Wednesday, October 18, 2023

Solving the Problems


Today’s blog posting is a selection from the book, Economic Personalism, which you can get free from the CESJ website, or from Amazon or Barnes and Noble.

In his 1936 Essay on the Restoration of Property, Hilaire Belloc identified five points that had to be addressed if widespread capital ownership was to be restored as a distinguishing characteristic of society. These were,

Hilaire Belloc

 

·       Concentrated Corporate Ownership,

·       Money and Credit,

·       Taxation,

·       Retail Distribution, and

·       Sustainability of Initial Efforts.

Belloc’s identification of key points was accurate, as was his statement of the problem. His proposed solutions were grossly inadequate, however, leading him to conclude that the goal he sought was virtually impossible to achieve.

Louis O. Kelso

 

Kelso’s solutions as developed and refined by the interfaith Center for Economic and Social Justice (CESJ) not only address Belloc’s points, but are based on techniques applying the three principles of economic justice. As systematized by Kelso and Adler in their 1958 collaboration, The Capitalist Manifesto, and developed and refined by CESJ (which expanded Kelso and Adler’s “principle of limitation” to the concept of “social justice”), the tripartite principles of economic justice are,

·       Participative Justice, or the input principle, “from each according to his productive contributions through his labor and capital,”

·       Distributive Justice, or the out-take principle, “to each according to his labor and capital contributions,” and

·       Social Justice, or the feedback and corrective principle that repairs the institutional environment whenever anyone is denied equal opportunity to contribute to production through his labor and/or capital, or from receiving his just due according to his contributions.

Charles Morrison

 

Concentrated Corporate Ownership. Both Belloc and G.K. Chesterton declared that workers must become owners of the corporations that employ them. They expressed a preference for smaller, family-owned farms and businesses, but admitted that it was a preference only, not a mandate.

In common with Charles Morrison and virtually all politicians and mainstream economists, Belloc and Chesterton assumed that the only way workers or anyone else could legitimately acquire capital ownership is to cut their consumption and accumulate money savings. Even when he acknowledged that capital acquisition could be financed with borrowed money, Belloc assumed that personal savings are still required to cover consumption needs while the new capital is formed and put into production.

G.K. Chesterton

 

Requiring workers to save before they can purchase shares in the company that employs them is unnecessary, as Kelso pointed out. It is only necessary that the workers obtain credit to purchase the shares, and that the company produce and distribute profits sufficient to repay the acquisition loan. This is the basic theory of the Employee Stock Ownership Plan (ESOP) that Kelso invented.

Money and Credit. Belloc missed the importance of the financial system in determining patterns of capital ownership. Consistent with a past savings orientation, he regarded the modern system of finance as a result, not a cause of concentrated capital ownership. As he said,

Credit is not a vital element in all societies, it is not a permanent and general social, economic or political problem. The modern function of credit is of comparatively recent development; it has already gone woefully wrong and appears to be approaching catastrophe. Credit, then, is only a local and ephemeral issue. Nevertheless it must be dealt with, because for the moment it monstrously overshadows our civic life.

Consequently, Belloc’s recommendations regarding money and credit were directed to minimizing its importance and removing its influence from society as far as possible.


 

Taxation. As the popes noted and Belloc agreed, a high level of taxation acts both to destroy existing ownership and inhibit or prevent a program of expanded capital ownership from being successful. Kelso proposed making dividends paid by corporations tax-deductible, and then treated as ordinary taxable income by recipients. If dividends were used to make payments on a capital acquisition loan, however, any taxes would be deferred until the capital was sold, i.e., total sale proceeds would be considered taxable income unless used to acquire other capital.

CESJ would also simplify personal taxation by abolishing all personal taxes except for a single-rate income tax. This single rate would be adjusted annually to meet current government expenses and reduce and finally eliminate existing debt. The tax would be imposed on all personal income from all sources above a level sufficient for a family to meet its basic needs, including shelter, healthcare, and education. By setting the income exemption at a realistic level sufficient to meet basic needs adequately, the effective tax rate would be zero or a small percentage at lower levels of income, and a larger percentage at higher income levels.


 

For example, given a single tax rate of 40%, a non-dependent exemption of $30,000, and a dependent exemption of $20,000, a family of four would pay no taxes on the first $100,000 of income, assuming that family income is aggregated for tax purposes. The effective tax rate on $200,000 of aggregate family income would be 20% or $20,000, while on $1 million would be 36% or $360,000.

By making dividends tax-deductible at the corporate level, corporations would be encouraged to pay out all earnings, thereby avoiding all corporate income taxes, and restoring owners’ traditional right to the full stream of income from what they own. Dividends would be treated as ordinary income by the recipient, unless used to purchase a pre-determined amount of qualified capital assets, usually in the form of newly issued shares representing new growth. By permitting people to defer taxes on any income used to purchase capital assets up to the statutory limit, people could accumulate a capital stake using pre-tax income.

Retail Distribution. Belloc assumed that small owners would mean small enterprises, which would be at a disadvantage when marketing to the consumer. The Just Third Way solution is the same as that for large-scale production: small owners participating in large-scale distribution on the same terms as large owners.

Sustainability of Initial Efforts. Belloc was rightfully concerned that, in the (to him) unlikely event capital ownership once again became widespread, large enterprises would take unfair advantage of smaller ones and drive them out of business. To protect small ownership, especially in its infancy, Belloc proposed the formation of legally established and protected guilds, similar to those of the Middle Ages.


 

Here again Belloc was blinded to some extent by his insistence that “small ownership” (widespread capital ownership) necessarily means many owners of small enterprises as sole proprietorships instead of many owners of large enterprises as joint stock companies. CESJ’s solution is essentially the same as Belloc’s, but with some improvements.

Instead of artificially protecting small owners by giving them favorable legal treatment such as government subsidies or putting restrictions on large enterprises, the market should determine the optimal size of enterprises. Unfair competition and monopolies should obviously be prevented or punished legally, but there should not be punitive measures taken against enterprises whether large or small when there has been no wrongdoing.

As for the interests of small owners (as distinct from small enterprises), Belloc was correct. Some sort of organization should be formed to protect the interests of small owners against large owners and to ensure that they enjoy the full rights of private property.

What to call these organizations is, of course, a matter of preference, but CESJ proposes what it calls “Ownership Unions.” Ownership unions would go beyond the wage system’s limitations and conflict orientation of traditional labor and craft unions.

Similar in concept to the Medieval guilds (which were associations of owners), ownership unions would serve a much broader constituency — today’s non-owners as well as minority shareholders — by assisting them to organize and transform themselves into worker- and citizen-owners, and then secure and protect their ownership rights.

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