America is Regressing Into a Developing Nation For Most People

On April 20, 2017, Lynn Paramore writes on the Institute for New Economic Thinking:

A new book by economist Peter Temin finds that the U.S. is no longer one country, but dividing into two separate economic and political worlds.

You’ve probably heard the news that the celebrated post-WW II beating heart of America known as the middle class has gone from “burdened,” to “squeezed” to “dying.”  But you might have heard less about what exactly is emerging in its place.

In a new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Peter Temin, Professor Emeritus of Economics at MIT, draws a portrait of the new reality in a way that is frighteningly, indelibly clear:  America is not one country anymore. It is becoming two, each with vastly different resources, expectations, and fates.

Two roads diverged

In one of these countries live members of what Temin calls the “FTE sector” (named for finance, technology, and electronics, the industries which largely support its growth). These are the 20 percent of Americans who enjoy college educations, have good jobs, and sleep soundly knowing that they have not only enough money to meet life’s challenges, but also social networks to bolster their success. They grow up with parents who read books to them, tutors to help with homework, and plenty of stimulating things to do and places to go. They travel in planes and drive new cars. The citizens of this country see economic growth all around them and exciting possibilities for the future. They make plans, influence policies, and count themselves as lucky to be Americans.

The FTE citizens rarely visit the country where the other 80 percent of Americans live: the low-wage sector. Here, the world of possibility is shrinking, often dramatically. People are burdened with debt and anxious about their insecure jobs if they have a job at all. Many of them are getting sicker and dying younger than they used to. They get around by crumbling public transport and cars they have trouble paying for. Family life is uncertain here; people often don’t partner for the long-term even when they have children. If they go to college, they finance it by going heavily into debt. They are not thinking about the future; they are focused on surviving the present. The world in which they reside is very different from the one they were taught to believe in. While members of the first country act, these people are acted upon.

The two sectors, notes Temin, have entirely distinct financial systems, residential situations, and educational opportunities. Quite different things happen when they get sick, or when they interact with the law. They move independently of each other. Only one path exists by which the citizens of the low-wage country can enter the affluent one, and that path is fraught with obstacles. Most have no way out.

The richest large economy in the world, says Temin, is coming to have an economic and political structure more like a developing nation. We have entered a phase of regression,and one of the easiest ways to see it is in our infrastructure: our roads and bridges look more like those in Thailand or Venezuela than the Netherlands or Japan. But it goes far deeper than that, which is why Temin uses a famous economic model created to understand developing nations to describe how far inequality has progressed in the United States. The model is the work of West Indian economist W. Arthur Lewis, the only person of African descent to win a Nobel Prize in economics. For the first time, this model is applied with systematic precision to the U.S.

The result is profoundly disturbing.

In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration – check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.

In the developing countries Lewis studied, people try to move from the low-wage sector to the affluent sector by transplanting from rural areas to the city to get a job. Occasionally it works; often it doesn’t. Temin says that today in the U.S., the ticket out is education, which is difficult for two reasons: you have to spend money over a long period of time, and the FTE sector is making those expenditures more and more costly by defunding public schools and making policies that increase student debt burdens.

Getting a good education, Temin observes, isn’t just about a college degree. It has to begin in early childhood, and you need parents who can afford to spend time and resources all along the long journey. If you aspire to college and your family can’t make transfers of money to you on the way, well, good luck to you. Even with a diploma, you will likely find that high-paying jobs come from networks of peers and relatives. Social capital, as well as economic capital, is critical, but because of America’s long history of racism and the obstacles it has created for accumulating both kinds of capital, black graduates often can only find jobs in education, social work, and government instead of higher-paying professional jobs like technology or finance— something most white people are not really aware of. Women are also held back by a long history of sexism and the burdens — made increasingly heavy — of making greater contributions to the unpaid care economy and lack of access to crucial healthcare.

How did we get this way?

What happened to America’s middle class, which rose triumphantly in the post-World War II years, buoyed by the GI bill, the victories of labor unions, and programs that gave the great mass of workers and their families health and pension benefits that provided security?

