Is the Proletarian Condition “Normal”?

Last week we looked at the question whether the rich, as F. Scott Fitzgerald claimed, are different.  We concluded that today the rich are, indeed, different . . . but not as human beings.  Rather, what makes the rich different these days is access to money and credit which enables them to buy advanced technology which can and usually does outproduce human labor at a quantum level.

Something Missing

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

In response to the spread of socialism and the other “New Things,” Pope Pius IX, socialism and the other new things continued to spread.  Finally, in 1868 he convened the first ecumenical council since Trent in the sixteenth century.

The Framework of Economic Justice: Restoration of Private Property

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

As we saw in the previous postings on this subject, widespread private property in capital is essential to a just society.  That of course raises the question as to what private property is.

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,

Feudalism v. Distributism

Someone asked us recently whether we thought distributism and feudalism are pretty much the same thing.  Off the top of our head (or is that “heads”?) our first response is “no.”  After all, feudalism meant that most (if not all) land was “public” land, and people “held” the land in return for specified service(s) to the State, usually military service.  Land was not private property.

Solidarism and the Just Third Way, III: Restoration of Private Property

Yesterday we looked at the role of free and open markets in solidarism and the Just Third Way.  We found that Father Pesch and CESJ are in substantial agreement that the free market and fair competition are fully compatible with the demand for justice and morality in daily life.

Socialist Delusions, Capitalist Illusions, I: What is Socialism?

Get into an argument with a socialist — any socialist — and you will sooner or later be informed that you just don’t understand, that you don’t know what socialism is, you’re ugly, and your mother dresses you funny.

Solving the Greek Debt Crisis, VII: Property and Money

Making every child, woman, and man productive is key to solving the Greek — or any other — debt crisis.  Figuring out how to make everybody productive, or at least providing the opportunity and means whereby they can become productive is quite another.  (We say “opportunity,” for everyone should be free to decide not to be productive, assuming that no one else is compelled to support anyone who freely chooses not to be productive.)

Why Have Property?

Recently — over the past couple of centuries or so — the idea has grown up that ownership of capital is justified on the grounds that it is the best way to optimize the possibility of an adequate and secure income.  As a bonus, property (the right to be an owner) also confers power.  As Daniel Webster noted almost two hundred years ago, “Power naturally and necessarily follows property.”

Poverty and Freedom

Almost exactly one month ago the Wall Street Journal ran a piece by William Easterly.  The point of the article was that there is a link between poverty, and economic and political freedom or (to be precise) the lack of wealth and income leads to a lack of economic and political freedom.  (“Singing About Fighting Poverty, Slightly Off-Key,” Wall Street Journal, 10/02/14, A13.)

A Proper Response

The other day someone sent around an e-mail suggesting that violence could solve many of today’s massive social and economic problems.  From a certain perspective, that is correct.  The idea that “violence never solved anything” is, frankly, just plain wrong.  Violence solves a lot of problems.  It just usually leaves you with much bigger problems than you started with.

State Blackmail

Ultimately, the goal of the Just Third Way (in the short term) is to surface a world leader and present him or her with a possible framework for solving the problems world leaders are faced with, and for that leader to communicate to the world that the principles of economic justice as presented by Louis Kelso and Mortimer Adler, and refined by CESJ.

Private Property: Absolute? or Absolutely Not!

A lot of people have a lot of problems with the word “absolute.”  They absolutely refuse to listen to anything that implies there might be such things as absolutes, moral or otherwise.  “There are no absolutes!” they trumpet . . . to which the obvious response is, “Are you absolutely sure of that?”

Abortion, Slavery, and Private Property, IV: The 14th Amendment

Picking up where we left off on August 15, following the Civil War and the abolition of chattel slavery, the Congress realized it was essential to overturn Scott v. Sandford — the Dred Scott case.  The ruling of the United States Supreme Court, that no human being of African birth or descent, slave or free, was a person as that term was used in the Constitution, could not be allowed to stand.

Why Capital Homesteading is Essential

We’ve been urging Bob Marshall of the Virginia House of Delegates to get in touch with CESJ president Norman Kurland.  Most immediately, of course, this would kick start the economy in Virginia, provide an example for the other states, begin the process of shifting from money supply backed with government debt to a money supply backed with private sector hard assets, create jobs, and so on.

Raw Judicial Power XVIII: Dodge v. Ford Motor Company

As we saw in the previous posting in this series, prior to the entry of Theodore Roosevelt into the 1912 presidential campaign on the Progressive ticket, the outlook was extraordinarily grim for the United States. The choice was between William Howard Taft, who had caved in to the reactionary Old Guard Republicans, and Woodrow Wilson, who, in defiance of the populist leanings of the Democratic Party, supported laissez-faire capitalism.

This put the American voter between a rock and a hard place as far as choice was concerned. Elect Taft and get more ineffectual progressive rhetoric as the Old Guard dismantled Roosevelt's reforms while they purged the G.O.P. of progressive elements, or elect Wilson and keep things as they were, with a stalemate between a reactionary president and a populist Congress.

By forcing both the Democrat and Republican presidential candidates to adopt a more progressive stance, Roosevelt made the election a genuine contest between Wilson and himself, instead of a landslide for Wilson. Taft was, to all intents and purposes, unelectable no matter what happened. He had lost the confidence of the progressive Republicans by caving in to the Old Guard, and all the Democrats and independents, and had never had the confidence of the populists and socialists in the first place.

Roosevelt thereby managed to turn the tide for a short time, but progressivism as a movement depended too much on him personally at that point; it had not been institutionalized, that is, become truly a part of the system. Had Taft not previously caved, or had Roosevelt been elected in 1912, the reforms could have taken root and grown, restoring the American system, but they did not, and the brief chance that reform had under the Democrats came to nothing in the end.

Still, the Democrats kept their biggest promises and instituted the Federal Reserve and the income tax. These institutions, however, necessary as they were and remain, were not integrated into a holistic approach. They were tacked on, so to speak, to a system that still embodied several flaws, notably lack of democratic access to the means of acquiring and possessing capital to replace the Homestead Act.

This became evident when, for the sake of political expedience, both the income tax and the Federal Reserve were misused to finance the entry of the United States into World War I. Rather than raise the necessary funds by the politically unpopular move of raising taxes — although taxes were raised; just not enough to defray the full cost of the war — the money creation powers of the Federal Reserve were used to monetize government deficits by purchasing the securities floated in the Second Liberty Loan and Victory Loan issues.

Bad as the misuse of these institutions was and remains, however, they can be corrected by relatively simple changes in government policy. This was not the case with the institution of private property, especially after the distortions that resulted from the decision in the Slaughterhouse Cases became embedded in constitutional law. Nowhere was the change more evident than in the decision of the Michigan Supreme Court in Dodge v. Ford Motor Company (204 Mich. 459, 170 N.W. 668. (Mich. 1919)).

As a result of the "slavery of past savings" assumption that forces an economy into capitalism, socialism, or the Servile State, the new definitions of private property that resulted from the Slaughterhouse Cases had the world economy in their grip. The Great War had accelerated the process of proletariatization and the economic disenfranchisement of small owners. The next step was to start undermining or eliminating the rights of minority owners, leaving only the richest and thus most powerful in total control. In Dodge v. Ford Motor Company the abolition of private property for the majority of the population even in a capitalist society was recognized as a legal principle.

The story is rather ugly. In the first quarter of the 20th century, Henry Ford decided to finance a plant expansion using accumulated cash instead of selling new equity or borrowing the money. The Dodge brothers, minority owners, protested. They wanted the dividends to which they were entitled under the traditional rights of private property. Ford refused to pay dividends, and the Dodge brothers sued.

