Natural Governance A New And Better America


How Natural Governance Would Affect Life

It will take decades to implement natural governance fully, and forecasting what the world would look like at that time is impossible. However, there is some benefit in quantifying the costs and benefits of natural governance if it had been fully implemented in 2016.

Doing this is quite an undertaking and by nature is imprecise. However, these projections do provide at least a rough idea of costs.

The benefits, of course, would be the absence of an income tax, unemployment security tax, or social security tax. In addition to no income tax, there would be no cost of preparation and submission and no headaches incurred by worry over deduction permissibility and fear of missed deadlines. Minimal records requirements due to shifted social welfare costs and the national registry would make hiring people easier. Medical expenses would represent a substantially lower burden. And, of course, each citizen would receive a weekly tax-free UBI payment.

As we would expect, this would have a cost. It would be paid by a VAT or other consumption tax or basket of taxes, which would increase the cost of living. The tax should be universal, or there would be a grab bag of exemptions. The cost of nearly everything would be higher—cars, food, clothing, pet food, and so on. But not quite everything. Federal payments would make medical expenses and insurance seem less expensive to the consumer, if not actually lower their true costs.

Let’s start with the cost of natural governance, all in billions. These costs include loss of income tax revenue (as there will be no income tax) and the costs of providing medical care and UBI.1

Loss of individual income tax proceeds 1,972,504
Loss of business income tax proceeds 428,878
Cost of medical care, after offsets 3,041,947
Cost of UBI, after offsets 1,314,835
Total 6,758,164

Natural governance suggests two ways to pay for these costs: a value-added tax by itself or a value-added tax combined with a supplemental tax (or pre-tax) on crude oil.2 Taxing crude oil is about as fair a tax as possible, as no one can easily avoid using some amount of it.

The value-added or consumption tax should apply to the following components of gross domestic product (in billions of dollars).

Personal consumption expenditures 12,753,100
Gross private domestic investment 3,035,400
Imports 2,732,900
Total 18,521,400

Based on these numbers, the value-added tax, if that were the only tax collected, would be 36.5 percent (6,758,164 divided by 18,521,400).3 Virtually everything one purchased would thus cost 36.5 percent more. A $100,000 car would cost $136,500, and so on.

If the government elected to add a pre-tax on crude oil, each dollar would reduce the percentage applied to GDP items. The price for downstream products made from crude would increase by the amount of the pre-tax, plus the percentage of the VAT. As a rough guide, assume that the price of each product would go up by the pre-tax and then by the VAT. Taking the example below, if there were no pre-tax on crude oil, the 36.5 percent VAT would apply. If the crude oil pre-tax were $1.00 per gallon of crude, the VAT would go down to 34.9 percent. In rough numbers, if gasoline were $2.00 per gallon before natural governance, with no pre-tax it would increase to $2.73. With a pre-tax of $1.00 per gallon, gasoline would go up to $4.05, but the VAT on everything else would go down to 34.9 percent. The proverbial $100,000 car would go down to $134,900, leaving the purchaser with $1,600 to put toward more expensive gasoline along with 1.6 percent of everything else he or she bought. This analysis assumes that the taxes on crude would go pro rata to all the downstream components (jet fuel, gasoline, etc.), but that would not necessarily be the case. However, that assumption is as good as any, because assigning any other distribution would be fruitless.

Pretax per barrel, in dollars Pretax per gallon, in dollars Revised Tax on Remainder of GDP Items Gasoline Price, starting at $2.00 before natural governance
0 0 36.5% 2.73
42 1 34.9% 4.05
84 2 33.2% 5.33
126 3 31.6% 6.58

[1] See “Cost of Natural Governance” tab in accompanying Excel Workbook, Natural Governance Costs.

[2] I use the term “pre-tax” because crude oil would be taxed at the fixed rate per barrel and again via the value-added tax.

[3] See “Cost of Natural Governance” and “GDP per BEA” tabs in accompanying Excel Workbook, Natural Governance Costs.

Analysis of the Affordable Care Act

In future decades, when historians evaluate President Obama and his sponsorship of the Affordable Care Act, he will probably get great credit for establishing the concept that the government must accept some responsibility for the medical needs of its citizenry. (Medical expenses are to some extent a social cost, and forcing employers and others to share the cost is not a legitimate solution.) A prosperous and developed country should not ignore this responsibility, and it is to our shame that it has taken so long to recognize this. For all the flaws of the ACA, the genie is out of the bottle and will never be forced back in. It is highly unlikely that the federal government will ever again allow citizens to suffer from a lack of medical attention and simply look the other way. Hopefully, a later administration will replace the ACA with a system that works and does not adversely affect the work ethic and family values of the populace.

Natural governance provides an approach that addresses the need for medical care without the unworkable elements. When and if a better system is implemented, historians may conclude that the waste and failures of the ACA have been an acceptable cost to reach a government commitment to making medical care available.

All of that said, the ACA is indeed terribly flawed, with an array of negative features outlined below. The natural governance plan addresses the health needs of the populace, and does so without the ACA’s adverse features.

