THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, July 22, 2015

Solving the Greek Debt Crisis, XII: The Key to Economic Recovery

Yesterday we noted that there is one key factor that cannot be omitted from the proposed program to put Greece on an even keel economically.  Regular readers of this blog already know what this is: an aggressive program of expanded capital ownership.  Why?

Ancient Greek democracy...for the élite.
We could list the reasons forever, but the most immediate selling point is that Greece, the home of political democracy, should also be an exemplar for economic democracy, without which political democracy is a hollow shell.  The most important reason, of course, is that the program simply won’t work for any length of time unless it includes equal opportunity and means for every child, woman, and man to own capital so that they can produce with labor, capital, or both — as long as they produce.

Thus, we recommend (a weak word) that Greece immediately institute a Capital Homestead Act — or, better, an Economic Democracy Act.  They mean the same thing, really, but probably “economic democracy” is a concept more people in Europe will grasp easily than “homesteading.”

The whole discussion on reforming the money and credit system leads right in to this, as does the tax reform.  Again, let’s take taxes first.

No escaping debt and taxes.
Four principles must guide the tax reform.  1) Efficiency: the tax system raises enough money to run the government without giving too much disincentive to produce.  2) Understandability: people should be able to pay their taxes without having to become an expert.  3) Equitability: people must be taxed in accordance with their ability to pay.  4) Benefit: people who receive the benefit should pay for it.

When any one of these principles comes in to conflict with any of the others, common sense should resolve the issue.  For example, you don’t tax the poor to provide emergency relief to the poor, even though that seems to violate the fourth principle.  Instead, you provide emergency relief on the basis of equitability: the rich who have the money are taxed to assist the poor who do not have money.

At the same time, however, you reform the system so that the poor do not require the assistance of the rich.  Continuing to tax the rich for the ordinary maintenance of the poor changes it from justice to injustice.

Thus, the fairest tax given these principles is a single rate imposed equally on all income above an exemption sufficient to enable people to live in reasonable comfort.  In addition, the tax laws must permit a tax deferral on income used to purchase capital assets, up to an amount sufficient to generate an adequate and secure income.

Homesteading is the backbone of true democracy.
Thus, every citizen should have a Capital Homestead or Economic Democracy Account in which he or she can accumulate a reasonable ownership stake of income-generating assets on a tax-deferred basis.  Now — how do they buy the assets in the first place on which to defer the taxes?

That’s where the money and credit reforms we described in the last couple of postings kick in.  Obviously, if a rich person or a corporation can finance new capital without using past savings, so can everyone else — and it’s better for the economy.  The fact is, the more people who are productive, the more income there is, and the more income there is, the more demand there is, and the more demand there is, the more people can produce and sell, making a . . . well, we’re not sure what the opposite of a vicious circle is, but this is it.

Thus, every child, woman, and man can open up an Economic Democracy Account in which every individual can accumulate up to €1 million on a tax-deferred basis.  That’s a nice round number, and at a ROI (“Return On Investment”) of a conservative 20%, would generate taxable income of €200,000 every year.

How could it be so large?  Simple.  Most companies today don’t pay out very much in dividends because they retain earnings to finance capital growth and expansion.  If they can finance capital growth by selling shares instead of retaining earnings, they can pay out earnings to the shareholders — who have a natural right to them, anyway.

Further, companies can be encouraged to pay out all earnings as dividends by making dividends tax-deductible by the corporation — and raising the corporate tax rate to give more encouragement.  That way a corporation has a choice: avoid all taxation of income by paying it out to the shareholders (who can pay taxes on their dividends the same as any other income), or pay even more taxes than they do now.

Besides, if they finance growth by selling new shares instead of retaining earnings, the new shareholders are going to need the full stream of profit attributable to their shares to pay for those shares.  Issuing shares instead of retaining earnings to finance growth will create a lot of new shareholders, and create a lot of new demand to justify more growth.

Less crime and poverty.
Thus, if everybody has the right to borrow money to purchase new shares that pay for themselves out of future dividends — and all profits are paid out as dividends — ordinary people can become capital owners without risking anything they might have at present . . . although the problem is that most people in Greece don’t happen to have anything to lose at present as it is.  If the money is created as described previously in this series, there will always be enough money for new capital formation — and for creating new owners without taking anything from anybody else.

What about security for the loans?  What if the borrower defaults, i.e., doesn’t make the loan payments?

Well, what about it?  There’s an entire industry that already exists to help people handle risk.  It’s called “insurance.”  Using the risk premium on all loans as an actual insurance premium (and just why do you think they call them “premiums”?), a borrower or lender can take out a capital credit insurance policy that pays off in the event of default.  Not in full, of course — we don’t want lenders to make bad loans just to collect insurance on them.  A loss should hurt, but not really harm a lender.

That, in brief (no, really) is a possible solution to the Greek debt crisis.  It beats expecting other people to pick up the bill for all eternity.