In Dodge, among other issues, the court ignored the traditional definition of private property, embodied in all codes of law, as the right to control what is owned. (Louis O. Kelso, "Karl Marx: the Almost Capitalist," American Bar Association Journal, March 1957.) The court, in effect, redefined the traditional right to receive the "fruits of ownership" (i.e., income from what is owned — dividends) for minority shareholders as limited to the power to sell their shares if they were not happy with the dividend policy of the majority owner(s).

The court ruled, in effect, that minority shareholders are able to enjoy their full "fruits of ownership," including the right to receive any and all income generated by what is owned, only if the majority owner so agrees. That is, the majority owner(s) alone, through control of the Board of Directors, have the right to set dividend policy for a company, and do not need the consent of a minority owner or owners to withhold that which belongs by natural right to the minority owner(s).

Ford built his case on the "business judgment rule." That is, if the individual elected by the shareholders (who happened to be Ford, as he retained the majority block of shares) decided it was in the best interests of the company — and therefore the shareholders — to stop or reduce payment of dividends, the minority shareholders had no recourse other than to retain their shares and take whatever the majority owner(s) chose to dish out. The alternative was to exercise their "take-it-or-leave-it" right to sell their shares and wash their hands of the whole business — in other words, to exercise their property rights solely to become non-owners.

The "business judgment rule" is a concept in U.S. corporate case law in which "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge." (Gimbel v. Signal Cos., 316 A. 2d 599, 608 (Del. Ch. 1974).) In order for someone to bring suit for violating the rule, the one suing must prove that there was a conflict of interest, i.e., "the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty — good faith, loyalty, or due care." (Cede & Co. v. Technicolor, Inc., 634 A. 2d 345, 361 (Del. 1993).)

If it cannot be shown that the Board of Directors had a self-interested motive in reaching its decision, the individual or group alleging a breach of fiduciary duty "is not entitled to any remedy unless the transaction constitutes waste . . . [that is,] the exchange was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." (In re The Walt Disney Co. Derivative Litigation, 906 A. 2d 27 (Del. June 8, 2006).)

The suit that the Dodge brothers brought against Henry Ford was one of the earliest cases in which this rule was invoked. In a line of reasoning that appeared to advance the claim that minority owners are not owners in the same sense or manner as majority owners, the Michigan Supreme Court ruled that, "courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud, or breach of that good faith which they are bound to exercise towards the stockholders." (Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919).) This is simply using a rule of law — the business judgment rule — to ride roughshod over the natural right to be an owner, whether one is a minority, small, or majority owner.

It might thus be argued at some time in the future, when the rights of private property have been restored, that by deciding to deprive minority owners — shareholders — of their traditional rights of property in furtherance of what might be interpreted as vindictive or malicious acts on the part of Henry Ford to deprive the Dodge brothers of their rights as shareholders, the court in Dodge v. Ford Motor Company might not have applied the business judgment rule properly in the case that seems to have been used most often to validate the concept.

What is also frequently ignored in analyses of the case is the fact that Ford had dismissed another right of private property, that of control. He had previously blocked every effort of the minority shareholders to have input into decisions and exercise some degree of control over the business, such as design improvements and marketing strategy. This was particularly egregious with respect to the Dodge brothers, who owned the next largest block of shares (10%) after Ford, and who were increasingly unhappy with Ford's dictatorial actions.

Consequently, prior to their lawsuit over Ford's restriction of dividend payments, the Dodge brothers began setting up their own automobile manufacturing company in secret, using their Ford dividends to finance the effort. Ford got wind of this and began withholding dividends. Ford was also suspected of wanting to reduce the price of Ford automobiles as a way of justifying the proposed reduction in dividend payouts and reducing the company value per share.

After the Michigan Supreme Court ruled in his favor, Ford threatened to set up another rival automobile manufacturing company, probably to be wholly owned by Ford personally. This was apparently as a way to compel the Dodge brothers to sell their shares back to the Ford Motor Company at the reduced value per share that Ford had manipulated. In this he was successful — and thereby undermined another right of private property, that of disposal, by taking away the Dodge brothers' free choice in the matter of whether or not to sell their shares.

Thus, consistent with the redefinition of private property that came out of the Slaughterhouse Cases, Henry Ford, one of the "high priests" of capitalism, did more than almost anyone else to wreck the institutions of private property, liberty, and free markets on which capitalism is ostensibly based.

#30#

The Restoration of Property, Part XII: Accelerate Private Sector Growth

Having outlined Capital Homesteading in the previous posting in this series, we need to list some of the specific ways in which Capital Homesteading will accelerate private sector economic growth. Some of this material will seem a little redundant. That, however, is due to the interdependent nature of the Just Third Way principles embodied in Capital Homesteading. There is also the fact that presenting a new paradigm is extremely difficult. Getting a handle on the Just Third Way requires an almost irritating level of repetition in order to make certain that the point gets across — and, make no mistake: the Just Third Way requires a dramatic paradigm shift, especially in our understanding of money.

On the economic level with which we are concerned, the Just Third Way requires that we shift from the tenets of the British Currency School, to those of the British Banking School. Adherence to the principles underlying the Currency School understanding of money has hampered, even prevented sound economic growth for centuries. While not perfect, the principles on which the Banking School is based are more consistent with economic and political reality than the contradictory assumptions and dictates of the Currency School.

As a result, we need to reject the artificial scarcity constraints built into the Currency School approach by Malthus and others, and revive and restore the real bills doctrine and Say's Law of Markets. To accomplish the goal of an economically just society, we believe that a Capital Homesteading program should focus primarily on increasing production by accelerating democratic growth of the private sector. This would be effective if for no other reason than making new investments productive and making certain the income from ownership is distributed widely and, above all, equitably throughout society in accordance with the principles of economic justice will ensure as far as humanly possible a sound and sustainable economic recovery.

Before beginning, however, we should offer Belloc's prescription from The Restoration of Property, along with a brief analysis to show where Belloc makes a few mistakes, but (more importantly) how the Just Third Way and Capital Homesteading can achieve the stated goal of restoring widespread private property in the means of production as the chief economic characteristic of society — but without relying on the flawed Keynesian/Currency School assumptions about money and finance that hampered Belloc's proposal.

Belloc concludes The Restoration of Property with a three-point program that he believed would effect a return to a society characterized by widespread direct ownership of the means of production:

• Pass legislation favoring "small" business over "large" business. After businesses reach a certain size impose legal penalties sufficient to offset the advantages of economies of scale. Where businesses remain large, ownership should be divided among many people.

• Reestablish the Guild. The Guild would not, however, be the medieval institution consisting of an independent body of individuals coming together in free association, but take the form of a State-mandated and regulated corporation.

• Establish a State-sponsored and protected cooperative banking system to finance the Guilds and compete with the independent commercial banking system.

The critical weaknesses and contradictions in Belloc's proposed remedies should be immediately obvious. The most serious problem, of course, is the fact that Belloc takes for granted the wrong definition of money, and assumes as a given that capital formation cannot be financed except out of existing accumulations of savings. Clearly, such assumptions necessarily result in concluding that, to bring about the desired outcome, the State will have to continue to control money and credit.

The only change is that, instead of benefiting a public sector elite as under socialism, or a private sector elite as under capitalism, the system would be manipulated so that the State's effective abolition of private property established and maintained by control over money and credit and separation of money from production will simply benefit — temporarily — a new elite: de Tocqueville's "tyranny of the majority." Thus would Benjamin Watkins Leigh's prediction in the Virginia Convention of 1820 come to pass: "Power and Property can be separated for a time by force or fraud-but divorced, never. For as soon as the pang of separation is felt . . . Property will purchase Power, or Power will take over Property."