  1. Forbidding health insurers to consider pre-existing conditions. Insurers may consider age and may charge higher premiums for older people, but they may not charge women higher rates than men (even though women experience statistically higher medical costs than men) and may not refuse to insure those with known expensive medical needs. Nor may they charge higher rates to those with higher expected medical costs, even when those costs are known in advance. These restrictions alone would ultimately doom the system. Most people have some idea of their upcoming medical expenses. For any insurance pool, premiums are a function of average policyholder claims. If people with higher medical expenses can buy insurance for the same price as those with lower expenses, the policies will be overpriced for healthy persons and a bargain for those with higher medical costs. Ultimately, the low-cost people will not renew their policies, and rates will rise. As they rise, even more healthy people will opt out, and on and on, until the rates are so high the company cannot continue to operate and must cease doing business in a given state—as is actually happening. Milliman, Inc., a large and respected actuarial consultant, estimates that 631 out of every 100,000 people have medical expenses that exceed $50,000 per year. Of those, 14 have medical expenses that exceed $400,000.1 If these high-cost consumers land together in one insurance company, they will quickly drive out the healthy people. This effect is known as adverse selection, and was known and considered by the architects of the ACA. In a feeble attempt to reduce adverse selection by retaining healthy people in the insurance pool, the ACA requires that most people buy medical insurance, whether they want it or not. If they do not, there is a penalty of 2.5 percent of household income, with a minimum of $695 per adult and $347.50 per child. There are exceptions, and enforcement presents complicated issues. It remains to be seen how many healthy people can be forced to participate, but it is likely that there will not be enough to enable the system to survive. Lower-income people (except for those with incomes low enough to get insurance for little or no cost) will only have to pay a small penalty, which might prove less expensive than purchasing health insurance even if they cannot find a way to avoid the penalty, which they probably can. Attempting to force healthy people to buy insurance at prices that include provision for less healthy people requires individuals to fund a social cost that should be funded directly by all taxpayers. It is bad policy, and likely to fail.
  2. Requiring large employers to provide medical insurance. Again, if the government determines that a certain level of payment should be made to those with health needs, that is a social objective that should be directly funded. Offloading this responsibility onto employers gives them another burden, which adds to the incentive to export jobs. If we wish to increase employment in the United States, we should reduce the burdens borne by employers rather than increase them. The ACA did not start the practice of forcing large employers to provide medical insurance to employees, but it exacerbated it. Many employers will elect to provide medical insurance to their employees as a means of attracting the most qualified workers, but this is best left to their discretion. In a free market, employers and employees are able to negotiate mutually satisfactory health plans or other conditions of employment. Universal basic income would give job applicants the ability to be more selective, because they would not have to accept the first job offered in order to put food on the table. That, along with the emergence of reduced insurance premiums as a result of the federal government sharing medical costs, would give employers an incentive to provide medical insurance, as well as to improve other conditions of employment.
  3. Providing means-tested federal payment of ACA medical insurance. Past and present procedures state that the federal government will pay a portion of the medical insurance premiums of a low-income applicant. Incredibly, the basis for computing the subsidy is the applicant’s own estimate of income for the upcoming year—not historical income. An agent can tell the applicant the amount of income that will yield the best subsidy, which is typically somewhere around $12,000 per year for a single man or woman (zero does not work, because the applicant will be directed to Medicaid). It is fairly easy to justify any estimate desired. Someone with historically high earnings can justify a low estimate by announcing a plan to quit or take a sabbatical or by stating their expectation of a layoff. Applicants claiming the optimum income can get a better plan than those with higher incomes can afford, yet pay little or nothing in out-of-pocket premiums. Those who work off the books have no problems with recapture should their actual income differ from what they’ve stated. Those whose actual documented incomes are higher than their own estimates are required to repay all or a portion of the subsidy, but whether the IRS will actually bill the difference remains to be seen. Even if it does, those with myriad approved excuses will be able to obtain forgiveness. For those who don’t obtain forgiveness, collection will probably be spotty. Collection of overpaid medical premium subsidies will in any case be an enormous workload for the IRS, which is already fully committed. A lesser (but still major) objection to the ACA is its waste of taxpayer dollars. It is more significant that the ACA premium subsidies add to public cynicism and dig the recipients ever deeper into the welfare trap. Given the realities of this situation, it takes an even higher-paying job than before to get off the dole, one that becomes increasingly less likely to be obtainable—especially considering currently legislated employer burdens such as medical insurance that natural governance would eliminate. Those burdens partly explain why many manufacturers choose to outsource work overseas rather than try to hire locals who cannot afford to take the jobs they offer.
  4. Establishing provider networks. The ACA sanctified (but did not create) provider networks, which at their core are simply buyer co-ops whose sponsors seek prices below those paid by others. Medical insurers contract with certain providers to reduce the prices they charge that insurer, which implies that others will pay higher prices. In exchange, the insurer directs a substantial volume of business to those providers. To do that, the insurer has to make it difficult for its policyholders to obtain treatment from others; otherwise, it would have nothing to offer in exchange for reduced pricing. These relationships are essentially agreements in restraint of trade. If providers give a price reduction to favored insurers, they presumably increase prices for others. Most or all the ACA plans are Preferred Provider Organizations (PPOs), Point-of-Service (POS) plans, Health Maintenance Organizations (HMOs), or Exclusive Provider Organizations (EPOs).2 The differences between these plans are arcane and confusing, making it difficult to compare plans. At heart, however, they are all attempts to direct business to in-network providers and away from others. In the process, they drive policyholders crazy and make it exceedingly difficult to compare and evaluate policies. Imagine trying to select a policy among the available alternatives when the doctors seen by various family members are in different networks such that no one insurer includes all of them. That is reality, and it happens more often than not. Natural governance resolves this issue by requiring that each provider offer the same prices to all.
  5. Perpetuating extreme complexity. The Patient Protection and Affordable Care Act, as it is formally known, runs to the thousands of pages, depending on who is counting. The implementing regulations go another 10,000 or more—many more, depending on the source. Any legislation this lengthy is bound to have surprises, and we still do not know how many shoes are yet to drop.