The dual economy didn’t happen overnight, says Temin. The story started just a couple of years after the ’67 Summer of Love. Around 1970, the productivity of workers began to get divided from their wages. Corporate attorney and later Supreme Court Justice Lewis Powell galvanized the business community to lobby vigorously for its interests. Johnson’s War on Poverty was replaced by Nixon’s War on Drugs, which sectioned off many members of the low-wage sector, disproportionately black, into prisons. Politicians increasingly influenced by the FTE sector turned from public-spirited universalism to free-market individualism. As money-driven politics accelerated (a phenomenon explained by the Investment Theory of Politics, as Temin explains), leaders of the FTE sector became increasingly emboldened to ignore the needs of members of the low-wage sector, or even to actively work against them.

America’s underlying racism has a continuing distorting impact. A majority of the low-wage sector is white, with blacks and Latinos making up the other part, but politicians learned to talk as if the low-wage sector is mostly black because it allowed them to appeal to racial prejudice, which is useful in maintaining support for the structure of the dual economy — and hurting everyone in the low-wage sector.  Temin notes that “the desire to preserve the inferior status of blacks has motivated policies against all members of the low-wage sector.”

Temin points out that the presidential race of 2016 both revealed and amplified the anger of the low-wage sector at this increasing imbalance. Low-wage whites who had been largely invisible in public policy until recently came out of their quiet despair to be heard. Unfortunately, present trends are not only continuing, but also accelerating their problems, freezing the dual economy into place.

What can we do?

We’ve been digging ourselves into a hole for over forty years, but Temin says that we know how to stop digging. If we spent more on domestic rather than military activities, then the middle class would not vanish as quickly. The effects of technological change and globalization could be altered by political actions. We could restore and expand education, shifting resources from policies like mass incarceration to improving the human and social capital of all Americans. We could upgrade infrastructure, forgive mortgage and educational debt in the low-wage sector, reject the notion that private entities should replace democratic government in directing society, and focus on embracing an integrated American population. We could tax not only the income of the rich, but also their capital.

The cost of not doing these things, Temin warns, is incalculably high, and even the rich will end up paying for it:

“Look at the movie,Hidden Figures: It recounts a very dramatic story about three African American women condemned to have a life of not being paid very well teaching in black colleges, and yet their fates changed when they were tapped by NASA to contribute to space exploration. Today we are losing the ability to find people like that. We have a structure that predetermines winners and losers. We are not getting the benefits of all the people who could contribute to the growth of the economy, to advances in medicine or science which could improve the quality of life for everyone — including some of the rich people.”

Along with Thomas Piketty, whose Capital in the Twenty-First Century examines historical and modern inequality, Temin’s book has provided a giant red flag, illustrating a trajectory that will continue to accelerate as long as the 20 percent in the FTE sector are permitted to operate a country within America’s borders solely for themselves at the expense of the majority. Without a robust middle class, America is not only reverting to developing-country status, it is increasingly ripe for serious social turmoil that has not been seen in generations.

A dual economy has separated America from the idea of what most of us thought the country was meant to be.

What has and continues to escape conventional economists, including Peter Ternin the economist author referred to in this article, and the politics of progressives, centralists and conservatives, is that the wealthy are rich because they own productive capital — non-human wealth-creating assets used to produce products and services. The reality is that in most economic tasks and in the overall economy, productive capital (not human labor) is independently doing evermore of the work that results in the products and services produced for consumption. It is productive capital’s increasing productiveness and evolution, rather than human effort (productivity conventionally considered) that is the productive means most responsible for economic growth. Effectively, technological innovation and invention limits new, higher-productivity jobs to relatively fewer workers, leaving most other people willing and able to work with lower-paying job opportunities or no jobs at all. This increasing majority is finding it more and more difficult to afford the products and services that are increasingly produced by productive capital.

It is true what Ternin states that “Around 1970, the productivity of workers began to get divided from their wages.” What he means is that worth of labor began to decrease, thus wage levels, while the worth of the non-human factor replacing the necessity for mass labor was increasing. Up to the 1970 or so, the United States economy was still labor intensive with pockets of industries transforming to employing non-human means of production that either eliminated the necessity for workers are dramatically reduced worker contributions. And of course, in a private property system those who OWN the non-human factor (productive capital) are the people entitled to the wealth and income produced by their productive capital contribution. After all, fundamentally, economic value is created through human and non-human contributions.

When the right to participate in production through productive capital ownership is effectively denied, especially when tectonic shifts in the technologies of production destroy and degrade the worth of jobs, then the people affected become increasingly insecure in satisfying their and their family’s basic survival. Such conditions force them to seek low-pay, low-security jobs, or either charity or welfare, or desperately engage in illegitimate means. Such disintegration tears at society’s sense of fairness and justice, and spreads resentment, alienation and despair.

