Thursday, April 5, 2012

Guide to a Capital Homestead Act

By Norman G. Kurland

Recently we were asked whether there was a specific "Capital Homestead Act" drafted. This is a very good question. The answer, however, is no — we don't have a draft of the legislative language.

We are an all-volunteer operation and do not have access to the Congressional expertise in drafting something that will be more comprehensive than Roosevelt's New Deal. The overall package for experts is in the free download of our 1994 book Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security (which is in the process of updating and revision of the estimated annual allotment of capital credit per citizen from $3,000 to $7,000.) (A free .pdf is available in the "CESJ Bookstore.") A more complete summary of the Capital Homestead Act is on the website, as well as one for public education.

These ideas were first conceived and published by Louis O. Kelso in his two books co-authored by the noted American philosopher Mortimer J. Adler, The Capitalist Manifesto (1958) and The New Capitalists (1961) — the latter with the significant and provocative subtitle, "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." These are also available for free downloading from the "bookstore." Kelso conceived the binary theory of economics as well as the "Industrial Homestead Act. He was also the inventor of the Employee Stock Ownership Plan or "ESOP" which has turned over 11 million workers into capital owners of their companies without reducing their take-home pay.

I worked with Kelso for 11 years, first as executive director of his Institute for the Study of Economic System and later as Washington Counsel of Kelso and Co., when he moved from the law into investment banking. My theoretical presentation of Kelso's binary growth model was published by the Journal of Socio-Economics.

What Kelso and I tried to offer were the CHA's specs for a radical overhaul all the tax laws, the monetary laws, corporate laws of the rights of shareholders, the inheritance laws, etc. that systemically control how $2-3 trillion of new job-destroying technologies, new energy systems, new plant and equipment, new rentable space, development of land and natural resources, new physical infrastructure will be financed, even at current conditions, both in the private sector and public sectors.

All laws perpetuating monopoly capitalism and encouraging mercantilist access to the ownership, control and profits from new capital formation would be abolished and all laws favoring speculation over investment by the poor, the middle-class and others in the 99% would be amended to discourage speculation. The Wall Street gambling casino could continue speculating for the top 1% and finding way for them to invest in the most high-risk ventures.

Some specific guidelines for a Capital Homestead Act are:

1. Simplify the tax code to a fraction of its current size so that:

(a) Every citizen could fill out a postcard-sized return to pay taxes at a single rate on income from all sources, which would also serve to justify government vouchers for health, education, housing and other well-being needs of the poor until they begin receiving adequate labor and property incomes from their equity ownership shares.

(b) All "tax expenditures," tax credits, tax exemptions and deductions (except for costs of producing marketable goods and services) would be eliminated on business and personal income-producing work, but each citizen and dependent would automatically be granted a "basic well-being" exemption of $30,000 for non-dependents and $20,000 for dependents for incomes from work, welfare, gifts, dividends, inflation-indexed capital gains, rents, gambling and all other income sources. Hence, a family of four would not pay a single cent of Federal income, payroll or other taxes until their incomes exceeded $100,000. They would pay the same percentage of a dollar of income above $100,000 that Warren Buffett, Bill Gates, and George Soros would pay on their billions earned over their exemption levels.

(c) In addition to exemptions from further payroll taxes (the entitlements to which would be paid out of general revenues), businesses would be eligible to escape from paying corporate income taxes by paying out fully-tax deductible dividends to all their shareholders, adding enormously to the personal federal revenue base at a rate calculated to address the continuing federal deficit problem.

(d) Free from federal corporate tax rates and with the drying up of existing pools of savings, businesses would be encouraged to issue new full-dividend, full-voting shares for financing their growth. This would put millions of shares on the new national market for citizens to purchase with their annual allotment of CHA credit available through tax-sheltered CHAs offered by local banks. The shares would be repayable with the future dividends with backed by private sector capital credit insurance. Bill Gates would be offered the same capital credit allotment as the poorest of the poor.

