Return-path: Message-Id: Date: Thu, 26 Mar 92 15:03:49 PST From: jim@pnet01.cts.com (Jim Bowery) To: crash!transarc.com!Ted_Anderson@nosc.mil Subject: NAT White Paper (part 1 of 2) A Net Asset Tax Based On The Net Present Value Calculation and Market Democracy By James Bowery The Coalition for Free Enterprise INTRODUCTION In nature, predators benefit prey by feeding on the weakest members of the population, thus strengthening the gene pool of the prey. Parasites are far less discriminating than predators. Parasites are careful to avoid killing their individual hosts by focusing on the vital fluids, rather than killing for tissue. Parasites are beneficial to neither the individual host nor to the host's gene pool. In his opus, "The Discourses" Niccolo Machiavelli counsels the founder of any new state to present tolerable challenges to the people at all times, so as to strengthen their character. Either the founder should locate in an austere land where nature herself will provide discipline, or, if locating in a fertile area, the founder should impose measured austerities on the people himself. Machiavelli specifically mentions taxation as an attractive tool. There is hidden morality in Machiavelli's apparent ruthlessness: At each stage of life, you have passed beyond dependence on that which raised you to that stage. If you continue accepting what was once given to you, it weakens rather than strengthens you. If we follow Machiavelli's wisdom and are consistent with the ecological model of predator/prey dynamics, we should avoid parasitic tax systems which drain off productivity in the form of income, capital gains, sales and value added. We should instead look for a tax policy that acts as a predator, applying disciplinary pressure to the economy by measuring how effectively business entities are utilizing their "living tissue" or net assets. We should do so without violating nascent businesses and families, as these are the fountainhead of wealth and value. To that end, this white paper argues for the adoption of the following policy reform: The government should tax net assets, in excess of levels typically protected under personal bankruptcy, at a rate equal to the rate of interest on the national debt, thereby eliminating other forms of taxation. Creator-owned intellectual property should be exempt. The use of government-backed debt instruments as a baseline for the calculation of asset value in the net present value formula indicates the existence of a de facto negative tax on net assets pervading all sectors of the economy. This situation, which provides a form of "capital welfare", sets off a familiar chain of events: Centralization of net assets leads to corporate central planning and monopolistic practices in the private sector with a drop in wealth-creating entrepreneurial investment. The consequent loss of equity in the general population, particularly in families with children and new businesses, has a tragic and predictable result: Structural economic decline and social decay. This flaw in the capitalist system has been exploited by the enemies of free enterprise throughout history. But the defenders of capitalism have been disturbingly silent except to address the weaker arguments of capitalism's detractors. The economic policy described herein, including the above tax reform and associated deregulation of financial institutions, repair this flaw in the foundation of our free enterprise system. Further, it provides immediate relief from the current economic disease afflicting our society, in a virtually revenue neutral manner (more than $1 trillion in tax revenue per year), while laying the ground work for optimal economic growth far into the future. CAPITAL WELFARE "The rich get richer" is an old saying based on a widely used mathematical formula in business economics: The net present value formula. The net present value formula allows asset value to be calculated as the size of a low-risk loan that one could pay off (amortize) with the after-tax profit stream generated by an asset, adjusted for risk. This means an asset's present value is proportional to the estimated wealth it will generate in the future divided by the prevailing rate of return on low-risk debt instruments. For example, a patent might be expected to produce some profile of royalties over a period of time -- ramping up as the technology comes into full production and then declining to nothing as the technology becomes obsolete or the patent expires. When multiplied by the probability of achieving that expectation (adjusting for risk) this royalty stream is equivalent to a series of payments on a low-risk loan. The size of the low-risk loan that could be amortized by the after-tax real profit stream is the patent's "net present value". The most obvious indicator of pervasive de facto capital welfare is a positive inflation-adjusted rate of return on government debt instruments. The market compares private investments and their risk-adjusted rates of return against the rates offered by the government, backed by its fiscal and monetary authority. If a private asset isn't obviously a better deal and the investor, as in socialist central planning, is too far removed from the private asset by wealth centralization to make a well informed judgment about the investment's viability, the investor will generally opt for investments that are backed my a history of known profit -- resorting to U. S. Treasury paper and their positive real interest rates, if all else fails. This is equivalent to a welfare "safety net" for capital. The widely used net present value formula, being based on these government supported interest rates, indicates the real rate of interest on the national debt is the rate of negative asset taxation the economy pays to all wealth in society and therefore quantifies the level of capital welfare pervading society. ASSET DISTRIBUTION A primary function of the market is to place assets under the ownership of those whose unique skills, knowledge, courage, intelligence and enterprise will maximize the assets' profitable use and minimize the risk of waste or idleness. This happens when people contending for the use of assets estimate the net present