It is essential that people focus their thinking on the understanding of who and what creates wealth, in order to fully understand how to solve growing income inequality and the disintegration of the nation wherein the majority of citizens are regulated to low-pay job serfdom and public welfare.

In a modern, technological era it is the ownership of wealth-creating productive capital assets, not the labor of people that is the primary creator of affluence.

Hence, it is access to ownership of productive capital assets, not to jobs, wherein the national economic policy guidelines for the 21st century ought to lie. As ownership of wealth-creating productive capital becomes widely diffused, political power ought also to be widely diffused.

Productive capital is defined as the non-human means of producing products and services (productive land; structures; infrastructure; tools; human-intelligent and non-human-intelligent machines; super-automation; robotics; digital computerized processing and operations; certain intangibles that have the characteristics of property, such as patents and trade or firm names; and the like owned by individuals).

Tectonic shifts in the technologies of production are constant and result in new formations of productive capital, whose role is to do ever more of the work, which produces income to the owners of the capital assets. People invented tools to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive — the core function of technological invention.

Businesses employ both productive capital and people, but full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum in order to produce efficiently and profitably. Because of the ever-accelerating shift to productive capital to lower business operational costs, jobs are constantly being eroded. The other aspect impacting job security — the overwhelming source of income for the majority of Americans — is global competition and the sourcing of low-cost “slave” labor. As a result, American businesses seeking to compete in global markets and within the United States market, which is driven by low pricing demand, have out-sourced manufacturing to other countries whose labor costs are significantly lower and whose tax extraction rates and environmental regulations are respectively far less costly and stringent. Such out-sourcing is motivated by the market demand to produce their products and services more efficiently and more profitably.

This combination of free-market forces means that private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever-increasing role, compounded by far less costly out-sourcing of production.

As a result, there are fewer and fewer “customers with money” to purchase the products and services that can be more efficiently produced with productive capital. Economic growth will always be stalled when there are high levels of economic inequality because there will be an imbalance between production and consumption.

Why is this happening?

The reason is simple. A relative few people OWN the preponderance of the nation’s productive capital assets and are positioned to OWN the FUTURE productive wealth, from which they earn dividend income and valuable capital gains asset growth. This is why there is widening economic inequality resulting in class conflict between the so-called 1 percent “successful” ownership class and the 99 percent, who are capital-less or under-capitalized, and whose ONLY source of income is a job or taxpayer-supported government welfare derived from tax extraction and national debt. This Income inequality is exponentially crippling the United States from realizing its creative and social and just economic potential.

Thus, there is the imbalance between production and consumption. A few wealthy people are thereby able to rig the “system” to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital owner more productive. How much employment can be destroyed by substituting machines for people or lowering operational costs is a measure of their success — always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the products and services produced as a result of substituting “machines” for people or devaluing labor wages and salaries. And yet you can’t have mass production without mass human consumption. It is the exponential disassociation of production and consumption, which is the problem with the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well being.

The solution is to employ capital credit mechanisms to facilitate the productive capital acquisition by EVERY citizen, whether poor or in the middle class, to fuel a larger and more affluent economy. This can be facilitated on the basis of self-finance, whereby the productive capital assets, after returning its acquisition costs, begin to pay a fully-distributed capital earnings dividend to its new owners, thus initially supplementing their labor income and reducing their taxpayer-supported welfare dependence, and over time building income to replace their dependency on job earnings and secure their retirement as they age.

For the nation to overcome widening income inequality, the obvious, logical solution is for people to OWN THE “MACHINES” and non-human means of production that result from technology. Broadening productive capital ownership should be the priority course of action for the FUTURE. “FUTURE” is capitalized to emphasize that the private property rights of ALL citizens MUST be respected, honored, and protected. Thus, ANY solution(s) to transform the United States into an OWNERSHIP CULTURE must not undermine or seize the private property of the 1 to 10 percent who now own up to 90 percent of the corporate wealth. Instead, the solution(s) MUST expand the ownership pie over time and result in EVERY American child, woman and man earning income to support an affluent life. The result would be that those who now own America would still be owners but their percentage of the total ownership would decrease over time, as ownership gets broader and broader and benefits the traditionally disenfranchised poor and working and middle class, who will become sought-after “customers with money.” Thus, productive capital income would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth. This also means that society can profitably employ unused and idle productive capacity and invest in more productive capacity to service the demands of a growth economy.

