Friday, September 19, 2008

Making Omelets Without Breaking AIGs

At first glance, it appears that socialism is continuing its advance. The announcement out of Reuters ("AIG rescue calms markets, HBOS and Lloyds in talks") on September 17 that the federal government was prepared to advance an $85 billion "lifeline" to the American International Group, or "AIG," effectively taking over ownership, according to the Washington Post banner headline: "U.S. Seizes Control of AIG With $85 Billion Emergency Loan." "Control" is "ownership" in all codes of law. The percentage of the equity stake is irrelevant.

At second glance, what was appearance becomes substance: the United States is now a socialist country. The State determines which businesses get credit, which survive, and who owns them. That is socialism by any stretch of the imagination.

It does little good to point out that the United States of America is the new workers' paradise without saying what should be done about it. Believe it or not, there is a simple, viable, solution to the problem, a solution we've been promoting for years, ever since the bungled privatization efforts in the former Soviet Union showed the inherent weakness of the Wall Street capitalist approach.

Step One: Reorient Thinking

Purge the country of one camp's mindless adherence to socialism on one hand, and the other camp's equally mindless adherence to capitalism. We want an economy characterized by the four pillars of a just (not socialist or capitalist) economy:
• Limited economic role for the State,

• Free choice and open and competitive markets,

• Restoration of the rights of private property, and

• Widespread ownership of the means of production.
Step Two: Restructure the Banking System

The United States has a poor record of proper use of the banking system, with or without a central bank. We need to restructure our banking institutions so that they meet the needs of real people on Main Street, not bureaucrats in government and gamblers on Wall Street:
• Cut the federal government off from the Federal Reserve money machine,

• Reform the Federal Reserve to supply credit to commerce, industry, and agriculture — as originally stated in the Federal Reserve Act of 1913,

• Restrict all financial institutions to the functional roles they were designed and intended to fill, beginning with a restoration of the quality and anti-corruption checks provided under the former Glass-Steagall Act that separated the commercial banking function of making private sector productive loans for long-term investments, from that of the investment bankers' function of packaging financial transactions, public offerings and more speculative securities,

• Create money and extend credit through the commercial banking system only for qualified commercial, industrial, and agricultural purposes, backing all new money with liens on the productive capital assets being financed, discounting the qualified self-liquidating loan paper at the Federal Reserve to provide 100% asset-backed reserves, with one qualification being that the money and credit would be used to create new owners of the newly-formed capital, and collateralizing the loans with properly-vetted and risk-assessed capital credit insurance,

• Provide each and every American with the ability to borrow an amount of new money equal to a pro rata portion of the total new capital formed each year (currently estimated at $7,000 for every man, woman, and child), creating the money only when the borrower presents a financially feasible investment (the costs of which would be repaid by the projected earnings of the investment) at a commercial bank and the loan is discounted at the Federal Reserve.
Step Three: Reform the Tax System

The United States also has a poor record with respect to its tax system. In the first half of the 19th century, the bulk of federal revenue came not from taxation, but from sales of land stolen from the Indians, notably the Cherokee. In the second half of the 19th century, federal revenue came from tariffs and import duties . . . which had a devastating effect on the balance of trade, while the richest people escaped taxation altogether by putting their productive assets into monopoly trusts. The Federal income tax laws of 1913, a coordinated reform with the Federal Reserve Act, was quickly subverted from simple revenue generation to social engineering.
• Raise the personal exemption plus deductions for education and health care to $30,000 for a non-dependent adult and $20,000 for a dependent,

• Eliminate all other personal deductions and tax credits,

• Enact an across-the-board "Capital Homestead" tax deferral for investment in income-generating assets up to $1 million,

• Merge Social Security and Medicare taxes into the general tax rate and keep all entitlement promises made to citizens from general revenues,

• Impose a single rate of taxation above the exemption plus deductions sufficient to balance the budget and begin paying down the federal debt,

• Raise the corporate tax rate to encourage a full payout of dividends, by making dividends tax deductible at the corporate level for corporations willing to finance their growth through the issuance of new shares through Capital Homestead Accounts.
We estimate that these reforms would result in a single income tax rate of 48% (2% less than the current corporate tax rate plus the special capital gains and dividend tax rate), while a "typical" family of four would pay no taxes on the first $100,000 of income from all sources, whether wages, dividends, capital gains, gambling on Wall Street, or State lottery winnings. A typical individual would, from birth to age 65 accumulate nearly $500,000 of income-generating assets, have net dividend income over that period of approximately $1.6 million, and have an annual after-tax dividend income by age 65 of $45,000.

The full program can be found in Capital Homesteading for Every Citizen.

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