value of the assets. Those perceiving the greatest value in the asset use their capital or credit to purchase the asset. If they underestimate the risk and/or overestimate the profit, they lose some capital or credit and therefore are less likely to grab assets and make poor use of them in the future. However, if they are right, they gain capital or credit at a greater rate than competitors. Thus, the market strives to maintain an optimal match between the particular qualities of owners and those of the assets they own as reflected in the owner-specific net present value calculation. We eliminate the market equilibrium in asset ownership when, independent of any particular qualities of the owners, our policies not only protect the inflation-adjusted value of assets, but actually provide a net return, including capital gains, on ownership. In such an environment, society pays a negative asset tax which amounts to welfare for capital, creating debilitating incentives similar to welfare for labor. In both cases, nonperformance is rewarded over enterprise. When combined with taxation on income, capital gains, sales, value added, inheritance, gifts, etc., (all market activities that reallocate resources within the economy), the disincentives placed on productive investment are greatly compounded. Just as important, capital welfare severely distorts the optimization of asset ownership in society by placing, as a matter of public policy, ever more assets under the control of those who already have the most assets. Capitalism expresses its worst potentials when capital welfare debilitates the character of the wealthy while it gives them ever more economic authority. This asset centralization impoverishes the population at large, ending with a collapse in consumer demand. Supply-side theory fails to predict this collapse because it fails to deal with the fact that the wealthy are just as prone to character erosion by welfare as are the poor. It is even more destructive than welfare for the poor because it corrupts the decision makers in the economy. In the face of collapsing consumer demand and capital welfare, acquisition of more capital assets is promoted over the productive use or investment of those assets. Political rhetoric defining "the rich" or "the wealthy" as those with high levels of income or capital appreciation, focuses public sentiment against the most productive members of society and away from the centralization of net assets as the underlying problem. The incentive for productivity in the economy, left after the disincentives of capital welfare are subtracted, is the long-term economic growth rate minus the interest rate on the national debt. When the interest rate being paid on the national debt equals the growth rate of the economy, the fruits of all productivity are being confiscated to pay capital welfare and the incentives for productive investment and labor disappear. When the incentives for productivity become negative due to capital welfare in excess of the economic growth rate, wealth is structurally centralized at the expense of others in the economy. The absolute level of net assets owned by the general population actually decreases so as to increase the net assets of the wealthy. This not only removes all incentives for production and entrepreneurial investment from the economy, but consumer demand collapses as credit is liquidated to pay for necessities. Depression ensues. It is under these circumstances that demands for socialist intervention in the economy via "public investment" take on an air of urgent legitimacy. In such a desperate environment, Marx's arguments in "Das Kapital" appear as rational and appealing as any made by Schumpeter, Laffer or even Adam Smith. It is therefore critical to understand to what extent socialist criticisms of capitalism are valid so we can credibly argue against their fallacies -- particularly when they are promoted during obvious manifestations of capitalism's flaws. THE APPEAL OF COMMUNISM Communists advocate the emergence of a "scientific state" in which all revenues and all functions of society are subsumed by government planning and execution. In updated terminology, Marx predicted that ultimately science would advance to the point that there would be no role for labor or enterprise -- only scientifically optimized systems of automated planning and production. In this situation, there would be no free market to sustain the masses since they would not own the automated means of production, and, labor being worthless, would, therefore, have no income. Although Marx predicted a "withering away of the state", the communist interpretation of Marx's dilemma was that the state should confiscate ownership of the automated means of production and distribute the products to the masses based on social need. Since science would have removed all uncertainty as to the most optimal way in which to plan and operate these facilities, there would be no need for the incentives of the market to optimally allocate assets. Clearly, communism touched a chord with this vision of an automated future in which laborers could not feed themselves or their families while capitalists, who controlled vast production facilities, had no incentive to operate them. The communist movement dominated the politics of the 20th century. Adolf Hitler exploited a related idea when he attacked "international Jewish bankers" in his national socialist movement. When such profoundly destructive movements run their course, it behooves us to do more than merely condemn their evils in moral outrage. Analysis of this recurring political disease, why we are susceptible to it and what can be done to prevent it in the future is just as great a moral responsibility as is condemnation of its manifest evils. The appeal of communism (and an appeal of fascism) is that it addresses a truth which capitalists exploit and typically resist acknowledging in a material way -- that nature and civilization provide common assets of knowledge, resources, infrastructure and defense of legal rights which enhance and secure the productive value of private assets. It is precisely this pervasive influence of common assets, attributable to