Significantly, by facilitating the acquisition of FUTURE wealth-creating productive capital assets by ALL Americans, everyone will increasingly be able to afford to purchase with their productive capital earnings (dividend income) what is increasingly produced by productive capital. This in turn will create the market conditions for sustainable economic growth, and as private, individual ownership spreads, the larger the economy will grow as people’s incomes increasingly grow and they purchase more products and services to satisfy their needs and wants. Thus, the effect created would be a self-propelling economic engine of growth capable of producing general affluence for every American, and not limited to those few who now OWN America’s productive power and whose consumption needs are satisfactorily, if not overly met.

This balanced Just Third Way approach to building a FUTURE economy that supports affluence for EVERY American is presently not in the national discussion. It appears that the President of the United States, the elected Congressional representatives and Senators, academia, and the media are oblivious to this principled solution that has the ingredients to power economic growth at double-digit GNP rates. This is the political situation, even though many are wealthy themselves because they OWN productive capital assets.

To achieve this goal requires investment in FUTURE income-producing, wealth-creating productive capital assets while simultaneously broadening private, individual ownership of the resulting expansion of existing large corporations and future corporations. Not only is employee ownership the norm to be sought wherever there are workers but beyond employee ownership the norm should be to create an OWNERSHIP CULTURE whereby EVERY American can benefit financially by owning a SUPER IRA-TYPE Capital Homestead Account (CHA) portfolio of income-producing, full-voting, full-dividend payout securities in America’s expanding corporations and those newly created to produce the future products and services needed and wanted by society.

This master plan agenda can be accomplished by applying the logic of corporate finance, which is self-financing and asset-backed credit for productive uses to grow the economy. People invest in capital ownership on the basis that the investment will pay for itself. The problem facing the nation, which prevents broadening capital ownership simultaneously with the growth of the economy, is routed in the financial system, which must be reformed.

The wealthy ownership class understands and employs the strategy of investing in opportunities expected to pay for themselves in a reasonable period of time, typically 5 to 7 years, perhaps 10 in some circumstances. This is the fundamental logic of corporate finance couched in “return on investment (ROI)” terms. This same logic is the personal investment strategy steadfastly followed by successful capitalized and under-capitalized investors. The rich further understand that once the acquisition cost is paid for out of the FUTURE earnings of the productive capital investment, the asset then continues to earn income indefinitely, or in perpetuity. This is precisely the process used by the rich to get richer.

The solution is not to focus on JOB CREATION but to focus on OWNERSHIP CREATION whereby EVERY American can acquire private, individual ownership in FUTURE income-producing productive capital asset investments without the need to limit their financing requirements to past savings and/or require workers to reduce their consumption incomes to become owners. This is not about creating small businesses, which tend to be operated by hands-on entrepreneurs and proprietors, but about creating a viable portfolio of income-producing, full-dividend, full-voting stock ownership in large corporations growing the economy, whereby there is no education and talent requirement to simply be a share owner. Large corporations are already publicly owned by millions of Americans. But what they have purchased is value-diluted stock through the “stock market exchanges,” purchased with their earnings as labor workers. Their stock holdings are relatively miniscule, as are their dividend payments compared to the top 10 percent of capital owners. And no one addresses whether Dow Jones gains have anything to do with the reality of the health of businesses. The stock market deals in secondhand securities, which essentially translates to a gambling casino. Wall Street has convinced us to see ourselves as “investors” instead of “gamblers” and “perceived values” instead of “bets.”

It is important to understand that, though, millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively minuscule, as are their dividend payments compared to the top 10 percent of capital owners. Pew Research found that 53 percent of Americans own no stock at all, and out of the 47 percent who do, the richest 5 percent own two-thirds of that stock. And only 10 percent of Americans have pensions, so stock market gains or losses don’t affect the incomes of most retirees.

Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital.

America has tried the Republican “cut spending, cut taxes, and cut ‘entitlements’,” and the Democrat “protect ‘entitlements,’ provide tax-payer supported stimulus, lower middle and working class taxes, tax the rich, and redistribute” brands of economic policy, as well as a mixture of both. Republican ideology aims to revive hard-nosed laissez-faire appeals to hard-core conservatives but ignores the relevancy of healing the economy and halting the steady disintegration of the middle class and working poor. Unfortunately, not enough conservative thinkers have acknowledged the damaging results of a laissez-faire ideology, which furthers the concentration of productive capital ownership. They are floundering in search of alternative thinking as they acknowledge the negative economic and social realities resulting from greed capitalism or “Hoggish” — the term I give to institutionalizing greed (creating concentrated capital ownership, monopolies, and special privileges).

