This is the text of a letter we sent to the Wall Street Journal today . . . not that we expect a letter of such length to be published, but it is useful to expose our readers (and the editors of the Venerable Journal) to innovative ideas. We grant full permission to anyone who wishes to send similar letters in to the WSJ or his or her local newspaper to borrow from our letter.
With all due respect to Senator Obama and the Wall Street Journal, the favored tax treatment of corporate dividends, capital gains and inheritance of large estates under "The Obama Tax Plan" (WSJ, 08/14/08, A13) is based an outdated Keynesian assumption that new capital formation and expansion of private sector can only be financed only out of "old money" (i.e., existing accumulations of wealth). In his profound treatise The Formation of Capital (1935), Dr. Harold G. Moulton, then-president of the Brookings Institution, disproved Keynes' fundamental assumption — the rationale for favorable tax treatment of dividends and capital gains. Moulton proved that conventional wisdom regarding new capital formation actually harms the economy by reducing effective demand during periods of under-consumption. The demand for capital is derived from consumer demand. The presumed necessity to save before investing thus seriously cripples economic recovery.
Moulton demonstrated that, from 1830 to 1930, the periods of greatest investment were preceded not by reductions in consumption ("saving"), but by increases in consumption. Savings were not being invested, but spent on consumption. The money and credit to finance the formation of capital were created by the commercial banking system out of the inherent productivity in the economy. When presented with this evidence, Keynes' only response was that it was an illusion; that such a thing was impossible.
Senator Obama's belief that offering benefits to the rich in the form of favorable tax treatment of capital gains and dividends is on a par with Keynes' dogmatic faith in his own opinion. The fact is, we do not need the rich to reinvest their income. The rich confer greater benefits on society by spending rather than by saving, thereby generating the consumer demand that generates the demand for new capital. The new capital can be financed by creating asset-backed money through the commercial banking system by discounting qualified loans that meet high feasibility standards at one of the 12 regional Federal Reserve Banks, as provided in § 13 of the Federal Reserve Act of 1913.
The Fed's discount window was opened, inappropriately in our opinion, for bailing out Bear Stearns. If the Fed's money-creating powers can be done to save a company engaged in faulty speculation in radically overpriced existing securities and sub-prime mortgages (given Moulton's sound insights on money and credit), why can't the Fed back the financing of feasible private sector job-creating investment projects by the issuances of new shares on expanded bank credit collateralized and repayable with future dividends? Such a reform in Fed policy could be combined with a reform of the tax laws that, among other things, would make dividends deductible at the corporate level, effectively eliminating taxable corporate income.
Further, rather than restrict access to capital credit to the rich (who, by definition, have more than enough to satisfy their needs and legitimate wants), the credit to form capital can be made available democratically, to all citizens, via a program called "Capital Homesteading for Every Citizen," from the book of the same title. By financing new growth with equity issues in this way instead of relying on retained earnings, there will be more capital owners, and shares will achieve stable values. Instead of relying on capital gains, shares will pay dividends, and more shares will be issued to reflect new self-liquidating capital growth. Yes, share values would tend to stabilize when new shares are issued. America, however, could still grow synergistically with more citizens gaining legitimate access to wealth accumulations and greater income independence from the largesse of Big Government, Big Corporations and Big Labor. The difference between the two investment strategies is the same as the choice between one sixteen-ounce pie, or two eight-ounce pies, with barriers lifted so that more people can have a pie. Such a tax treatment of dividends for repayment credit for financing corporate growth assets is already available in laws encouraging leveraged Employee Stock Ownership Plans ("ESOPs"). (For the systems logic of our proposals, see Kurland, "A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation," The Journal of Socio-Economics, Vol. 30, 2001.)
In conjunction with a Capital Homesteading program, the tax system needs to be reformed - but not along the lines suggested by either Senator Obama or Senator McCain. Making dividends tax deductible at the corporate level, eliminating most personal deductions and tax credits and raising the personal exemption to a realistic level (our admittedly limited research suggests that $40,000 for an adult and $20,000 for a child might be adequate), merging the payroll tax into general revenues (eventually substituting private sector dividends from Capital Homesteading assets for unsustainable Social Security, Medicare and other entitlement programs), and taxing all income above the exempted amount — including dividends and inflation-indexed capital gains — at a single rate sufficient to balance the budget and pay down debt is far more realistic than anything proposed by any of the current crop of candidates.
Under our projections, a child born today could accumulate a portfolio of income-generating assets of close to half a million dollars, receive an after-tax annual dividend income by age 65 of at least $50 thousand, and enjoy total dividend income by that age of about $1.6 million.
Norman G. Kurland, J.D.
Michael D. Greaney, CPA, MBA
Director of Research
Center for Economic and Social Justice