natural and historical heritage rather than the merits of any living person or operating corporation, that provides the definition of government's proper function, and, therefore, its proper level and source of revenue. A CRITIQUE OF HENRY GEORGE In the 1800's Henry George advocated a "single tax" based on unimproved land value. His rationale for this was that unimproved land was the only heritage in common to all and therefore not attributable to the merit of any person. This was a reasonable approximation of the contribution of "common assets" to wealth generating activity during an era in which most economic growth was occurring in the westward expansion across the continent of North America. But in modern technological civilization, the common assets of scientific knowledge, public domain technical knowledge, defense, law, infrastructure and education dominate our society. Perhaps at some point space will become a physical frontier and allow real property rights to become as important as they were during the 1800's, but at present, Henry George's approximation is a poor one. Indeed, it has never been a good approximation in urbanized areas, which is a major reason that Henry George's "single tax" ideas have failed to find great currency in political and academic circles. One of the greatest strengths of Henry George's land tax was that it would have promoted a much more rapid development of the American frontier by allowing the government to simply open more of its territories to private claim, without worrying about unproductive hoarding of those territories. Because of this fear of hoarding, the government resorted to a highly political system of land grants which created the rail road trusts that became a persistent blight on society. Similar blights are now being created in the bureaucratic allocation of frequency spectrum by the Federal Communications Commission and geostationary orbits for communications satellites. In reality, we are surrounded by "frontiers" in many dimensions. Few have the profound implications of a physical frontier such as the American west or space, but all share in common the attribute that proprietary access to them is restricted by government so as to prevent unproductive hoarding. In the case of technological frontiers, this problem is solved by limiting the patent claims to 17 years. An inventor can sit on an invention doing nothing with it for up to 17 years, but beyond that time, its use cannot be inhibited by the inventor. In practice, most inventors are so eager to see their invention brought into widespread use, they endanger their own claim. The patented technique is unique among frontier claims in that it's use is not inherently limited -- techniques are not "resources", and in that it is truly the creation of the inventor -- not an emergent phenomenon of civilization and nature. But in other areas, such as radio frequency and orbital slots, the analogy with frontier "land" is almost perfect. The NAT, unlike George's land tax, makes it possible for the government to open up all frontiers to private claim and development. Claimants must simply define and register the nature of the property rights that they wish to claim so that others can avoid overlapping claims or negotiate easements. Naturally, there are many such abstract property rights which are now in use by people, although unclaimed. The principle of first use, like first to invent in patent law, should be the criteria for priority on a claim. "Use" should include not only direct physical utilization, but declaration of intent to use the property right via claim. NAT liability begins with the date that the claim is protected under law. A CRITIQUE OF COMMUNISM While, unlike Henry George, communists recognized the contribution of all common assets, they provided no clear and verifiable measure of this contribution. They could not define to what extent civilization had achieved an automated scientific optimum, and, therefore, to what extent economic production was attributable not to the qualities of individuals, but to the qualities of civilization. It is the lack of such a measure and corresponding limits on the role of government, that has made communist theory so destructive.1 Fortunately, we have evolved just such a measure in our own society. This measure is the ratio of the interest rate on the government debt to the overall economic growth rate in the economy -- the degree to which a typical asset's value, as calculated in the net present value formula, arises from the existence of nature and civilization. Government debt instruments "automatically" produce more wealth for their owners. They are financially certain. The interest rate on these instruments describe the degree to which capital enjoys a welfare safety-net that reduces the incentive for productive investment. It, therefore, approximates the degree to which it is appropriate and practical for government to collect society's wealth for the maintenance of common assets. When the proceeds of society's productive capacity are just enough to pay out at a rate equal to government debt instruments, we confront capitalism's dilemma in which the only sustainable source of income is ownership of the means of production and our only choices appear to be economic depression or communism. This is the first indication that the large deficits of supply-side economics must inevitably lead to an a promotion of centralized management -- whether in government or corporate bureaucracies. A corollary of communism is that the common knowledge, that makes private ownership of resulting wealth immoral, make central planning the most efficient way to allocate resources. Just as a wise and benevolent dictatorship is the best form of government, so central economic planning, given adequate knowledge, is the best way to allocate assets. Central planning efficiently exploits economies of scale without wasteful duplication of facilities and competition between different ideas. Of course, central planning assumes that the central planners know what consumers want in the absence of any demand-side market information. Indeed, this is virtually identical to the failure of supply-side theorists such as