The Just Third Way is a balanced approach, which encompasses the realization that the troubling economic and social trends (global capitalism, free-trade doctrine, tectonic shifts in the technologies of production, and the steady off-loading of American manufacturing and jobs) caused by continued concentrated ownership of wealth-creating productive capital assets will threaten the stability of contemporary liberal democracies and dethrone democratic ideology, as it is now understood. Without a policy shift to broaden productive capital ownership simultaneously with economic growth, further development of technology and globalization will undermine the American middle class and make it impossible for more than a minority of citizens to achieve middle-class status.

Economic democracy has yet to be tried. We are absent a national discussion of where consumers earn the money to buy products and services and the nature of capital ownership, and instead argue about policies to redistribute income or not to redistribute income, or to engage in austerity measures or pursue government stimulus.

But how will we ever achieve affluence for EVERY American and eliminate poverty and reliance on taxpayer-supported government welfare, which is fueling national debt? This will require a return to higher income tax and corporate tax rates, which are lowered or entirely eliminated when corporations have demonstrated growth decisions that enable their workers and other citizens to finance their future growth and share in the companies’ fate as share owners. This would enable us to more effectively create investment stimulus incentives through reduced tax rates tied to creating new owners.

While tax and investment stimulus incentives are excellent tools to strengthen economic growth, without the requirement that productive capital ownership is broadened simultaneously, the result will continue to further concentrate productive capital ownership among those who already own, and further create dependency with redistribution policies and programs to sustain purchasing power on the part of the 99 percent of the population who are dependent on their labor worker earnings or welfare to sustain their livelihood. By stimulating economic growth tied to broadened productive capital ownership the benefits are two-fold: one is that over time the 99 percenters will financially benefit from acquiring productive capital assets that are paid for out of the future earnings of the investments and gain greater access to job opportunities that a growth economy generates.

Starting with the business corporation, a legal entity created and sanctioned by state and federal government and judicial law, the government should provide tax incentives for full-dividend payouts to its stockholders, or alternatively legislate that from now on 100 percent of all profits be paid out fully as dividend payments to stockholders (thus, eliminating the corporate income tax), with the dividend income subject to individual taxation. This would effectively prohibit retained earnings financing of new productive capital formation (reinvesting the corporate earnings already earned). The government could also limit debt financing by legislating some ratio formula to annual revenue under which a corporation could debt finance new productive capital formation with borrowed monies. Both retained earnings and debt financing only enhance the ownership holding value of the existing corporate ownership class and do nothing to create new owners. Thus, the rich get richer systematically and capital ownership concentration is furthered, facilitated by financing further productive capital acquisition out of the earnings of existing productive capital.

In place of retained earnings and debt financing, the government should incentivize business corporations to issue and sell full-voting, full-dividend payout stock to more people to underwrite new productive capital formation, with the purpose of providing opportunity for new owners, both employees of corporations and non-employees, to participate in a growing economy. This approach can be applied to singular corporations or multiple corporate diversification portfolios facilitated with private capital credit insurance or a government reinsurance agency (ala the Federal Housing Administration concept). This would provide the solution to the need for a financial mechanism put in place that will guarantee loan risks; otherwise banks and lending institutions will not make the loans, and the system will continue to limit access to capital acquisition to those who already own capital—the rich and who have “psst savings” to pledge as collateral. This is because “poor” people have no security or collateral, or sufficient income to pledge against the loan as security, and/or are disqualified on the grounds of either unproven unreliability or proven unreliability.

Criteria must be created to qualify the corporations subject to this policy and those corporations that qualify overseen so as to ensure that their executives exercise prudent fiduciary responsibility to generate loan payback. Once the guaranteed loans are paid back, the new capital formation will continue to produce income for existing and future owners, and subsequently provide “customers with money” to support the output of the economy.

This approach would use the existing taxing power of government in a way to restructure the economy along the guidelines of universal access to ownership of productive capital wealth with a thrust toward the creation of new wealth.