[1] Milliman, Inc., Benefit Designs for High-Cost Medical Conditions, April 22, 2011, See also the Medical Care tab in the accompanying Excel workbook.

[2] For definitions of these types of plans, see the government website,

Division of Responsibility between Federal and other Jurisdictions (and Charity)

It is most efficient for the federal government to provide UBI, direct medical income payments, and other large payments that do not require individual or case-by-case decisions. Even with UBI and federal support of certain medical expenses, we must recognize that some people will fall between the cracks. If a single mother who is unqualified (or unwilling) to work has four children under the age of six and cannot identify any of the fathers, she will need assistance. However wanton she may be, we cannot in good conscience let the children starve. The children do not get UBI until they are 18, so the mother’s UBI represents the entire family income. This will not be sufficient, even though she may live in subsidized housing and get some medical care from the federal government. However, we should not increase the UBI for her, because a fundamental concept of UBI is that each citizen should get a uniformly computed amount. Similarly, if a person experiences a $400,000 medical expense, the government share of $345,000 (60 percent of the first $50,000 plus 90 percent of the excess) still leaves $55,000 to be paid. That is likely a substantial burden on the individual.

Cases such as these should be the purview of state and local governments. They are closer to the people they serve and can be expected to make better decisions. If local governments take over responsibility for feeding and caring for someone, they can preempt all or a portion of the UBI payment to assist with the cost. In any case, the states already spend substantial sums on welfare, and natural governance should make these expenditures go even further. According to a 2012 policy analysis by the Cato Institute’s Michael D. Tanner, the states collectively spend $284 billion per year via cost sharing of federal programs and on their own welfare programs.1 This data was from 2011, so today’s amount is probably higher. This should be more than enough to address special cases.

Several conservatives have suggested eliminating welfare and replacing it with charity. This is entirely impractical. Americans are already exceedingly generous. According to Giving USA, they donated $358 billion to charity in 2014.2 That is a lot, and believing that we could be induced to give substantially more is unreasonable. Moreover, the existing level of charity was in addition to enormous government welfare payments made concurrently, and yet we still see poverty. Although charity cannot replace welfare, it can go a long way to helping people who still cannot live normal lives despite UBT and other federal assistance.

[1] Michael D. Tanner, “The American Welfare State: How We Spend Nearly $1 Trillion a Year Fighting Poverty—and Fail,” Cato Institute, April 11, 2012,$1-trillion-year-fighting-poverty-fail, 10.

[2] Tom Radde, “Americans Donated an Estimated $358.38 Billion to Charity in 2014; Highest Total in Report’s 60-Year History,” Giving Institute, June 29, 2015,, 1.

Subsidized Housing Analysis

Before discussing the faults of subsidized housing and ways to improve it, we should look at what is good about it. Along with other anti-poverty measures, subsidized housing gets much of the credit for the low level of violent crime in the United States. Some think crime is high, but that perception is relative: we could be like Venezuela or many Middle Eastern countries, where murder and armed robbery are the norm rather than the exception. By providing shelter and the wherewithal to buy food, we eliminate much of the motivation for pillaging.

So much for the good. Before making suggestions to improve the housing situation, we need to get an idea of what it consists of; there are many programs, and the big picture is complicated. In 2015, the most recent year for which data are available, the major housing subsidy programs can be summarized as follows:1

Broad Categories
Type of Rental Assistance Households Receiving Assistance
Housing Choice Vouchers 2,217,000
Public Housing 1,020,000
Project-Based Section B 1,175,00
Elderly and Disabled 154,000
USDA 265,000
Total 4,831,000

The first type of rental assistance, housing choice vouchers, is the least defensible as a policy, but it is the most desirable from the perspective of the voucher holders. Vouchered families can choose any house or apartment that will rent to subsidized tenants (I have a few, and many others do as well) and rent the unit. The tenant family pays 30 percent of its of income as rent, and the federal government pays the difference. (That’s 30 percent of the “on the books” income; obviously, the family pays no part of its “off the books” income unless someone gets caught, which almost never happens; and even when someone is caught, the penalties are light.) The housing tends to be far more desirable than public housing (the worst option), and still substantially more desirable than Project-Based Section 8 and USDA options.

One may reasonably ask, ”If vouchers are so desirable, why are they indefensible as a policy?” The answer is that there are only 2.2 million of them. Those who hold vouchers are not more deserving than others; they were just in the right place at the right time. A few are awarded to residents of government-owned subsidized housing that was taken out of service, so that the Department of Housing and Urban Development (HUD) does not suffer unfavorable publicity by evicting families from their homes. Most are awarded by the local public housing agency (PHA) to families based their rank on a waiting list. It is not unlikely that working parents holding two jobs would not know how to get on the waiting list, but that seasoned users of the dole would be alert to such opportunities. In many cases, the waiting lists are closed when they get too long, then later reopened. It would be no surprise if PHA employees notified their friends when a waiting list reopened.