(e) Local banks would issue promissory notes to purchase ("accept" or "discount") bills of exchange (share purchase contracts) offered by each borrower. Acceptance would be based on the soundness of the business plans of the companies whose shares are purchased with the CHA credit allotment. The discount rate would be set at the present value of the future redemption of the bill at face value, plus a risk premium to cover the cost of capital credit insurance and reinsurance. The bills would then be offered immediately for rediscount at one of the 12 regional Federal Reserve Banks under Section 13, paragraph 2 of the Federal Reserve Act. (This could be done individually, but would be more feasible to "bundle" bills of the same quality in lots as a single instrument.) This is "the real bills doctrine," an application of "Say's Law of Markets" (below).

By this means the Fed would monetize real productive growth in the private sector with an asset-backed currency, instead of government spending with a debt-backed currency. The promissory notes would be repaid (i.e., the borrower's bills of exchange redeemed at full face value) with "future savings." In contrast to past savings that represent accumulated reductions in consumption, future savings represent future increases in production.

Using future savings instead of past savings to finance growth increases the wealth of society by forming new capital (productive assets) and adding the present value of the future marketable goods and services to be produced by the businesses issuing the new CHA shares. The new shares are available for purchase by every man, woman and child citizen in America.

Widespread capital ownership would stimulate private sector growth, create jobs naturally, and generate ownership incomes to provide the mass purchasing power ("effective demand") to keep the system in balance. The increase in effective demand would match the new productive capacity (effective supply) in a way not possible under the current system of monopoly capitalism. This would validate Say's Law of Markets, a common-sense theory that can be summarized as "production equals income, therefore supply creates its own demand, and demand its own supply." (I can only give the conclusion of Say's Law here; the explanation is somewhat complex, but has been covered a number of times on this blog.) Due to their assumption that only past savings can be used to finance new capital formation, both Karl Marx and Lord Keynes rejected Say's Law at the expanse of freedom, justice and shared prosperity.

Instead of "full employment" being an exclusive national economic goal, full production through equal opportunity to share the power and profits of capital ownership as a fundamental right of citizenship would enable America and any other nation that adopts a CHA to demonstrate how economic democracy can help save political democracy to be sacrificed to those who worship the expansion of the power of the State, humanity's only legitimate monopoly. Capitalism and Socialism will wither away to the Just Third Way.

(f) The single tax rate under a CHA would void any future budget deficits, even permit government to begin repaying the existing unsustainable reported debt of nearly $16 trillion from the past as well as meet the more than $60 trillion in projections for Social Security, Medicare, and government retirement incomes kept off the reported debt. A CHA would over time reduce and the eliminate this hidden debt by enabling every citizen to accumulate equity accumulation in excess of these "entitlements." If a CHA were operating, the average child born today would have received $1.6 million in after tax revenues up to age 65, close to $50,000 in after-tax dividend at age 65, backed by an accumulated capital estate of close to $500,000. These are on very conservative growth rates under the CHA compared to the current wage slave, welfare slave, debt slave, charity slave monopoly capitalist system.

(g) The rich and super-rich under a CHA would not lose any property rights on their existing ownership accumulations during their lifetimes. (After all, they have never figured out how to continue to control their assets when they die.) Hence, a CHA would reform the inheritance and gift tax laws to tax the recipients if their combined accumulations after receiving the inheritance or gift exceeded $1 million. This would encourage today's super-rich to spread out their monopolistic accumulations to all members of their families, the workers who helped create their fortunes, teachers, the military, firefighters and police, all public employees, the disabled, artists, inventors, and others they deem worthy directly, instead of funneling their wealth into foundations to keep it concentrated and under the control of an elite.

(h) The only thing the rich and super-rich would lose is their artificial (aided by politicians) monopolistic and mercantilist protections against truly free and open competition in the economy. Gone would be their violation of one of the most fundamental property rights, the right of an owner to receive the full fruits or profits from his shared ownership of a business; under current law a shareholder has no right to a dividend, his shares of profits. Only if those who control the company decide to pay a dividend does a minority shareholder ever receive a dividend, which in moral terms is the equivalent of theft. Gone also would be financing corporate growth out of accumulated cash or outside loans repayable with future government "tax expenditures" or future undistributed profits. This explains largely why the rich continue to get richer, and the 99% are forced into a modern version of slavery. The "deck is stacked" to perpetuate monopoly control and in turn the corruption of political leaders who turn to the top 1% to finance their political careers.

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