The ultimate result of the use of the taxing power of government to stimulate the widespread access to ownership of productive capital wealth should be a growing independence of an economically emancipated people both from reliance upon government and from the wage slavery brought into being by monopolistic and oligarchic ownership; and the role and function in our lives both of government and of monopoly and oligarchy ownership ought to diminish.

The national goal should be to foster an economic policy direction toward broadening private ownership participation for all people in the capital wealth base of our economy.

The American Dream since the time of the Founding Fathers has been to foster individually owned free enterprise. Our economic policies, and tax laws foster concentration of business ownership in the hands of a wealthy few by subsidizing and favoring narrowly owned conglomerates and monopolistic combines. This is not good. We need a new economic policy thrust, which will promote the birth of profitable new business enterprises and expand the ownership of large corporations, while stimulating the entrepreneurial creative spirit of business innovators.

This is an agenda for “a quiet revolution” — a national movement for economic justice, tax equity, and governmental responsibility. The thrust of this movement is to focus upon tax reformation and economic policy. To guide this movement toward realizing the goal of economic justice, positive and constructive reforms in the tax laws, policies, and procedures of the U.S. Government will be necessary.

When the Federal income tax was authorized by the 16th amendment to the Constitution, it was designed to levy taxes in a progressive and fair way on all income, “from whatever source derived,” in order to pay for the legitimate functions of government as authorized by the people through their elected representatives.

But, over the years, exception after exception has been made to this principle; tax loopholes have allowed the wealthy and the wealthy owners of the corporations to escape high taxes. This means that the tax burden has fallen increasingly on low- and moderate-income working people.

The average American worker works at least 2 out of 5 days just to pay taxes, while scores of wealthy people with incomes over $1 million pay no Federal income taxes at all.

This is not just.

There is hardly any progressivity in taxation. Those with low and moderate incomes pay a higher percentage in taxes than those with higher incomes.

Tax loopholes and government subsidies are really a welfare program for the rich.

Recommendations For Tax Reformation: A Just Tax Concept For The U.S. Government

Implicit in the original income tax concept was the “ability-to-pay-theory,” that those who earn or receive more income should pay a progressively larger proportion of their incomes to support government.

Another concept inherent in the original income tax law was that government should limit in some manner the vast personal incomes derived by a few people or legal entities owning huge amounts of capital wealth and property.

Tax policies today encourage concentration of capital wealth and property, generating on one hand a huge governmental bureaucracy to regulate centralized economic activity, and on the other hand, an ever-expanding number of economically dependent people requiring another huge government bureaucracy to administer to their needs.

The economic, social, and legal injustices of our society are fostered by tax policies, which enable the rich to become richer, while the majority of the working people, the elderly, small businessmen, family farmers, and poor pay the taxes.

As a nation, we must adopt an economic policy designed to broaden private individual ownership of all forms of property — particularly property ownership rights which yield viable incomes to people. The function of Federal tax policy then should be to encourage broadened private, individual ownership, and discourage private concentrations of capital wealth and excessive personal incomes from property holdings.

For genuine tax reform, positive, constructive, and just reforms in tax law, with review every 5 years or less, are needed.

Recommended Tax Reforms

Personal earned incomes and property-derived incomes

The tax rate would be a single rate for all incomes of natural persons from all sources above a personal exemption level so that the budget could be balanced automatically and even allow the government to pay off the growing unsustainable long-term debt, but the poor would pay the first dollar over their exemption levels as would the hedge fund operator and others now earning billions of dollars from capital gains, dividends, rents and other property incomes (which under some tax proposals would be exempted from any taxes). Provide an exemption of $100,000 for a family of four to meet their ordinary living needs.

Eliminate the payroll tax on workers and their employers, but pay out of general revenues for all promises for Social Security, Medicare, Medicaid, government pensions, health, education, rent and subsistence vouchers for the poor until their new jobs and ownership accumulations provide new incomes to substitute for the taxpayer dollars to fill these needs.

Inheritance and estate taxes

As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes; teachers; health workers; police; other public servants; military veterans; artists; the poor; and the disabled.

Each year tens of billions of dollars in wealth-creating productive capital assets are passed along to heirs under current tax laws. The revenues generated from inheritance taxes should be pledged to support the Social Security program, thus achieving a reduction in Social Security taxes, which are becoming a tax burden.