A family of three can qualify for vouchers with an income of 80 percent of the local median annual income—say, $47,000. More than 60 million people in the United States over the age of 14 have an annual income of less than $15,000; let’s say that equates to 20 million families with an average size of three.2 That means that only 10 percent of eligible families have vouchers (2,217,000 vouchers divided by 20 million families). Why should the federal government give such a reward to some and not to everyone, especially when non-voucher-holders pay taxes that go to pay for vouchers? Adding to the unfairness, vouchers can also be used to purchase homes. The voucher program is yet another layer in the welfare trap, making it even more difficult for the poor to improve their lot and escape the system. Vouchers should be eliminated forthwith.3

The next category is public housing, and natural governance’s answer is simple: eliminate federal subsidies and rent the units for at least the cost of maintenance and management. When all citizens receive UBI, they can afford to pay some rent. Public housing rents will likely be the lowest in the market. If these rents are still not affordable to some families, state and local governments can step in. If the projects themselves are not economically viable on this basis, raze them and use the land for other purposes. Units may be rented to documented immigrants, but if any project has a waiting list, citizens should have preference over immigrants. If immigrants are unable to rent a place to live, they should return to their country of origin.

That leaves Project-Based Section 8 and USDA housing options. These two types are quite similar, and the principal difference is that Section 8 housing is administered by HUD, while USDA (the United States Department of Agriculture) housing is administered by RD (Rural Development, Farmers’ Home Administration [FmHA], or some similar name, which changes from time to time), an agency within the Department of Agriculture. FmHA was originally created to help farmers but now funds and administers subsidized housing in small towns.

Because of their similarities, we will consider them together, looking at a total of approximately 1,285,000 units.4

To see how the system works, we will look at an actual HUD Section 8 property,
Baytree Apartments, which is typical of many subsidized properties, but by no means all. The property is owned by Baytree Apartments, Ltd., a limited partnership. The partnership was capitalized by contributions from limited partners whose primary incentive was gaining tax breaks allowed by legislation at the time. Limited partners in Baytree have no liability for partnership losses beyond their actual investment and no right to control except for democracy rights triggered by certain adverse events (which have never occurred in the partnership’s 35 years). The partnership is controlled by its general partner, Marshall GP, LLC, successor to the original developer. It is managed by One Management, Inc., an affiliate of the general partner.

Baytree is located in Fuquay Varina, North Carolina, a small town 18 miles southwest of Raleigh, North Carolina—about a 30-minute drive away. Raleigh has excellent job opportunities. Baytree has 48 two-bedroom and two three-bedroom apartments, totaling 50 units. Even when brand new, Baytree met fairly minimal standards of housing and had no unusually attractive or desirable design features. It was built in 1982 for about $1.6 million, or $32,000 per apartment. The land component of that cost was about $80,000, or $1,600 per apartment, which was the most HUD would allow in the mortgage. If the developer paid more, it would be entirely out of pocket, and with rents controlled by HUD, the developer would receive no return on the cost overage. Desirable sites for apartments were more expensive, so Baytree, like most HUD properties, was built in a less desirable location.

Moreover, HUD, at the time, directed that properties it subsidized be in counties that had “need,” as defined by HUD. This generally meant counties that had low median income and few job opportunities, precisely the places profit-motivated developers would avoid. That, of course, is why those communities had “need” in the first place. The less desirable location was acceptable to the developer, because the HUD mortgage came with a 20-year housing assistance payment (HAP) contract. Tenants pay a percentage of their income, which may be zero for unemployed occupants or those working off the books. The apartments would have been impossible to rent at rates that justified the initial construction cost and ongoing management costs. However, the ability to rent apartments for almost nothing made the property rentable.

Because HUD specifically directed its subsidies to economically depressed counties and then (by limiting the site acquisition cost) to less desirable sites within those counties, property appreciation was highly unlikely or even impossible. No current appraisal exists for Baytree, but even after 35 years, it is highly unlikely that if it were stripped of its HUD subsidy and favorable mortgages, it could be sold for anywhere near its original cost of $32,000 per apartment unit. During the same period, values elsewhere have more than tripled. The housing price index for Q4 1982 was 112.23, and by Q3 2016 it was 382.73.5 The reason is clear. Real estate values are a function of location (everyone has heard the real estate mantra, “The three most important things in real estate are location, location, location,” which appeared at least as early as 1926 in a Chicago classified ad).6 Because of its inferior location, the value of Baytree has fallen, while the value of other real estate has more than tripled.

(There is one way a few owners can sell their subsidized properties at a profit. Each state has a Housing Finance Agency which, in cooperation with HUD, is empowered to sell tax-exempt bonds insured by the federal government and loan the proceeds to developers who in turn purchase and rehab subsidized housing. Such properties may also obtain rent subsidies. Current policy gives a preference to investments that maintain the housing stock. This means that it is easier to finance a property that is in poor condition and needs rehab, because if it is not rehabbed, it will become uninhabitable and drop out of the housing stock. Thus, the government rewards owners who either fail to maintain their property or whose property was poorly constructed in the first place. Baytree does not qualify, because neither its construction nor its maintenance was sufficiently inadequate.)