We should note that the new tyrant would only be in power a relatively short time. This is in the nature of things. Ironically, Belloc's recommendations all require a high degree of State involvement in and control over the economy — and thus over the personal lives, liberty, and property of everyone in the State. This creates a society indistinguishable for all practical purposes from the socialized capitalism (or capitalized socialism) that Belloc called the Servile State. In his anxiety to gain for the "small man" the protections currently enjoyed by the elites under capitalism and socialism, Belloc failed to keep in mind that (as Kelso reminded us), "Property in everyday life, is the right of control." (Louis O. Kelso, "Karl Marx: The Almost Capitalist," loc. cit.) The great mass of ordinary people might enjoy a brief period in which they receive the benefits presumably due them, but the State would soon find a way to justify a more politically based distribution as a means to restore its "lost" power.

The Just Third Way as applied in Capital Homesteading is the only rational alternative to capitalism, socialism, or a diluted distributism corrupted into effective socialism by a bad definition of money and reliance on existing accumulations of savings to finance capital formation. A Capital Homestead Act offers the following goals in place of Belloc's unfortunate (and seemingly completely unconscious) Statism:

Promote Private Sector Growth Linked to Broadened Ownership. Recreate in the 21st century the conditions that resulted from the first Homestead Act of 1862. As a Capital Homestead Act would be based on all productive capital, not just land, this would include full employment, declining prices, and widespread, individual and effective ownership of income generating assets. Part of the Act would be to set a realistic long-term target, based on the nation's industrial growth potential, to achieve a minimum Capital Homestead stake for every American family within a reasonable period of time.

Stimulate Maximum Growth, with a Balanced Budget and Zero Inflation Rate. Remove barriers to maximum rates of sustainable and environmentally sound, private sector growth to achieve a balanced federal budget and a zero inflation rate under a Capital Homestead program.

Establish a Tax System That Stimulates Economic Growth and Jobs, and is More Accountable to Taxpayers. Rewrite and radically simplify the existing federal tax system to automatically balance the budget. Keep more money in the pockets of taxpayers from their initial earnings to cover their own health, education, housing and other basic household living expenses. Make Congress more directly accountable and responsive to all taxpayers. Eliminate all tax provisions, personal deductions, tax credits, and exemptions (except for the front-end exemptions for adults and dependents) that unjustly discriminate against or discourage property accumulations and investment incomes for poor and non-rich families.

Keep the Social Security System and Medicare Promises. Keep existing promises and reduce the unsustainable burden on the Social Security and Medicare Systems, by enabling every American to accumulate sufficient wealth-producing assets to provide each person with an adequate and secure taxable income from property, independent of Social Security and Medicare benefits and incomes from other sources. Based on conservative projections of U.S. growth potential, by age 65 a child born today could accumulate a capital estate of nearly $500,000, generating $1.6 million in after-tax dividends over that period.

Restructure the Credit and Tax Systems to Encourage Universal Health Care through the Private Sector. Capital Homestead reforms, supplemented by health care vouchers for the poor, would provide a sustainable way to finance the health care system. These reforms would empower each citizen and family with the means to enjoy and pay for affordable, quality health coverage of their choice. Through market-disciplined, comprehensive health care enterprises that are owned and controlled by health care providers and health care subscribers (patients), the doctor-patient relationship could be restored, while providing greater insurance portability, accountability and lower administrative overhead costs throughout the system.

Solve the Home Foreclosure Crisis and Make Home Ownership Accessible to all Citizens. Starting in communities with homes whose market values are deflated due to the sub-prime mortgage crisis, resident-owned Homeowners Equity Corporations (HECs) could receive interest-free credit to buy up the foreclosed properties. As occupants of the homes in default pay the HEC their monthly rents (which could be supplemented with housing vouchers for the poor), these would be applied toward debt service, using pre-tax dollars to pay off the loans that the HEC used to purchase the foreclosed properties. As they make their regular monthly lease payments, these renters would become full owners of HEC shares and their dwellings.

Stop Federal Reserve Monetization of Government Debt. Terminate use of the Federal Reserve's powers to create debt-backed money, to support foreign currencies, or to buy and sell primary or secondary Treasury securities. This would reduce excessive government spending and improve accountability. It would force government to borrow for deficits directly from savers in the open markets.

Stabilize the Value of the Currency. Require the Federal Reserve to create a stable, asset-backed currency to encourage ownership by all citizens of productive private sector assets rather than non-productive public sector debt or future ownership monopolies.

Reduce Dependency on Existing Accumulations of Savings for Financing Growth. Require the Federal Reserve to distinguish between "sound" and "unsound" uses of credit, by providing interest-free money to expand bank credit to enable every American to become an owner of a viable accumulation of new income-producing assets. This would reduce America's dependency on existing accumulations of savings, corporate retained earnings, or foreign government wealth funds advantaged by America's growing trade imbalances.

Restore the Federal Reserve to Its Original Function. Require the Federal Reserve System to supply sufficient money and credit through local commercial banks to meet the liquidity and broadened ownership needs of an expanding market-disciplined economy. Such "Fed-monetized" loans would be subject to appropriate feasibility standards administered by the banks and limited only by the goal of maintaining a stable value for the dollar. Unsound or usurious uses of credit, such as the speculative credit that created sub-prime home mortgages and the global financial meltdown and the growing burden of consumer and government debt, would be financed from the accumulations of the wealthy that can afford the risks.

Democratize Ownership of the Federal Reserve. Provide every citizen a single, lifetime, non-transferable voting share in the nation's central bank — the network of twelve regional Federal Reserve banks. This will ensure that the Federal Reserve's board of governors is broadly representative of all groups affected by Federal Reserve policy, and that power over future money creation is spread widely among all citizens.

Discourage Monopolies and Monopolistic Ownership. Link all economic reforms to methods that discourage privileged access to monopolistic accumulations of private property ownership of the means of production. Enforce anti-trust laws by providing access to interest-free capital credit to encourage broadly owned new competitors to enhance and sustain market-oriented growth.

Introduce a Market-Driven Wage and Price System. Gradually eliminate rigid, artificially protected wage and price levels and other restrictions on free trade that afford special privileges to some industries, businesses and workers at the expense of American and foreign customers of US products. Replace subsidies with interest-free credit incentives to farmers who wish to associate voluntarily in cooperatives and in enterprises jointly owned by farmers and workers, including integrated agribusinesses. The income generated by farmer-owned enterprises would supplement farm incomes and reduce the need for subsidies.

Restore Property Rights in Corporate Equity. Restore the original rights of "private property" to all owners of corporate equity, particularly with respect to the right to profits and in the sharing of control over corporate policies. Preserve traditional powers of professional managers held accountable by Justice-Based Management corporate governance structures.

Offer a More Just Social Contract for Workers. A top priority during the next decade would be developing a more just "social contract" for persons employed in the private sector. This would be geared toward establishing maximum ownership incentives. Instead of inflationary "wage system" increases, employees would begin to earn future increases in income through production bonuses, equity accumulations, and profit earnings. These "bottom-line" rewards would be linked to workers' individual contributions, and to the productivity and success of their work team and the enterprise for which they work.

Encourage More Harmonious Worker-Management Relations. Promote the right of non-management workers to form democratic unions and other voluntary associations. Instead of promoting the traditional "conflict model" of industrial relations, however, "labor" unions would be encouraged to transform themselves into democratic "ownership unions." These ownership unions could become society's primary institutions for promoting a free market version of economic justice, while continuing to negotiate and advance workers' economic interests, including worker ownership rights and Justice-Based Management policies.