Corporations and business taxes for non-small business enterprises

Investment credit tax incentives — The net result of new capital wealth formation is to create more productive land, industrial plant and equipment, machinery, tools, et cetera. In a highly technological economy the purpose of scientific advancement is not to create jobs (labor intensive production), but to substitute more efficient machines, buildings, tools, and productive land for labor — human work effort. This is the basis of increasing productiveness, and has been since the invention of the wheel to today’s age of cybernetics. Invention and innovation are supposed to save labor and free people for the enjoyment of the good life, the pursuant of happiness, and the improvement of their minds and bodies — to enable the fulfillment of the needs of the flesh (man’s material needs and well-being), so that the works of the soul may flow.

With an economic policy designed to foster widespread private equity ownership participation in the capital wealth assets of our economy, the use and purpose of the investment tax credit device as a special governmental subsidy to private corporations has a significant potential for encouraging broader ownership of income-producing productive property rights among all people.

If an investment tax credit is given to a business organization, it should be limited to finance real new capital wealth expansion for widespread private ownership participation by individuals and families.

The Federal Reserve should stop monetizing unproductive debt and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares.

Nonpublic close corporations — All non-publicly registered and traded corporations, that is, those that are close corporations owned by a few people, and not classified under definitions set by the Small Business Administration, Department of Commerce, as a “small business,” or whose stock is not traded on the open markets and broadly owned, should be taxed as personal holding companies. The tax policy for close corporations, which by their nature concentrate wealth and limit free enterprise, should result in expanded ownership of capital wealth and discourage such organizations.

The income of such corporations should be treated as the personal incomes of their owners and taxed at personal income tax rates as herein recommended.

This tax policy will discourage private concentrations of capital wealth, and encourage viable small businesses and widespread private popular ownership shares in the small and large business corporations of America.

Public corporations — Tax policy of the Federal Government should encourage broad private ownership of public corporations, Publicly registered business corporations should be taxed on a basis, which encourages broad ownership and the fullest distribution of earnings to their owners.

The following tax policies for all publicly owned private corporations should be applied, based upon the philosophy that a corporation is a creature of the State, created by law, recognized as an “artificial person,” able to amass vast amounts of capital wealth with limited liability, and can have a life in perpetuity. Since a corporation is a legally created entity, and not a human being, its function, powers, responsibilities, and ownership are a matter of significant social, political, and economic policy.

Public corporations should be taxed as follows:

If profits are retained, that is, reinvested and not paid to the stockholder-owners, the corporation will pay a 90 percent tax on retained earnings.

Dividends paid out to stockholders-owners would be deductible from corporate earnings thus making these earnings subject to personal income tax rates.

All subsidiary corporations and partially or wholly owned enterprises of a parent or holding corporation will be taxed as a separate enterprise entity, as under the above recommended policy.

Business sole proprietorships and partnerships, and close corporations classified as small business

No change in existing tax procedure are necessary, except that the tax rate on such business incomes would be the same for individuals.

Capital gains tax — non-public corporations and close corporations

For individuals, capital gains realized on the sale of a personal residence, owned and occupied by a natural person or persons and/or a family would be taxed at the personal income tax rate.

All other capital gains in property interests (real or personal, securities et cetera) unless exchanged within 1 year for property of equivalent value, would be taxed at the personal income tax rate.

Capital property holdings tax: Limits on ownership

All individuals, whether their property is combined with others in joint tenancies, co-tenancies, or community property holdings of natural persons should be subject to a capital property holdings tax if the certified net worth or equity value of the property holding of the taxpayer exceeds $1 million.

Tax loopholes and subsidies

Eliminate all.

Legitimate Functions Of Government And Governmental Responsibility

Tax policy must, by necessity, be linked to a definition of the legitimate functions of government and governmental responsibility with respect to the uses of Federal tax revenues.

Therefore, the tax revenues flowing to the Federal Government as a result of these recommendations should be used for the following purposes:

  1. Promote the general welfare for all people.
  2. Encourage viable and broadly owned business enterprise, and a free competitive market.
  3. Foster broad private individual ownership of the capital wealth base of our economy.
  4. Insure a fair and meaningful stake among individuals in the future of our nation.
  5. Promote economic justice for all people.
  6. Enhance civilization, and encourage the arts, science, significant educations, and other creative human endeavors.
  7. Guarantee individual liberty, and economic security and independence for all people.
  8. Promote peace and world enrichment, while providing for the common defense.
  9. Encourage community enhancement and environmental quality.
  10. Enhance life, health, and personal happiness for all people.
  11. Foster domestic tranquility and fraternity.
  12. Encourage human tolerance, respect, and personal responsibility and dignity.
  13. Promote mutual cooperation and trust for mutual benefit for all people.