George Gilder, who claim that centralized wealth not only can make good decisions about what people want without purchasing power necessarily being placed in the hands of the consumer, but will go ahead and invest in such an environment. In Gilder's supply-side manifesto "Wealth and Poverty" supply-side economics is founded on Say's Law which states that supply creates demand. Both communists and supply-side economists distrust the consumer's wisdom to make wise choices in the marketplace -- preferring the conservative wisdom of centralized power to make such decisions and trusting their altruistic instincts. Both prefer centralized authority over consumer sovereignty. Neither supply-side nor communist theory accept the democratic dynamics of a consumer market. Ironically, supply-side policies seem to amplify the errors of communism in two ways: 1) By requiring consumers to go into debt for their basic necessities, supply-side economics imposes negative wealth on consumers so that, at some point, not only may they not obtain the bare necessities of life, but they must also provide what they do not have to those who are already own everything. The material rights of communism prevent this ultra- pathological situation from arising. 2) Deficit spending for government contracts awarded to large corporations typically goes into advanced technology projects, as opposed to mature- technology infrastructure projects. With mature technology, the management is much more "scientific" than it is with technology development, and therefore more compatible with communism. For examples, it is obvious that a mile of train track built across a given kind of terrain will cost no more than a certain amount of money. When building a new space vehicle, or thermonuclear fusion furnace, however, there is no way for central managers or politicians to determine whether initial bids and/or cost overruns are reasonable given the difficulty of the project, or whether those executing the project are simply dishonest and/or incompetent. FROM SLAVERY TO FREEDOM There are property rights that deserve special treatment in our laws and markets. If we are to avoid a political free-for-all in seeking exemptions from normal tax and regulatory burdens, there must be basic principles that define which property rights are and are not special. A starting point is the foundation of modern democracy. The cornerstones of this foundation are the principles by which democracy replaced systems such as slavery and feudalism in the Old World. First among these principles is that people are not to be treated as property.2 Since they are not property, investments in their health, safety and education are not recoverable as profits by investors in the free market. This difficulty in recovering human investments, resulting directly from abandonment of slavery, is a "market failure" which must be addressed by non-market institutions such as the family, religion and government. In a sense, the abandonment of slavery was a first step away from the primacy of property since it undermined one's right to own one of the most valuable assets conceivable: Human beings. Public investment in the health and education of people also happens to be one of the highest-return and most obvious ways that society can increase its overall wealth. Although the best means of educating and maintaining health may not be so obvious, market synthesis is feasible as a means of optimization. An example of this is the proposal for education vouchers and school choice, although the value of such vouchers should, as a moral matter, be adjusted by a bidding system to fit individual student needs. Similar market syntheses can be proposed for national health insurance and many other government functions. Failures of the market, such as the difficulty of collecting tolls on roads and other infrastructure, have been used to justify government intervention, but they are not nearly so fundamental as the abandonment of slavery. For example, systems are now available which can automatically identify vehicles traveling at full speed, and bill for the use of roads. This means the state can now sell its road systems to private interests and leave optimal investment decisions in road infrastructure to the market, assuming market-driven means of allocating rights-of-way are established. Although formally abolished, degraded forms of slavery continued in feudal times. After capital became a central organizing principle, debtors prisons were abolished as part of the move away from feudalism, thus the power to enslave via legal contract was virtually eliminated. The institution of bankruptcy protection against creditors was a final rejection of slavery and feudalism. Bankruptcy protection allows one to maintain ownership of one's residence and the tools of one's trade despite the claims of creditors. Not only is one's own person exempt from market confiscation but one's vital possessions are protected as well. Elimination of debtors' prisons and the institution of bankruptcy protection of limited personal assets were the final steps away from slavery and feudalism. These steps toward freedom caused additional failures in the capital markets. These capital market failures provide the basis for many government policies including progressivity in taxation and the promotion of home ownership and small businesses.3 During the Great Depression of the 1930's, two additional interventions were established to protect the immediate assets of individuals: 1) Securities and Exchange Commission regulations to protect average individuals against losses in risky investments, and 2) Deposit insurance for banks and savings and loans. SEC regulations have required compensating programs in an attempt to deal with the capital market failures created by these regulations. Deposit insurance, being backed by the federal government, created the need for highly intrusive federal banking regulations to prevent monopolistic abuses -- regulation which ended in the early 1980's. Government support of deposit insurance continued, however. This imbalance of authority of responsibility resulted in the banking abuses and failures of the late 1980's. Significantly, all