Under Capital Homesteading, unions could expand their role in a free market system by educating and expanding their membership to include all citizen-shareholders. Ownership unions would enhance the property rights of all shareholders by enhancing management accountability and transparency, and protecting against unjust executive compensation schemes.

Promote a Life-Enhancing Physical and Cultural Environment. Encourage special ownership incentives for those engaged in research and development, especially in the search for new and sustainable sources of energy, ecological restoration and labor-saving technologies. Provide sufficient low-cost credit and royalty-free licensing for enterprises capable of commercializing life-enhancing technologies developed for the military and space programs. Subsidize the development of new methods of conserving and recycling non-replenishable and limited natural resources that are vital to civilization's long-term survival, at least until suitable substitutes can be discovered and developed. Promote the teaching at all levels of education of universal principles of personal morality and social morality that are based on the inherent dignity and sovereignty of every human person within all institutions of a just social order, including the State.

Reduce Public Sector Costs. Provide America's military, policemen and firemen, teachers, and other public-sector workers with a growing and more direct equity stake in the free enterprise system, both as a supplement to their costly pension plans and so that they will better understand and defend the institution of private property. Whenever feasible, transform government-owned enterprises and services into competitive private sector companies, by offering their workers (and customers and other stakeholders in capital-intensive operations like TVA) opportunities to participate in ownership, governance and profits.

Establish Workable Demonstrations of Capital Homesteading at the Community, State, Regional and Global Levels. Launch several Capital Homesteading demonstrations. These would be most effective in areas of high unemployment. A major objective would be to evaluate ownership-broadening Federal Reserve reforms, innovative broadened ownership mechanisms, advanced concepts of worker participation in decision-making, and servant leadership developments like Justice-Based Management.

Encourage State and local governments and other countries to promote widespread capital ownership as a basic "Just Third Way" framework for building a sound market economy.

Study the feasibility of a national and global citizen-owned "Land and Natural Resources Bank" to plan development of Nature's resources, receive rentals for use of land and natural resources, and distribute citizen dividends among the population. With the leadership of the United States, urge the United Nations and other international agencies to encourage the use of such economic development vehicles in order to bring about "peace through justice" in conflict-torn countries.

Initiate New Challenges for Multinationals. Provide special encouragement to U.S.-based multinational corporations and global financial institutions to become instruments of peace and a more just world economic order, by broadening access to their ownership base to all citizens of the world community. Encourage businesses to open up future ownership opportunities as they begin harnessing the resources of the sea, the airways and other planets.

Promote a New Global Monetary System based on full production and full participation in production instead of inflation and debt. Encourage the convening of a second "Bretton Woods Conference" to consider the implications of the Kelsonian binary economic model on global currency standards, the feasibility of a single global currency, and more just foreign exchange rates. The new policy should seek to reform global financial markets to address the challenge of global poverty and sustainable development, as well as leveling the playing field among nations for global free and open trade.

These measures, of course, are expressed in necessarily broad terms, but they give a good idea of the approach of the Just Third Way as applied in Capital Homesteading. The orientation is removal of barriers to full participation in the common good so that every person has an equal opportunity to acquire and develop virtue and so become as fully human as possible.

This is in sharp contrast to the imposition of barriers that Belloc and many others recommend, an approach directly opposed to essential human dignity. Trapped by a bad definition of money, Belloc ends up simply recommending changes in a few outward forms, with no substantial changes at all in the institutional structures. Thus, to be able to engage in productive activity, Belloc would shift from mandatory employment in a State-regulated wage system job, to mandatory association in a State-controlled Guild. A State-controlled cooperative banking system would be established to compete with the State-controlled commercial and central banking system. To ensure that businesses remain small (instead of at optimal or appropriate sizes), the State would impose legal disabilities on anything State bureaucrats consider "too large."

In short, Belloc would replace the private elite's near-total control of the economy and people's lives under capitalism, with the absolute control of the economy and people's lives under something that is socialism in all but name. Blinded by the wrong definition of money, Belloc believed himself forced to accept the unacceptable: the very socialism that abolishes in name as well as in fact that which capitalism "only" abolishes in fact: private property. As he undermined his own argument, "State ownership is better, of course, than ownership by a few very rich individuals, or even than ownership by many small shareholders who are at the mercy of a few rich ones, as they are under our English company law." (The Restoration of Property, op. cit., 88-89.)

We cannot stress this point enough, for it is the inevitable result of the abandonment of a concept of the natural moral law based on the Nature of a Creator and discerned by the use of reason, and adopting an orientation that bases the natural law on what ends up being the will of the strongest — the "might makes right" of Kallicles the Sophist. Rejecting lex ratio for lex voluntas ("law is reason" for "law is will"), means abandoning the full spectrum of natural rights and a specific understanding of the human person as analogously complete with his or her Creator and each other, and exaggerating one or two rights to the detriment of other rights and society as a whole, as well as denying the full humanity of selected individuals or classes.

Thus, the capitalist raises liberty (freedom of association) to the status of the highest virtue. In this, capitalism displaces both charity as the highest supernatural virtue, and justice as the highest natural virtue. Freedom becomes license as it ignores the demands of charity, justice, and the natural equality of all humanity within the common good and before the law. The capitalist system does this by denying most people equal opportunity and access to the means of becoming an owner of the means of production and maintaining barriers inhibiting or preventing the situation from being any different. When the economy becomes too chaotic for the system to maintain itself more or less naturally, the laissez faire capitalist turns semi-socialist and demands the assistance of the State to maintain the status quo.

The socialist reverses this order. Socialism raises equality to the status of an idol with extremely heavy feet of clay. The socialist system rejects freedom of association — liberty — in an effort to force a pre-determined and artificial equality of results on everyone. As this is wholly contrary to nature, the socialist necessarily uses the coercive power of the State to achieve this end when private efforts fail — as they must. When the economy begins to implode and becomes unsustainable, the strict socialist becomes semi-capitalist and demands that economic license for a few overcome the effects of denying economic liberty to all. (cf. "Why Democratic Nations Show a More Ardent and Enduring Love of Equality than of Liberty," Democracy in America, Volume II, II.1.)

Examining Belloc's three recommendations objectively, we instantly see that each one involves using the coercive power of the State to enforce an artificial equality at the expense of liberty. In his anxiety to establish an economically just social order, Belloc forgot the whole reason for having an economic order in the first place, or even society itself: to provide an environment within which each and every individual can develop more fully as a person without any more coercion than is necessary to maintain order and prevent harm to individuals, groups, or the whole of the common good.

It is no wonder that Belloc declared so many times that the task of restoring property was very nearly hopeless, for he had already given up hope! How else could it have been possible for him to say that a system of State ownership — in which there is no possibility of private ownership of the means of production, and which has been condemned many times by his own Church — is better than a system in which there is at least lip service paid to private property, and thus always a chance that people will come to their senses once right-minded people organize and carry out acts of social justice directed at the common good? It is incomprehensible how someone who viewed the State with such suspicion could, in the end, prefer socialism to even the worst forms of capitalism.

Thus the Just Third Way, which avoids Belloc's fatal compromise with and acquiescence in socialism by starting with the correct definition of money, can offer more than a vague and contradictory "hope" that leaves us hopeless. As applied in Capital Homesteading, the principles of the Just Third Way offer specific recommendations that do not rely on turning over control (and thus property) to the State, but on restoring to people their dignity as human persons by securing to them the exercise of their natural rights to life, liberty, property, and the pursuit of happiness. In this way we can best heed the warning with which Alexis de Tocqueville closed the second volume of Democracy in America:

The nations of our time cannot prevent the conditions of men from becoming equal, but it depends upon themselves whether the principle of equality is to lead them to servitude or freedom, to knowledge or barbarism, to prosperity or wretchedness. ("General Survey of the Subject," Democracy in America, op. cit.)