The ultimate result that we should seek is growing independence of an economically emancipated people both from reliance upon government and from the wage slavery brought into being by monopolistic and oligarchic ownership, and the role and function in our lives both of government and of monopoly and oligarchic ownership ought to diminish.

Recommendations For Future Study

While these tax reform recommendations will generate substantial revenue increases to the Federal Government, strengthen the nation, and result in reducing the burden upon all poor and working people, particularly those families with incomes under $30,000 per year, an in-depth study is necessary to determine the full impact of such a new tax and economic policy thrust, as herein advocated.

A Tax Reformation Commission should be established by the U.S. Congress to conduct an in-depth study of these tax reform recommendations and those of others to determine the impact of these measures on the economy, the structure of private property ownership and free enterprise, the concentration of wealth, income distribution, and revenues generated to the Federal Government.

The U.S. Congress should establish a census of wealth valuation inventory. Every five years, the Commissioner of Internal Revenue, in conjunction with the Bureau of the Census, should conduct a valuation census of the property holding of all individuals, held in accordance with regulations published in the Federal Register. These records should be treated with the same confidentiality as is presently given to personal income tax records.

The wealth valuation computations for each individual would be used to establish one’s priority relative to other individuals for qualifying for government programs aimed at strengthening the self-sufficiency of the individual through acquisition and ownership of new and/or transferred capital wealth assets.

Concluding Remarks

The fact is that political democracy is impossible without economic democracy. Those who control money control the laws that foster wage slavery, welfare slavery, debt slavery and charity slavery. These laws can and should be changed by the 99 percent and those among the 1 percent who are committed to a just and economically classless market economy, true equality of opportunity, and a level playing field in the future for 100 percent of Americans. By adopting economic policies and programs that acknowledge every citizen’s right to become a capital owner as well as a labor worker, the result will be an end to perpetual labor servitude and the liberation of people from progressive increments of subsistence toil and compulsive poverty as the 99 percent benefits from the rewards of productive capital-sourced income.

A National Right To Capital Ownership Act and the Capital Homestead Act (aka Economic Democracy Act) that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.

The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today — management and banks — that each transaction is viably feasible so that there is virtually no risk to the Federal Reserve. The Federal Reserve Board is already empowered under Section 13 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded productive capital ownership opportunities for all Americans.

The labor union movement should transform to a producers’ ownership union movement and embrace and fight for this new democratic capitalism. They should play the part that they have always aspired to — that is, a better and easier life through participation in the nation’s economic growth and progress. As a result, labor unions will be able to broaden their functions, revitalize their constituency, and reverse their decline. Unfortunately, at the present time the movement is built on one-factor economics — the labor worker. The insufficiency of labor worker earnings to purchase products and services increasingly produced by productive capital gave rise to labor laws and labor unions designed to coerce higher and higher prices for the same or reduced labor input. With government assistance, unions have gradually converted productive enterprises in the private and public sectors into welfare institutions.

The unions should reassess their role of bargaining for more and more income for the same work or less and less work, and embrace a cooperative approach to survival, whereby they redefine “more” income for their workers in terms of the combined wages of labor and capital on the part of the workforce. They should continue to represent the workers as labor workers in all the aspects that are represented today — wages, hours, and working conditions — and, in addition, represent workers as full voting stockowners as capital ownership is built into the workforce. What is needed is leadership to define “more” as two ways to earn income.

If we continue with the past’s unworkable “trickle-down” economic policies, governments will have to continue to use the coercive power of taxation to redistribute income that is made by people who earn it and give it to those who need it. This results in ever-deepening massive debt on local, state, and national government levels, which leads to the citizenry becoming parasites instead of enabling people to become productive in the way that products and services are actually produced.

There is a solution to America’s economic decline, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. This new paradigm is the subject of the Agenda of The Just Third Way Movement at and is founded on the concept of Monetary Justice (

Support the Capital Homestead Act (aka Economic Democracy Act) at,, and

Also see “The Path To Eradicating Poverty In America” at and “The Path To Sustainable Economic Growth” at

Also see the article entitled “The Solution To America’s Economic Decline” at…economic-decline and “Education Is Critical To Our Future Societal Development” at

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