Financial Reform, Capitalism and the State

Today, there will be a vote in the Senate on a motion to proceed to financial reform. It may or may not pass. Ultimately, no matter what happens, it will be tinkering around the edges. Only two things would qualify for real financial reform - and neither is in this bill.

The first thing is to revoke the corporate charters of most Wall Street firms and force them to operate as partnerships. This would quickly make them risk averse, since the personal property of the partners would be on the hook, rather than simply the accumulated shares of the owners. That probably won't happen and I am not sure it should - although it would certainly end Wall Street as Casino.

The second thing is to move more quickly to employee-ownership in the economy as a whole. (The reason I can't insist on the first thing is that I can't honestly argue for employee-share ownership of Chrysler while denying it to Goldman Sachs). Employee-ownership can be expanded in two ways.

The first would be to allow unions to sink most of their pension funds into the firm(s) that their members are employed at. This is currently forbidden under the Taft Hartley Act, primarily to stop what was seen as socialism from taking over American industry (even though that would have been the cure for what currently ails the economy). Some portion of pension funds would be invested in other firms, but safety can be achieved for less than 90% diversification if unions have enough employers to spread the risk or if many locals combine their insurance pool for a larger, more secure, fund.

The second way to do this is to use Social Security personal accounts to allow employees to invest two-thirds of their (equalized) employer contribution in employer voting stock - with the other third invested in an insurance fund made up of similarly situated companies. To make funding adequate the income cap would be blown away and employee-paid contributions would be ended, with the remaining employer contribution equalized at the average contribution. If a company's management pulled an Enron - or even started to - one quarter of the employee stock shares plus one in combination with the insurance fund shares could fire management and install a neutral manager from the insurance fund to investigate and reorganize the firm. If the firm could not be saved, employees would be paid off with shares in the insurance fund. The other feature of this reform is for unions or employee professional organizations to vote the shares of their employee-owner members rather than appointing a unitary board.

Employees at non-stock firms would buy shares non-voting shares in the insurance fund only. Even though most firms are non-stock - most employees work for firms that are, which are bigger firms.

Very quickly, most publicly traded firms would go private (under either scenario) and most employers would reorganized to become employee-owned - since the best employees would want to be owners - especially if employee-owned firms got smart and began to pay for innovation directly rather than burying it in higher salaries for "creative" personnel.

Employee-owned firms could also do what European unions do and offer financial services to their employees, including consumer debt, mortgage debt and educational debt - as well as the full gamut of insurance services. This would both encourage long term employment arrangements and lower interest rates - since employee-ownership means that interest need not be charged if there are no outside investors. Indeed, the only way to avoid peonage is to limit these tools to employee-owned enterprise.

As you can see, this would radically reorganize the financial sector. Financial sector employees would go to work for employee-owned firms. While some firms might utilize outside services, the vast majority would internalize most of their supply chain and employee-services (from finance to medical to land acquisition and home building). The entire financial sector would cease to exist as an independent entity and would no longer need to be regulated except to make sure that employee-owners are free to leave or are treated equitably if terminated.

Employee-owned firms could also offer services that replace the State. They could hire teachers to train employees' children or pay for their tuition at a public or private charter school. They would send younger employees to university and pay them to attend. They could provide involuntary mental health services to employees and family members - replacing the prison system and preventing most tragedy before it happens. They could provide additional income to larger families so that government can get out of the income redistribution business (and take it away when children leave home to remove the perverse incentive to fire experienced employees who demand more money to support their families). They could pay longer term employees with stock dividends rather than hire salaries - another way to encourage longevity. They could hire under-educated workers and send them to school as well instead of paying taxes for the government to do so. They could build employee homes in cohesive neighborhoods and provide the same services that Home Owners Associations provide (roads, road clearance, security) and even some that local governments provide (rescue and fire protection).

Employee-owned firms could even do international development - at least the ones that are already multi-national in employment or supply. Indeed, they would have to so that trade isn't used to offshore their jobs. Giving overseas workers and suppliers the same standard of living that American workers get saves American jobs by stopping exploitation. It also raises the standard of living for overseas workers generally and leads to the creation of a world-wide middle class, with the demand for local democracy and the recognition of human rights. Democracies generally do not go to war with each other, so the need for military spending goes way down and may even become non-existent - thus overcoming the need for any kind of government at all.

The only reason for any taxation would be to finally pay off the national debt and fund moving from Social Security to private ownership - although when these limited obligations are met, even income taxes can sunset.

All this would occur from repealing the Taft Hartley Act prohibitions on union control of employers and creating personal accounts for Social Security.

Robert Samuleson gets in wrong on the VAT

Robert Samuelson writes in today's Post about a VAT, which follows George Will's criticisms of yesterday. Both got it wrong, at least partially.