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The Restoration of Property, Part XI: Enact the Capital Homestead Act

All of the measures discussed in the previous postings in this series are, as we mentioned, part of a larger proposal grouped under the name "Capital Homesteading." Capital Homesteading is a financially sound and politically feasible program to restore private property for the great mass of people in a manner consistent with the principles of the Just Third Way, and is thus in conformity with the demands of the common good and the dignity of the human person. How this can be done is (at least compared to the gyrations and complications of Keynesian economics) relatively simple.

Naturally we cannot give the complete Capital Homesteading program in a blog posting or two. Even the "fleshed out" outline given in the book Capital Homesteading for Every Citizen (Arlington, Virginia: Economic Justice Media, 2004) is a manual to guide policymakers and advisors to put together a specific legislative package, not to detail every step that needs to be taken. Finally, the point of this blog series is to point the way to a restoration of private property, a goal that, strictly speaking, concerns only two of the four pillars of an economically just society that we listed earlier in this series, 3) restoration of the rights of private property, especially in corporate equity, and the "fatal omission," 4) widespread direct ownership of the means of production.

Not that these two pillars can be separated from the first two, 1) a limited economic role for the State, and 2) a free and open market as the best means for determining just wages, just prices, and just profits, in any realistic manner. If this blog series has done nothing else, it has demonstrated that, even in this simplified presentation, all the elements of the Just Third Way are so intertwined and interdependent on all the others — just as the institutions of the common good come together in a complex and interdependent network — that isolating them even for the purposes of analysis and discussion is extremely difficult. We cannot consider the restoration of property without also taking into account the role of the State and the market, any more than we can understand what needs to be done without clearly distinguishing between the natural right to property — the absolute right every human being has to be an owner, individually or in free association with others — of the means of production, from the socially determined rights of property: the specific institutions that define what an owner may do with what he or she owns, and often, for the sake of expedience, whether a specific thing (such as a nuclear bomb) should be private owned.

We must, therefore, keep current social and legal conditions in mind when considering the problem. To this we necessarily add all the principles of the Just Third Way as well as the basic precepts of the natural moral law and the laws of economics. Unless we fall into the trap of Machiavelli and start believing that the end justifies the means, we cannot take short cuts by redefining basic institutions, or asserting that a particular expedient is good when we know full well — or should know, based on common sense — that it is really bad. On the contrary, we must keep all these things in mind without denigrating or dismissing any of them.

That being the case, we can present (at least in brief) the case for enacting a Capital Homestead Act.

As a first principle we take as a given that productive capacity must be restored. We can no longer adhere to the Keynesian dogma that it is possible to continue to redistribute and consume wealth without producing anything. That requires an examination of the system by means of which capital is financed and put to use, as well as the distributive mechanism inherent in the rights of private property.

In "normal" times in the United States, public and private productive capital grows annually at a rate exceeding $7,000 for every man, woman and child. This amount increases dramatically if we include replacement capital. This new and replaced capital, the source of America's capacity to produce in greater abundance than other economies, is almost inevitably financed in traditional ways. That is, financial institutions and other sources of capital credit assume as a given what we have already demonstrated is false: that capital formation is always financed out of existing accumulations of savings. Since the rich and the super-rich are the only people who can afford to save under this assumption, few, if any, new owners will be created, and ownership of the means of production will become increasingly concentrated.

Over the years this assumption — the "slavery of past savings" — that underpins traditional methods of corporate finance has resulted in policymakers' and academics' unthinking adherence to Keynesian dogma. This has led to an enormous and growing wealth gap. A rough estimate is that the wealthy top 10% in the United States own 90% of all directly held corporate stock. Most citizens have not accumulated sufficient savings — if they have managed to save at all — to meet their household needs for more than a month or so. If a typical worker becomes disabled or loses his or her job, he or she has little or nothing in the way of income-generating investments. Most people are wholly dependent on jobs, welfare, or charity to meet their needs. The non-rich have no independent source of an adequate and secure income.

Capital Homesteading is designed to close this growing wealth gap through the restoration of private property in the means of production, and do so in a manner consistent with free enterprise values of private property, free market competition, and minimal government intervention with voluntary choices among producers and consumers. In other words, Capital Homesteading is designed to lower barriers so that the poor and non-rich can lift themselves up into capital ownership, without taking anything away from the rich except the monopoly the rich currently enjoy on future wealth acquisition. Like the "the Great American Desert" covered by Abraham Lincoln's Homestead Act of 1862, the Capital Homestead Act is oriented to an open frontier — the technology frontier. Unlike land, however, which is limited, the technology frontier need never be "closed." The opportunity to become an owner of a part of the technology frontier can and should be made equally accessible to everyone as a fundamental right of citizenship.

The Capital Homestead Act is a proposal to provide a package of integrated income, gift, retirement and inheritance tax reforms, combined with monetary policy changes and other structural improvements to national economic policy. These are designed to provide every citizen an equal opportunity to own, control, and share profits from productive capital by opening up democratic opportunity to obtain capital credit, the primary means by which new and replacement capital is financed in an advanced economy.

The political rationale behind the Capital Homestead Act is that there is no reason that those who already have capital (and collateral to qualify for capital loans) should have a monopoly or be the exclusive beneficiaries of the government's control over "social goods" like money and credit that largely determine who will own future capital. A political democracy cannot rest comfortably and sustain itself on a foundation of government-supported economic plutocracy. Decentralized wealth would also counter the corrupting influences of concentrated wealth in campaign financing, and inhibit or even prevent the continuation or reformation of the "unholy trinity" of the federal government, the central bank, and Wall Street.

An essential premise of Capital Homesteading is that those who have no capital should have equal access to credit in order to acquire capital. This capital credit can be made available by the country's central bank — the Federal Reserve System — and allocated through local lenders for financing the capital needs of the productive economy. To address the growing wealth gap in market economies, Capital Homesteading would end the monopoly held by those who already have capital and thus collateral to qualify for capital loans. As we saw in the previous posting on taxation, the belief that capital formation can only be financed out of existing accumulations of savings "forces" the State to grant favorable — and inherently unjust — tax treatment to the very rich in order to encourage them to reinvest their capital earnings, further concentrating ownership of the means of production, and laying the groundwork for an eventual State takeover of the economy, resulting in an unending pendulum swing between different degrees and forms of economic and social injustice.

As described in Louis Kelso and Mortimer Adler's two books, The Capitalist Manifesto (1958) and The New Capitalists (1961), the monetization of capital credit under Federal Reserve policy and reinforcement by loan default insurance as a substitute for traditional collateral would facilitate the implementation of Capital Homesteading. Capital Homesteading reforms would then enable every citizen to establish a tax-sheltered Capital Homestead Account (CHA) at a qualified local lending institution. A Capital Homestead Act would allow every citizen to purchase and accumulate dividend-yielding, full-voting shares to supplement retirement income, relieving the burden on Social Security as the aged population expands. As with most ESOPs ("Employee Stock [or Share] Ownership Plans") and in contrast to IRAs ("Individual Retirement Accounts"), the citizen would put up none of his own money. Through the CHA, each citizen would gain access to self-liquidating capital loans at low service charges to buy equity shares. These shares would be expected to recover their purchase price out of future pretax dividends. The loan insurance, with premiums paid out of dividends, would cover the risk that the loan failed to be self-liquidating.