The developers financed the property with a HUD-insured loan of the approximate cost of the property at an interest rate of 5.6 percent. By 2014, the balance had been paid down to $466,000. The interest rate was unchanged, even though the rate for Treasury Bills is well under 1 percent.7 The interest rate is higher than would have otherwise been the case for a federally guaranteed loan because it is pre-payable. This is theoretically a detriment to the borrower, but HUD has not taken advantage of this right.

Baytree has been well managed by an affiliate of the general partner since 2005, with consistent HUD reviews of “Superior.” In 2004, when the property was 32 years old, the partnership entered into a loan restructuring agreement with HUD under a HUD program called Mark to Market. HUD established that program for older properties when rents became embarrassingly high due to the application of automatic annual increases, and many properties needed rehab for which rental income was insufficient. By agreement with the owner, HUD agreed to fund the rehab and prepay a portion of the first mortgage loan by loaning the property the approximate amount of $932,000, for which HUD would receive two mortgages totaling that amount, along with a reduction in the rent rate. The provisions of the mortgage loans are complicated but generally provide that the interest rate is 1.0 percent and that the owner’s repayment obligation is limited to cash flow after certain incentive payments to the owner and allowed cash flow.

The two new mortgages, like the first mortgage, are entirely non-recourse. They are collateralized by a deed of trust on substantially all the owner’s property, including real estate, rents, and cash. The only right HUD has upon default is to take the collateral, although if there were fraud, HUD could probably pursue criminal prosecution.

Baytree’s annual rental income runs around $500,000 per year, of which tenants pay around $60,000 and the federal government pays the rest ($440,000). Interest costs $33,000, HUD charges a mortgage insurance premium of $2,000, and principal repayment is $15,000, for a total of $50,000.8 Given these numbers, it is apparent that the entire mortgage structure is an illusion without reality. HUD insures the mortgage for a fee and then pays the entire debt service cost, several times over, as part of its subsidy payments.

Note that for virtually all HUD properties with project-based subsidies, the owner never took any risk other than perhaps minor architectural and other submission costs for properties that do not get approved. HUD micromanages every aspect of design, management, and operation. HUD virtually mandates the location, and the owner goes along with the plan because HUD takes all the market risk. The contractual documents for most properties prevent the owners from repaying the mortgages and converting the properties to other uses. Even if that were not the case, the mortgages far exceed the value of the properties absent the Housing Assistance Payments (HAP) contract, so the owners are inextricably tied to HUD. For these reasons, “landlords” of HUD properties are not true landlords, at least in the sense of being property owners that try to make their properties desirable to tenants so that they can maximize rents. In reality, they are government contractors, despite the trappings of fee-simple ownership, leases, and mortgage loans. Their most profitable business model is to get good grades from government inspectors, not to improve the desirability of their properties.

Tenant rents at Baytree are currently 30 percent of adjusted income, with a minimum rent of $25 per month. The income adjustments include a reduction for young children and for certain medical expenses. SNAP payments (which replaced food stamps) are not included in income for purposes of rent computation. To move in, tenants without jobs must demonstrate a small income source to provide for needs such as toilet paper and detergents, often a commitment from a parent to provide funds. That amount is included in unadjusted income but usually gets adjusted out.

However, this is not quite what it seems. HUD defines rent as actual rent plus utilities. Actual amounts for Baytree for December 2016 are provided below. All amounts are per month.

Tenants receive a utility allowance of $145 for a two-bedroom unit and $191 for a three-bedroom unit. A zero-income tenant in a two-bedroom unit would actually receive a check for $120 ($145 utility allowance less $25 minimum rent). A hypothetical resident with an adjusted income of $1,000 would pay $155 ($300 rent at 30 percent of income, less utility allowance of $145).

HUD pays the contract rents—$840 for a two-bedroom unit and $936 for a 3-bedroom unit. In addition, HUD pays the full utility allowances, less the tenant shares.

Of the 50 units at Baytree, 23 pay zero rent and get a check for $120 each. Twenty-seven pay some rent based on their income. The highest rent paid by any tenant is $500, which would imply a monthly family income of $2,150 (rent of $2,150 x 30 percent or $645, less utility allowance of $145, or $500). For that resident, HUD pays $485 (contract rent of $840 plus $145 utility allowance or $985, less tenant rent of $500). The average rent paid by the 27 tenants who do pay rent is $162. The total rents and utility allowances are $49,534 ($42,191 in rent and $7,342 in utility allowances). Of that, tenants pay $4,384 and HUD pays $45,150.

One might reasonably assume that the main subsidy for subsidized housing comprises the reduced-rate mortgages and tax benefits that make it possible to build the property, and that the tenants pay all or most of the operating expenses. In reality, the month-to-month ongoing cost is surprisingly high. The debt service and other financial costs are a measure of the subsidy that went to offset the initial cost. At Baytree, the rent needed to operate the property in 2016 if there were no financial costs or owner profit would be $671 for a two-bedroom unit and $747 for a three-bedroom unit. Thus, even the highest paying tenant, at $500, does not cover the monthly operational costs. Much of the administrative component of operational cost involves income verification and other HUD requirements that would not apply without means testing, but estimating the amount is difficult. If total administration were reduced 50 percent, the rents would be $583 and $650, respectively. In any event, operating expenses for the year, excluding financial costs, totaled $345,947 and tenants paid $60,515, or 16 percent.9

[1] “Fact Sheet: Federal Rental Assistance,” Center on Budget and Policy Priorities, March 30, 2017,

[2] See U.S. Citizen Data tab on accompanying Excel workbook, Natural Governance Costs.

