mirage,” by Alvaro Vargas Llosa (12/26/07) Spanish Translation

Liberty for Latin America: How to Undo Five Hundred Years of State Oppression, by Alvaro Vargas Llosa

Barron’s Recommendation

The Che Guevara Myth and the Future of Liberty, by Alvaro Vargas Llosa

Center on Global Prosperity

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4) The Myth of Resource Exhaustibility

Fossil fuel deposits are limited in quantity, but is this cause for alarm? Proponents of the “peak oil” hypothesis, and advocates of government subsidies for alternative fuels, typically answer in the affirmative. In reality, these alarmists overlook a vital distinction: physical exhaustion is not the same as economic exhaustion.

What is that distinction and why does it matter? Physical exhaustion is the total depletion of the physical stock of a resource; economic exhaustion is the loss of expected profitability required to induce resource owners to continue extracting and marketing the resource. The distinction may sound overly technical, but it is crucial because economic exhaustion arises long before physical exhaustion occurs.

When this happens, it is usually because private-property rights have been encumbered by public policies, limiting the ability of resource owners and entrepreneurs to maintain the economic value and commercial viability of their deposits, explains John Brätland, senior economist at the U.S. Department of the Interior, in the new issue of The Independent Review.

“Replacement of resource deposits depends on the prospective profitability of doing so; therefore, anticipated shortages of extractive resources are a principal inducement of deposit replacement,” writes Brätland. “The resource-replacement process is fundamentally entrepreneurial and depends on access to land and on managerial flexibility in maintaining capital and entrepreneurial income.” The strict enforcement of private-property rights enables resource entrepreneurs to maintain the economic value of their extractive resources and to continue to supply customers.

“Resource Exhaustibility: A Myth Refuted by Entrepreneurial Capital Maintenance,” by John Brätland (The Independent Review, Winter 2008)

Also see:

Richard Stroup’s review of The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy, by Peter W. Huber and Mark P. Mills (The Independent Review, Winter 2008)

Table of Contents and Article Summaries for The Independent Review, Winter 2008

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