To encourage the issuance of new shares for meeting the financing needs of an enterprise, the double tax on corporate profits would be eliminated for companies that sell full dividend payout, voting shares to CHAs, or extend these provisions to existing share issuances. To secure economic independence, each citizen would be sheltered from taxes on his or her CHA accumulations below $1,000,000, or an average of $10,000 per year for a centenarian. (Obviously, not everyone will live to be one hundred years old or be able to put $10,000 each year into his or her Capital Homestead Account. Some people will only be able to put in the amount of their annual capital credit allocation, estimated at $7,000 — although this is expected to increase dramatically as our current slow- or no-growth economy regains its health. Others will take the opportunity to put existing accumulations into their CHAs, or inherit sufficient wealth to reach the tax-favored accumulation limit immediately, carrying forward the tax deferral until completely offset against future income. Ten thousand a year is simply a rough guess as to how much an average person might be able to put into a CHA each year when he or she doesn't have to worry about cutting consumption in order to save.)

As noted, capital credit insurance would replace the usual demand for collateral for properly vetted capital loans that create new owners. All other loans, such as those on which the risk premium for an insurance policy would be prohibitive, loans for speculation, consumption, government expenditures, and owners who wished to retain sole ownership of their companies, would not qualify for capital credit insurance or for discounting at the central bank. Instead, such borrowers would have to go to the pool of existing savings.

We anticipate that this will benefit current savers immensely — and provide a lucrative replacement investment for the rich who will lose their monopoly on ownership of new capital. The primary benefit, of course, will result from the fact that the federal government, unable to monetize its deficits by selling "secondary" government securities to the Federal Reserve by means of the fiction of passing them through bond traders, will be forced to go to existing accumulations of savings if it wishes to spend more than it receives in tax revenues. This will drive up the market cost of capital for existing accumulations of savings, possibly into the double digits, thereby benefiting people who invested their retirement savings in government bonds. This will have the added benefit of making the interest free credit available to companies that share ownership increasingly attractive, and cause owners who want to retain sole ownership and total control to rethink their position.

By far the best investment into which existing accumulations of savings can be put, however, will be capital credit insurance and reinsurance. One of the first rules of insurance is that you must never invest your insurance pool in the same thing that you are insuring — a rule that AIG "forgot" in their anxiety to cash in on the investment bubble. Given that all — or virtually all — new capital formed is financed in a way that creates new owners and collateralized with capital credit insurance, the insurance industry will likely do one of two things, probably both: 1) specialize in specific industries and invest the insurance or reinsurance pool in a diversified portfolio of other industries, and 2) invest a significant portion of the insurance or reinsurance pool in government securities.

Paradoxically, investing capital credit insurance and reinsurance pools in government bonds will ultimately back the money supply with the full faith and credit of the United States government — but in a manner far more secure and financially sound than at present. Currently, of course, the officially recognized money supply, M1 (coin, currency, demand deposits), is backed almost 100% by federal government debt. (There is a tiny amount in "United States Notes," that can be recognized by their red serial numbers and seals, that are "officially" backed by gold, but these are rarely if ever seen in circulation, having been hoarded by collectors.)

Under Capital Homesteading, the money supply would have several layers of backing, compared to the current one layer of government debt. First, of course, the currency and demand deposits would be backed by the liens taken by commercial banks on hard assets financed by extending credit to feasible and properly vetted capital investments. The liens themselves would be backed by the hard assets — level two. The third level would be the capital credit insurance policy, representing a claim on the insurance pool made up of existing accumulations of savings and government securities. The fourth level would be the capital credit reinsurance — that is, insurance on the insurance, which consists of a claim on the reinsurance pool composed of existing accumulations of savings and government securities. The federal government, backing the promissory notes issued by the Federal Reserve with its full faith and credit, would be the fifth level.

Thus, instead of Henry Simons's Chicago Plan in which the money supply would be backed directly by 100% reserves in the form of government securities (debt), the money supply would be backed by 500% reserves, of which less than 100% would be in the form of government securities, and none of it directly.

To further promote CHAs, a "National Capital Credit Association" (NCCA) would be set up to facilitate and securitize capital acquisition loans. The NCCA, which could be owned and controlled by CHA lenders and citizens, would package insured CHA loans, create software for helping lenders to scrutinize the feasibility of CHA loans, and set uniform standards for CHA insurers, reinsurers, and lenders.

The NCCA and competitors qualified by the Federal Reserve would then bundle and take these securitized CHA loans to the discount window of the regional Federal Reserve Bank. The Federal Reserve would treat these insured dividend-backed securities (DBSs) as it currently treats government debt paper, using them as a hard-asset backing for the currency. An added benefit would be that as the federal government pays down the national debt, all debt backing would be removed from the money supply. The result would be a stable, asset-backed "flexible" currency that could increase and decrease as the economy requires without inflation or deflation — as the Federal Reserve was set up to provide in 1913.

That is the essence of the Capital Homestead Act. To get into greater detail, the Capital Homestead Act is designed to:

1) Generate millions of new private sector jobs by lifting ownership-concentrating Federal Reserve credit barriers in order to accelerate private sector growth linked to expanded ownership opportunities, at a zero rate of inflation.

2) Radically overhaul and simplify the federal tax system to eliminate budget deficits and ownership-concentrating tax barriers through a single rate tax on all individual incomes from all sources above basic subsistence levels. Its tax reforms would:

a) eliminate payroll taxes on working Americans and their employers;

b) integrate corporate and personal income taxes; and

c) exempt from taxation the basic incomes of all citizens up to a level that allows them to meet their own subsistence needs and living expenses, while providing "safety net" vouchers for the poor.

A number of specific financing and ownership vehicles have been proposed to facilitate the implementation of a Capital Homesteading program. We've mentioned a number of these already, but it will be useful to recap.

The "Capital Homestead Account" or "CHA" is the primary tax-sheltered vehicle for the democratization of capital credit through local banks. It would enable every man, woman and child to accumulate wealth and receive dividend incomes from newly issued shares in new and growing companies, without being taxed on the accumulations (including property and shares gained through inheritance, savings, and arrangements like ESOPs, CSOPs and CICs). In addition to serving as a source of capital credit for corporate workers, CHAs would also provide an ownership-building account for individuals who do not work for profit-making enterprises, such as school teachers, civil servants, military personnel, police, and health workers, and for individuals who have no remunerative employment, such as the disabled, the unemployed, homemakers and children.

The "Citizens Land Cooperative" or "CLC" (previously known as the for-profit "Community Investment Corporation" or "CIC") allows residents of a community to share in the control and profits associated with land planning and development.

The "Employee Stock (Share) Ownership Plan" or "ESOP" channels low-cost credit for financing the needs of business corporations (such as expansion, capitalization and ownership transfers), and links private sector workers to ownership shares and dividend incomes in the companies for which they work. Shares acquired on credit by worker-owners are paid for out of the future corporate profits they help to generate.

The "Consumer or Customer Stock Ownership Plan" or "CSOP" lets customers of utilities share in the governance and profitability of "natural monopolies," like telecommunications, water and power companies, mass-transit and cable television.

Thus, Capital Homesteading is in no way "pie-in-the-sky" or otherwise unrealistic. Instead, it is, as we have seen, a much more rational and financially feasible way to run an economy than the current slapdash, panic-stricken crisis management that results from adherence to disproved Keynesian dogma.

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The Restoration of Property, Part X: Reform the Tax System

Any way you look at it, the tax system in the United States is an abomination. Based on the tenets of the British Currency School, the tax system assumes as a given that existing accumulations of savings are essential to finance new capital formation and private sector economic growth. The tax system has been distorted, first, to encourage more savings and thus more investment by the rich, and, second, to encourage the non-rich to spend more than they make. The present federal tax system represents a virtually insurmountable barrier to widespread participation in capital ownership, democratic corporate governance, and the broad distribution of capital incomes from advancing technologies.