[3] “Homeownership Vouchers,” US Housing and Urban Development, accessed Month Day, Year,, for information on vouchers. Note that HUD lost no time adding Ben Carson’s name as Secretary.

[4] Center on Budget and Policy Priorities.

[5] “All Transactions House Price Index for the United States,” Federal Reserve Economic Data, last modified May 24, 2017,

[6] “Who Coined the Phrase, ‘Location, Location, Location’?” The Real Deal, June 29, 2009,

[7] “Average Interest Rates, 2017,” Treasury Direct, last modified March 3, 2017,

[8] See “HUD Apt Cost” tab on the accompanying Excel workbook, Natural Governance Costs. Numbers approximated for easy readability.

[9] See the accompanying Excel workbook, “HUD Apt Cost” tab. There is an interactive feature allowing the viewer to select any reduction of administrative costs and see the effect on rents.

Subsidized Housing Conclusions

Natural governance posits these conclusions:

  1. If value is considered, government programs can never actually reduce the cost of housing. The free market works exceptionally well with rental housing, and government involvement will only increase costs relative to value. Government may reduce the rent paid by occupants, but only by subsidizing the difference between tenant rent and actual cost. Government subsidies include actual rent payments and utility allowances, as is the case at Baytree; tax reductions to investors; and below-market interest loans. The government hides a portion of the cost by providing tax reductions instead of cash payments, making the cost difficult to compute—but the cost is still there. Equal value to equal value, the total cost will always be higher for residential units constructed with government subsidies. If the total cost of government-subsidized units appears less expensive than the cost of market-rate apartments, it is because the value is even lower.
  2. Subsidized rents are a function of the combined and adjusted income of all occupants and the number of young children. These must be verified and changed annually, as well as every time an occupant reports getting or losing a job, a new income earner moving in or out, or the number of children changing. Computing these rents adds an expensive component to management cost, one that market rate managers do not incur. Even with the best management, rent computation is porous. Management cannot see who sleeps in every apartment every night. Many mothers have live-in fathers of children or others are who are not on the lease and who do not report their income for rent computation purposes. In any case, the difference between an occasional visitor and a live-in resident can be fuzzy. Domestic workers in private homes, in particular, rarely report or pay taxes on their income.
  3. It is a mistake to pay people to live in apartments by giving them utility allowances. This devalues the properties in their mind, and it is not possible to determine whether they really want to live there or just want the money they’re offered. At a minimum, tenants in subsidized properties should be responsible for their own utility costs plus the HUD minimum rent of $25. It is a virtual certainty that many, or even most, of the zero-income tenants do have some source of income they are not reporting; they should be required to use that to provide for their own utilities.
  4. The federal government has an extensive inspection procedure for its Project-Based Section 8 and USDA subsidized housing. The process includes both an audit of compliance with rent computation and HUD billings and inspection of the properties’ physical condition and appearance. HUD contracts out the inspection process, which involves substantial cost. Owners must hire a larger staff because of the inspections, in addition to just doing the work—the costs of which are passed along to HUD. The inspection procedure is necessary, because tenants must live in the project to obtain the reduced or free rent. Unlike tenants in market-rate apartments, they cannot move if the maintenance is substandard and have little leverage to combat shoddy standards. There is no equivalent inspection process for market-rate apartments, because owners must maintain the apartments in order to attract and keep tenants.
  5. If rents are not affordable, the real issue is not excessive rents but insufficient income. Competition will reduce rents to the lowest economic level. In other words, if people cannot afford adequate housing, it is because they lack sufficient income, not because housing is too expensive.
  6. Subsidized housing is at the low end of the spectrum of housing values, as it should be. Occupants of subsidized housing should not have better units than those who pay the full cost out of pocket.
  7. New apartments and single-family homes are continually being built in virtually every city and town in the United States. New apartments are designed to be more desirable than existing stock because they will not otherwise attract tenants. The newest units tend to make older units look shabby by comparison, so the older units rent for less. Older apartments and smaller and older single-family homes make a good choice for those wishing or needing to save money.
  8. It makes no sense to construct new housing intended to be on the lower end. Most (but not all) rental housing, like most other assets, declines in value with age. Those who have lower incomes, or those who choose to spend more of their money on goods and services other than housing, should rent or buy older units or units in declining areas.
  9. A complaint against subsidized housing is that it concentrates the poor in areas with large minority populations, high poverty, low income and education levels, more crime, increased drug problems, and limited employment opportunities. To HUD’s credit, it has long attempted reduce concentrations of subsidized housing and disperse its locations. It has had little success. Part of the reason is that homeowners in prosperous neighborhoods often do not want “projects,” and manage to thwart the approval process. Another factor is that it is easier to find cheap sites “on the wrong side of the tracks.” Despite HUD efforts to scatter subsidized housing, most projects are therefore located in poorer areas.
  10. If people were provided with UBI, they could rent where the opportunity lies and avoid the concentration issue on their own. Many will choose to remain in neighborhoods occupied by people with similar interests and backgrounds, but that will be their choice. Millions of people, each acting in his or her best interest, will collectively make far better housing choices than those made by the government. Housing will resolve itself naturally rather than artificially. Admittedly, there will be some people who cannot take care of themselves and/or their children, but each will have a separate and distinct set of circumstances and a widely disparate spectrum of needs. Assisting them should be a function of state and local government, not the federal government.
  11. Existing subsidized housing projects may be a benefit because they have already been built and paid for with money that cannot be recovered but that certainly did not justify their cost.
  12. First mortgages on Section 8 projects are a fiction and, in reality, represent a subsidy to the financial services industry. The federal government is the most efficient borrower of all time and could simply provide the funds directly. Borrowing mortgage funds might make sense if the borrowers were assuming risk, but with the federal government both providing the funds for mortgage payments and guaranteeing repayment, fee-paid mortgage lenders have no real function.