Samuelson fears that a VAT would hurt young families and that it would have too many loopholes. This would only be true without the inclusion of a transfer to employees with families to help them pay the tax. According to a recent study by the Tax Policy Center of Brookings/Urban, such a subsidy would allow a much broader tax. Indeed, if you make the subsidy broad enough, you could solve the demographic problems in Social Security by encouraging people to have children and pay for such a subsidy by voiding the home mortgage deduction and the property tax deduction. Overall, this would change the distribution of housing provided, but not the amount, as the biggest expense for growing families is a bigger home.

Will fears the opposite, the elderly will pay too much as they spend down their savings. Whether this is true or not depends on how you handle IRA withdrawls. If you leave traditional IRAs untaxed, or count them as income with a much higher floor for taxation (say $75,000 for individuals and $150,000 for joint filers), you will find most of the elderly avoiding any additional taxation. Roth IRA holders would have to be given some form of rebate, but that won't break the budget. Will also says that the income tax should be repealed with a VAT.

Will is wrong. What should happen, however, is that the income tax should have a higher floor, as I described above, so only the truly wealthy pay income taxes (Michael Graetz, a Republican, proposes this, though with a lower floor than I favor and with more deductions). Non-retirement payroll taxes should also be part of the VAT, or better yet merged entirely into an employer-based levy so that these can be hidden from view and increased to cover hospitalization insurance under Medicare, as well as Medicaid for seniors who need catastrophic care.

I find it amusing that in two days, one Post essayist says seniors will be hurt and then the other says the young will be hurt. They are both wrong.

The 47% payer problem

Howard Gleckman, of the Brookings/Urban Tax Policy Center, weighs in on the discussion of the number of Americans who pay no income tax. Give it a look here and check out my comments, which I will repost below:

There are some of us, like myself, Len Burman and Michael Graetz who would decrease the number of people filing even more, with the payment on their wage taxes going on other places. Burman would make filing unnecessary but not invisible by turning low rate income taxes into something more akin to a payroll tax (but with tax benefits paid by the employer). Graetz would eliminate the personal tax for most earners altogether, but would retain payroll taxes, which could be a vehicle for VAT offsets. I would simply shift the burden of both payroll taxes and low rate income taxes to employers (and VAT payers), who would distribute credits and lose their deduction for wage and salary income - leaving only the wealthiest to pay taxes but removing their most favored mortgage interest and property tax credits. Burman's higher 25%tax rate is only 10% over the general 15% rate (I don't recall what he does with the mortgage deduction). Graetz's surtax is higher at 20% to 25%, retains the home mortgage and charitable deductions and reaches lower to the $50K/$100K range. My proposal is for a broader base (only ESOP and charitable deductions - although I could be talked into a state income tax deduction) - including inherited income when cashed out, more progressive rates (from 3% to 20%) and a higher exemption $75K/$150K).

I would love to see you guys do a side by side of Graetz, Burman, Ryan and Bindner as to the distributional and revenue effects. May the best proposal win!

The issue of everyone paying taxes is key to those who support a Flat Tax, who desire totally proportional taxation with everyone paying the same rate. The Fair Tax is a varient of this, even with VAT offsets, since the rate charged prior to offsets is equal to everyone. This view is important to people who believe in equality in process rather than equality of result. Indeed, they believe equality of result rewards sloth and breaks down a sense of community sacrifice. Dick Armey is an extreme believer in this view - and not just because his funders also hold it.

This view is not uncommon in society. It's existence is why I propose a VAT along with a shift of wage taxes from individuals to an expanded business income tax. Making such taxes visible promotes at least some shared sense of sacrfice.

The desire for shared sacrifice also leads to the use of per capita debt statistics - even though such statistics are entirely inappropriate given our tax system. The real liability for the national debt is exactly the same as the liability for the payment of tax. They are one and the same, since the ability of a nation to borrow rests solely on its ability to tax. If anything, the national debt liability should reflect the distribution of wealth, which is much more skewed to the top than either the distribution of income or the distribution of taxation. Since wealth is harder to tax than income (even by an LVT - because of the liquidity problem), what each individual owes is a function of the amount on line 60 of their Form 1040, less the credits on lines 63, 64, 65, 66, 67, 69 and 70. This total, times 9 (which is roughly the ratio of federal income taxes to national debt) gives each individual what they really owe. We ended up owing roughly $5,500. Our share of the debt (aside from taxes owed) is roughly $50,000.

The tax changes I propose would essentially further limit the liability for the debt to the wealthy who pay an income surtax - however I would limit the surtax to debt repayment, interest payments and the payment for overseas deployments. Once such deployments are ended and the debt repaid, the reason for the tax would cease - as would the tax itself.

The other egalitarian feature I wish to emphasize is my proposed expanded child tax credit, which would be an offset to business income taxes and paid to workers as a component of wages. This would replace other family entitlements and is necessary on justice and efficiency grounds because small employers of low wage workers cannot afford to pay a living wage (which for me as a Catholic intellectual is non-negotiable doctrine) if mandated without some kind of tax support. Lacking tax support would either drive small firms into bankruptcy or result in business size exclusions that defeat the purpose of living wage mandates.