Both changes virtually guarantee that new money will 1) be created in ways that concentrate ownership of the means of production, and 2) spur demand artificially by encouraging consumers to spend far beyond their incomes. In the latter case, the home mortgage crisis is only the inevitable result of inducing the consumer to spend far more than he or she can ever hope to earn, although the consumer credit "industry" has the potential to maintain the current economic crisis or create a new, more severe one of its own.

To correct a situation that can only be described as inherently unjust and forestall a series of disasters even worse than the present one, we need to conform the tax system and the entire system of government finance and fiscal policy to support a restoration of property. Coincident with this is the need to restructure the tax system so that it becomes possible for people to live within their means without the necessity of constant borrowing to generate artificially induced demand. Creating a vicious circle, "stimulating" consumer demand by increased consumer lending in turn justifies artificial job creation to produce marginally marketable goods and services — which requires increased consumer debt in order to clear those same goods and services at what can only be described as subsidized prices.

As a first step, we advocate eliminating the "payroll tax" and merging the Social Security and Medicare taxes into general tax revenues. This does not mean the elimination of Social Security and Medicare. All promises must be kept, and kept per the original understanding and value of the promise. This is the basis of sound government as well as sound money. Ending the payroll tax, however, would put an end to the nation's most regressive tax by increasing the standard exemption plus an essential minimum number of deductions, and only taxing income above that level — no exceptions. These exemptions plus deductions and deferrals would apply to all income from whatever source derived. The myriad of other tax deductions, credit and other "tax expenditures" would be eliminated, so that a family could fill its annual federal tax return on a postcard.

All promises that have been made must be kept — but the government needs to stop making new promises that it cannot keep, whether in the form of creating money to cover the increasing deficit, or refusal to reform the Social Security and Medicare system or other entitlements that account for two-thirds of the Federal budget in "normal" times. This "social safety net" will then be properly understood as a supplement to wage and investment income instead of a primary source of income for so many. Social Security and Medicare would gradually be phased out in their present form, replaced by increased wage and property income. For those below a very generous "poverty level," we would institute a "negative income tax" supplemented with vouchers for health insurance and education. Such a reform would also greatly reduce administrative costs for the federal, state, and local governments.

We also advocate replacing the current progressive and regressive tax rates (Social Security and Medicare taxes are possibly the most regressive taxes in history, levied on the first dollar of wage income whether the individual is making a million a year or is far below the poverty level) with a single rate tax on all personal income above the standard exemption plus deductions for health care and education, and a deferral for every citizen to begin to save and accumulate income-producing assets through tax-sheltered vehicles. With guaranteed democratic access to capital credit for financially feasible projects, every citizen, whether or not he or she currently owns any capital in any form, will be empowered to purchase newly issued or transferred shares, and repay the capital credit extended for the purchases out of the "future savings" made possible from the full distribution of profits on shares acquired by the newly economically enfranchised capital owners.

While no one at the time put the two concepts together, with the institution of the Federal Reserve System in 1913 (perhaps not coincidentally, the same year in which the income tax was established) it became possible for the first time in American history to have a coordinated and systematic program of creating interest-free "new money" in ways that would universalize access to capital ownership and break the dependency on existing accumulations of savings. The twelve banks of the Federal Reserve System, although "hijacked" during World War I to finance government deficits and never returned to their original purpose, were intended to serve as regional development banks with the capacity under existing law to extend credit via the "discount window" through member commercial banks for qualified industrial, commercial, and agricultural investment. (§ 13 of the Federal Reserve Act of 1913.)

The shift away from the Federal Reserve System's stated purpose in providing a flexible and stable asset-backed currency by discounting private-sector productive loans to finance growth of agriculture, industry, and commerce, to a debt-backed currency to cover non-productive federal deficits, was made official in the 1930s with the formation of the "Open Market Committee," headquartered at the Federal Reserve bank in New York City. Ironically, one of the chief reasons for the formation of the Federal Reserve System was to break the monopoly on money and credit held by Wall Street. (U.S. Congressional House Committee on Banking and Currency, Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit. Washington, DC: U.S. Government Printing Office, 1913.)

With the institutionalization of open market operations via the Open Market Committee centered in New York City used to fund government deficits, the "money power" in the United States became even more concentrated than before the Panic of 1907 that resulted in the investigations that led to the formation of the Federal Reserve System. Far from being key installations in a program to spread out economic power, the eleven Federal Reserve Banks outside New York have become relegated largely to research roles, and implementing policies dictated by the Federal Reserve Board of Governors in Washington, DC, and the Open Market Committee in New York.

In theory, calculating a single tax rate is simplicity itself. The calculations that follow are necessarily vague. The numbers should be taken only as illustrations of the concept, and certainly not as specific recommendations! Arriving at "good" figures will require at the minimum months of intensive effort by experts trained in the field of tax and fiscal policy, not a few hours research carried out with the goal of testing the general plausibility of the concept. Thus, these figures should, at most, be taken as a general, even vague hypothesis that must be subjected to a great deal of further testing and gathering of data. We're after the concept, not strict accuracy in the numbers. The numbers that follow should be construed as assumptions, not established facts.

The Gross Domestic Product (GDP) is divided into the anticipated government expenditures for the year after subtracting aggregate exemptions from the GDP. (Government expenditures must be retained in this calculation, because while expenditures should come out of tax revenues, they represent income for whoever sells a good or service to the State.) The amount of GDP representing government expenditures can be expressed as a percentage. To calculate this percentage, we first subtract the estimated aggregate of all income below the exemption. Anything above that amount is subject to taxation.

If the proposed tax reforms were adopted today, we estimate that the single federal tax rate for incomes above the aggregate exemptions, deductions, and deferrals would be around 35-40%. (If we haven't stressed this point enough, we will state it again: these are assumptions. They may be good assumptions or bad assumptions, but we're after the concept, not mathematical accuracy.) Adding up all the exemptions and deductions for a "typical" family of four would mean that any such family group earning less than $100,000 would not be taxed.

Briefly (for the rationale and the calculations even for these general assumptions would take up more text than this entire blog series), we assume that each non-dependent taxpayer should have a basic standard deduction of $10,000. We picked this amount because it is approximately the poverty level from 2005 for a single individual. Each dependent should have a basic standard deduction of $5,000.

To this we add $7,000, consisting of $6,000 for an average per capita health insurance premium and a $1,000 deductible for a non-dependent, and $1,000 premium plus $1,000 deductible for dependents (direct medical expenses for minor children are typically substantially less than for non-dependents, especially when most of them are aggregated under those of the parents). Education works out to $3,000 per capita, while we add another $10,000 to allow tax-free accumulation of capital assets up to $1 million.

To ensure that taxpayers receive the full benefit of the increased exemption and limited deductions and deferrals, all vouchers received for education or health care are included in calculating income as well as an expenditure, and any unused portion of a deduction or deferral would be carried forward or back without a time limit or sunset date. (For example, a taxpayer could "amortize" an educational expenditure of, say, $60,000 in a single year over twenty years, using the full $3,000 deduction every year and carrying over the unused amount of the deduction. Setting money aside for future educational expenditures would be counted toward the deduction in the year in which the money was saved.)

The total exemption plus deductions for a non-dependent taxpayer would thus typically be an average of $30,000, and for a dependent taxpayer would be $20,000. A "typical" family of four of two non-dependents and two dependents would thus pay no taxes until aggregate income exceeded $100,000.

We now come to the question of calculating the single tax rate to be applied on aggregate family incomes in excess of $100,000. Again, we have to caution the reader that these figures are not intended to represent reality accurately, but to present the concept.