Alien Visitation Discussion

One of the benefits of natural governance is that it simplifies the immigration conundrum. On the one hand, we benefit greatly from immigrant visitation and immigration. Generally, higher-energy individuals who have more motivation tend to emigrate, which has enormously benefited the United States. We are easily the most powerful nation on earth, largely because of the human capital we have obtained from other parts of the world.

On the other hand, we cannot simply ignore our borders and let anyone and everyone who wants to enter come in and stay for as long as they wish.

One consideration missed by those that want to force all undocumented immigrants to return to their home countries is that many of them would be here legally if we had rational visitation laws. Our procedures are a maze of complexity. The process often requires a lawyer to negotiate and a lot of time in addition. Many overseas visitors just cannot afford either.

The National Registry and consumption tax would work together to (a) make it easier for desirable immigrants to enter and (b) to get them to pay government costs that they now often avoid. Immigrants can be added to the National Registry, and the government would have time to add any information that would dictate that they not be allowed to enter or that they should be subjected to additional inspections or investigations. With the elimination of the income tax and the creation of a value-added or other consumption tax, overseas visitors would pay a portion of the UBI, federal medical expenditures, and all other government costs. Everyone consumes, so everyone would pay consumption taxes.

Replace Income Tax with Consumption Tax

The case for replacing the income tax is so compelling that it hardly need discussion. The internal revenue code is so long and complicated that no one could really understand it, not even tax professionals much less ordinary citizens. Pundits debate its length, with estimates ranging from 70,000 pages down to 2,600, but either way it is too long.1 Lobbyists have riddled it with loopholes. Tax lawyers regularly find ways to avoid taxes, and the government spends substantial amounts trying to eliminate those ways. The accounting profession devotes a major amount of its time accounting for taxes and figuring ways to minimize them. All of this is sterile, because consumption taxes would be fairer and virtually without cost to collect.

With so much wrong with the income tax, we should ask why it was not replaced many years ago. There are two answers. The one that is publicly advanced is that a consumption tax is regressive, whereas an income tax is progressive. Regressive means that the poor pay relatively more than the wealthy when compared to a progressive tax. Advocates of the federal income tax claim that it is progressive, because the very poor do not pay any tax and the less affluent pay tax at a lower tax bracket than the more affluent. This is true up to a point, but the code is actually so riddled with complicated ways to reduce taxes that its progressiveness is watered down. Tax avoidance is mostly available to people with high incomes who can afford expensive lawyers. In balance, many economists contend that the code is slightly regressive, with the loopholes offsetting most but not all the effect of higher tax rates for those with higher income. The supposed regressiveness of the income tax actually serves the same purpose as income redistribution, but Natural Governance does it far more beneficially.

The second answer is less intuitive. The public expects the federal government to stimulate the economy and create jobs. Because there is at present no simple and universal way the government can transfer money to the citizenry,2 the only way to increase the level of economic activity is to either spend money or force the public to spend money. In many cases, that is beneficial. Spending money for such purposes as hospital staffing and construction, schools, and police and fire departments, provides both tangible benefits and an increase in economic activity and prosperity. Unfortunately, wasteful expenditures still stimulate the economy. The government could pay people to dig ditches and pay others to refill them, which would create jobs but provide no ancillary benefit. The Internal Revenue Code is similar—it creates jobs that are not only without benefit, but are actually detrimental.

Therein may lie the real reason we still have the income tax. If the government eliminated it one morning, there would be a loss of jobs that would cause the economy to suffer. If Congress were to seriously consider such an action, there would be enough of an outcry to prevent it from happening.

Fortunately, Natural Governance addresses both concerns. By providing Universal Basic Income (“UBI”), the regressive aspect of a consumption tax is reduced or eliminated. Although a consumption tax benefits those with higher income, the UBI benefits those with lower income. The two taken together can achieve any level of income redistribution. Raise both UBI and consumption taxes, and income redistribution is increased.

The UBI also causes money to be spent usefully. The best decisions are made by those most immediately affected by those decisions. Both UBI dollars and dollars spent because of Internal Revenue Code requirements will create jobs. However, UBI dollars go toward goods and services people need or want, whereas IRS dollars are wasteful and sterile. Do we really think that lawmakers in Washington can spend the public’s money better than the public itself?

Admittedly, there are some potential recipients of UBI that should not receive it. However, the preemption [hyperlink to Universal Basic Income (UBI), third paragraph] capability allows the government to redirect that money when warranted.

Americans For Fair Taxation,, makes an excellent case for eliminating the income tax in favor of a consumption tax. The organization even addresses the regressive aspect of consumption taxes by proposing a payment similar to UBI which they term a “prebate.” However, they have not addressed the effect on the economy of losing all the jobs required by the income tax. That may be why they have not prevailed despite an ongoing and effective lobbying effort going back to 1999.3 Natural Governance does address this issue with the UBI.

One provision of the Natural Governance consumption tax component is that the most prominently stated price be inclusive of taxes, and that the purchaser not be forced to do the arithmetic. The principal purpose of marked prices is to give prospective purchaser a basis for making a decision—not to disclose the components of price. Vendors do not normally state how much of the price goes to labor, to rent, or to profit. Likewise, the tax can be disclosed, but the total price must be at the forefront. Many parents have had young children count their money carefully and decide what to buy, only to find that after sales tax they did not have enough to make the purchase. This should not happen; the public should not be burdened with the requirement of computing the end price of what they want to buy.

An incidental benefit of consumption taxes, when combined with UBI and the elimination of means-testing, is that they facilitate a workable Alien Visitation [hyperlink to Alien Visitation} policy. All non-citizens purchase something while in the United States. Illegal aliens probably don’t purchase much, but they still eat and stay somewhere. If they are farm workers, their employers may provide for them, but either way there are purchases made and consumption taxes paid. Elimination of means-testing as proposed by Natural Governance will lessen the need for alien workers, which when combined by the additional cost of consumption taxes on their behalf, will reduce their numbers and tend to limit the number to those really needed. Recreational tourists, students, guest workers, and medical tourists will all pay consumption taxes on their purchases, and will not receive UBI. This will increase the economic benefit of overseas visitors, and make UBI and the other social costs of Natural Governance more affordable. Note that under Natural Governance, non-citizens must provide their own health insurance and must provide for the education of their children. This reduces the chance of their becoming a financial burden, and lessens opposition to their being allowed to enter the United States.


[2] Actually, the government can and does transfer money to those that qualify as low income, but that has its own set of adverse effects that are widely discussed throughout this website.


Author Bio

George Frederick Marshall (“Rick”) bio

Marshall has spent over fifteen years conceiving and refining the Natural Governance philosophy. His business career, which included employing large numbers minimum wage employees and managing subsidized apartment projects, gives him a unique insight into many of the problems Natural Governance seeks to resolve.

From 1964 to 1978 Marshall was a principal of several affiliated corporations which performed service contracts with the Departments of the Army, Air Force, and Navy; the General Services Administration; other large corporations; and with State of North Carolina, which contracts required unusually intense standards of integrity and financial capability. During its 12 years of operation, the company’s employees numbered at times between 1,000 and 2,000, and over 200 contracts were successfully completed. Many of the employees were minimum wage, giving Marshall a unique opportunity to understand the needs of lower income workers.

Subsequent to his successful work in the government service contract industry, Marshall became involved in the development, management and syndication of affordable housing projects. He was an owner and Chairman of the Board of Phoenix Development Associates. From 1980 to 1992, the company, and its successor MB Corporation, constructed approximately 50 apartment complexes in North Carolina, South Carolina and Virginia. During the same time, Phoenix Management Services, the property management arm, managed over 7,000 apartment units. Phoenix was sold in 1992.

Along with many excellent properties, Phoenix managed a number of troubled inner-city properties that were exceedingly difficult to manage, and did so with mixed results. One of these was Clifton Terrace Apartments, a drug ravaged 285-unit property in Northwest Washington, D.C. During a year when inner-city Washington was known as the “Murder Capital of the World,” Clifton Terrace experienced 7 separate murders, 1% of the total in Washington. In an attempt to better understand the human circumstances affecting the property, Marshall spent a noisy Saturday night in one of the vacant units on the property. After managing the property for 13 years, and receiving criticism from HUD, Marshall determined the property to be unmanageable and voluntarily gave it back to HUD. The HUD involvement, following his experience as an employer of minimum-wage workers, contributed to Marshall’s determination and qualifications to formulate Natural Governance.

Marshall, and/or his affiliated entities, is a managing general partner in roughly 70 partnerships owning rental apartments developed primarily by a related entity. He continues to be president and majority stockholder of One Management, Inc., a company that manages housing subsidized by HUD under its Section 8 program.

He has developed and owned a small number of retail properties. These included land and an existing shopping center adjacent to Raleigh’s Crabtree Valley Mall, as well as a 45,000-square foot Circuit City store on 6.7 acres of land whose development had been successfully blocked by adjacent neighbors for over 5 years. Marshall, by working with those same neighbors and addressing their concerns, obtained their approval and completed the development. Circuit City later filed for bankruptcy, after which Marshall sold the property at a profit.

Marshall served on the Parks, Recreation, and Greenways Advisory Board in Raleigh, North Carolina, a branch of the Raleigh City Council. The Advisory Board provided advice for the development of the remarkable Capital Area Greenway System. During his tenure, Marshall successfully advocated connecting separate segments of the Greenway, which now has over 100 miles of trails.

In 2012, Marshall donated Marshall Park (, which connected two critical segments of the Greenway system. The Park is dedicated to Marshall’s father, who was KIA during World War II. Marshall sold land contiguous to the Park for apartments now known as Marshall Park Apartments (359 units), and participated in the entitlement process.

Marshall resides in Ft Lauderdale, FL. He has one son who, as of 2017, is a sophomore at CU Boulder CO.