Dividing the "pre-recession" federal budget of approximately $3 trillion by taxable GDP of $4.25 trillion (total GDP less the aggregate of exemptions, deductions, and deferrals) gives us a single tax rate of 70.59% for any taxpayer earning more than $30,000. Since this figure is a rough "guesstimate" in any event, we will round it down to 70% for ease in calculation. This looks bad, but let's look more carefully at these numbers. Realizing that self-employed individuals making below $30,000 per year at the present time can pay an effective federal tax rate of almost 40% makes the figure slightly more palatable, but not much. Are these rather stark figures, however, significantly worse than current tax rates applied to income reduced, as at present, by a token exemption and deductions insufficient to shelter enough income to provide for common domestic needs adequately?

We can expect that individuals in the upper brackets will protest that the bulk of their income derives from dividends and capital gains. Due to the erroneous belief that existing accumulations of savings are essential to finance capital formation, such "capital income" is usually taxed at a more favorable rate than wage income. This is to encourage reinvestment of corporate profits in order to finance economic growth and provide wage system jobs — which can then be taxed instead of dividends and capital gains. Is that, however, the most efficient and cost-effective means of financing more universal participation in economic growth and capital formation?

Not according to Dr. Harold Moulton in The Formation of Capital. As we have already noted previously in this blog series, by cutting consumption (which is what, effectively, reinvestment is), economic growth is slowed dramatically. In extreme cases, where money is created for non-productive uses and reinvested in speculation or gambling (as was the case in 1929 and again with the home mortgage crisis), the resulting "readjustment" in the economy can be devastating in its effects.

Even without reductions in the federal budget the effective tax rate on incomes of less than $150,000 under our proposed single rate reform would be under 15% — substantially less than now. Still — an effective rate of more than 60% on incomes of $1,000,000 or more is pretty high. It is much higher than the approximately 15% rate for dividends and capital gains currently paid, especially considering that wage income above $1 million is relatively rare. Most people with incomes at that level receive it in the form of dividends and capital gains — on which they receive favorable tax treatment.

Consider this, however. Given the actual "double taxation" of dividends and the effective double taxation of capital gains (presumably a reflection of the value of retained earnings, which represent undistributed corporate income on which taxes have been paid), is the favorable tax treatment for dividends and capital gains all that "favorable"? Looking at how dividends and capital gains are currently taxed for a single individual gives a somewhat different picture. Assuming a 15% tax on dividends and capital gains, and a 35% tax on corporate profits, we get an effective "single rate tax" for "non-wage" income in the form of dividends and capital gains of 50%.

Thus, people who receive "favorable" treatment of capital gains and dividends have already paid 35% in taxes before receiving a dime. When personal taxes of 15% are added in, the recipient of dividends and capital gains under the current system pays an effective rate commensurate with individuals earning $300,000 of wage income under a reformed single rate tax with high exemptions but no reductions in the federal budget. These figures do not materially change when we factor in the current level of personal exemptions and the standard deduction — many rentiers (small investors) do not qualify for itemization if they've been financially prudent. The figures, however, increase if we factor in a corporate tax rate greater than the 35% minimum we used in the calculation. The "favorable" tax treatment under the current double- and triple-taxation is not quite as "favorable" as many people suppose.

We have to remember, however that income from capital will at first supplement, and eventually replace virtually all transfer payments, Social Security, Medicare, and other entitlements once existing promises have been kept, and that the personal exemption plus deductions and a negative income tax (or vouchers) will take care of education and health care. Private charity will be able to handle much of what remains in hard cases, so that government welfare and entitlements will diminish to the absolute minimum necessary to maintain an emergency "social safety net."

Assuming that the average income below the new individual "poverty level" of $30,000 (the amount of the personal exemption plus deductions and savings deferrals) is exactly half of the new poverty level gives us $15,000. This means that $15,000 would be needed on the average for each person in poverty to bring him or her up to the poverty level. According to the Census Bureau, 37 million Americans live in poverty, which we will round up to 40 million.

Obviously, increasing the "poverty level" to $30,000 would, in and of itself, vastly increase the number of Americans living in "poverty." This is offset by the fact that the Federal Reserve Board estimated total consumer debt as of September 30, 2007 at $2.482 trillion, or approximately $8,000 per capita. Adding in mortgage debt (characterized by former Federal Reserve Chairman Alan Greenspan as a "bubble") of $3.001 trillion gives an additional $10,000 of per capita debt, much of which exceeds the value of the homes on which the mortgages were made.

In effect, each American family of four has a debt burden of $72,000. We are forced to conclude that families are spending far beyond their actual incomes, and are already effectively, if not officially, living in poverty (we called this "the Micawber Effect" in an earlier posting, from the character in Charles Dickens's David Copperfield). The needs of these individuals and families must be met out of non-existent savings or by various forms of State welfare or redistribution.

Taking only the "non-revolving" consumer debt figure of $1.5 trillion supplied by the Federal Reserve for September of 2007 (ibid.) ("non-revolving" meaning debt that must be paid in the current period, and is not renewable, or "revolving"), gives a per capita amount by which each individual lives beyond his or her means each year of $5,000 ($20,000 for a family of four). Subtracting $5,000 from the basic exemption of $10,000 plus the health care deduction of $7,000 gives $12,000.

A significant amount of this "increased" income (actually taxes that are not paid until income from all sources exceeds $30,000) will result from folding Social Security and Medicare taxes — currently at around 15% — into the general, single tax rate. This would mean an effective increase in consumable income of $4,500 on wage incomes of $30,000. This is, ironically, almost exactly equal to the reported per capita annual borrowing for consumer goods and services. (The possibly unwelcome conclusion resulting from this analysis is that the Social Security and Medicare taxes are in some measure causing the very conditions they are intended to ameliorate, as Alexis de Tocqueville predicted in his Memoir on Pauperism in 1835.)

Multiplying our new "half poverty" level of $15,000 by 40 million persons gives us an "add back" to the Federal budget of $600 billion in negative income taxes. We round this down to $500 billion due to the fact that we originally rounded up the number of people in poverty. We also did not take into account that there are probably no individuals receiving absolutely no income, and, as the economy gears up for full production, far fewer people will receive the negative income tax, and those in decreasing amounts as personal income rises with the creation of jobs in a fast-growth economy combined with increased capital income.

Adding $500 billion back into the reductions of $2 trillion leaves us with a rough estimate of the federal budget under a program of expanded capital ownership of $1.5 trillion — less than half the current anticipated budget. Using these new figures to calculate the single tax rate under Capital Homesteading gives us $1.5 trillion divided by taxable GDP of $4.25 trillion, or 35.29%, which we round to 35% for ease in calculation.

If it were possible to eliminate all welfare and other entitlements that make up two-thirds of the pre-recession federal budget (an unrealistic expectation, of course), we would have a tax rate calculated by dividing $4.25 trillion by $1 trillion, or 23.53%, or (rounded) a tax rate of 24% on incomes over $30,000, much less than today, but still high. Still, being able to reach the hitherto "unreachable star" of full employment by including full employment of capital combined with widespread ownership thereof and a focus on full production, should eliminate poverty as a permanent condition of life for an estimated 13% of Americans. Something along the lines of a negative income tax could be implemented to succor the truly unfortunate until they can get back on their feet, instead of trapping people into an unbreakable cycle of poverty.

This version of the single rate tax represents a revolutionary restructuring of the Welfare State based on class warfare and redistribution, to a welfare state based on the economic empowerment through capital ownership of every citizen as a fundamental right of citizenship and self-governance. This, of course, would make the State more dependent on the citizens, rather than having the citizens increasingly dependent on an absolutist government.

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