of the government interventions which protect the immediate assets of individuals have about the same cut-off point. SEC regulations define "qualified investors" (those qualified to make high risk investments) as those who have net assets on the order of $100,000. Deposit insurance for individual savers cuts off at $100,000. Bankruptcy protection for one's residence plus the tools of one's trade is typical at around the same level. The unifying principle behind these exemptions and regulations is the protection of one's control over one's own person and vital possessions. The abandonment of slavery with the ancillary abandonment of debtor's prisons plus the protection of home and tools, are at the foundation of our free society. Finally, the U. S. Constitution contains a provision for patents of invention and copyright along with a prohibition on patents of nobility. In a very real sense, the "royalties" collected by inventors for their inventions and artists for their creative works are the basis for a new definition of "nobility" upon which the United States culture is founded. In the United States, nobility is in the creative act rather than in the mere possession of land or titles conferred by the authorities. Just as the land of old world nobility was protected from the normal contention of the marketplace, so the "creative spark" of inventors, researchers and creative writers should be protected. Indeed, given the need for inventors and artists to focus their energies on creative rather than acquisitive disciplines, special protections are far more necessary than they were for the old world nobility, which possessed exceptional acquisitive capabilities. For this reason, patents of invention and copyrights, when possessed by their creators, should be treated as vital possessions of their creators for a limited time (17 years in the case of patents). The particularly perverse trend toward government-financed technology development has been attributed to a failure of the capital market to address these critical needs. However, the real problem with technology competitiveness is simply that technologists have been economically disenfranchised by a capital welfare system favoring acquisition over creation. The present reforms eliminate capital welfare for acquisitors while restoring creativity to its Constitutionally-mandated place of nobility. THE NET ASSET TAX The existence of pervasive capital welfare discussed above provides the basis for a system of taxation. The principles of freedom upon which our country was founded provide the basis for exemptions from taxation. These insights yield the following proposal for a Net Asset Tax (NAT) reform: The government should tax net assets, in excess of levels typically protected under personal bankruptcy, at a rate equal to the rate of interest on the national debt, thereby eliminating other forms of taxation. Creator-owned intellectual property should be exempt. The levels typically protected by personal bankruptcy can be approximated by the median price of housing an individual added to the median capitalization of a job in the economy. Together, these exemptions add up to between $50,000 and $100,000. Additional but smaller exemptions may be added to represent the lower levels of bankruptcy protection typically extended to children within families. The NAT is a self-adjusting system that seeks an equilibrium between government debt levels, current tax rates and private wealth distribution, without attempting to achieve an outright balanced budget or direct intervention in the economy. Under current (1992) asset distribution and government debt the NAT would generate between $1 trillion and $1.5 trillion in revenue, thus totally displacing other forms of taxation. MARKET DEMOCRACY Under the NAT, government functions and regulation can be cut back as capitalism becomes more functional. This does not mean, however, that government expenditures will necessarily decline. As government debt is paid down, the role of government declines and capital productivity climbs, the rate of interest offered on government debt will fall to unprecedented levels with respect to the economic growth rate. In this situation, it will become the responsibility of the legislature to determine to what extent society has reached a scientific optimum and increase its deficit spending accordingly. Although the legislature has this Constitutional responsibility in any case, the NAT will make this clear as never before. One way of viewing public and private domain functions under the NAT is that as optimum ways of doing business are discovered in a sector and become "scientific" or common knowledge, investment risk disappears and with it the merit of private investment. Theoretically, in such a mature sector, the government could invest and compete with the private sector without any appreciable loss in productivity. As demonstrated in communist societies, not only is such a theoretic optimum never fully achieved, but the bureaucracies that are supposed to apply the scientific knowledge of a mature sector in order to optimize and distribute its value invariably succumb to politics. Just as monopolistic corporate bureaucracies can become regressive in a relatively mature sector, such as the U.S. automobile industry, so will any attempt to subsume such sectors under government control result in bureaucratic regression. With the exception of basic functions of government and the pay down of debt, the government budget should be dispersed to citizens as cash, rather than being spent in government programs or even limited in the form of vouchers. This is "market democracy" in which the citizens and their markets, rather than central planning and politics, influence the selection of goods and services to be capitalized and provided. In fulfilling the moral mandates of a free society, such as education and health care, government assistance feeding the market should be restricted in ways that ensure the market is providing those goods and services to the people who need them. However, it is imperative that the recipients of government assistance be allowed to choose from multiple sources so as to suppress the monopolistic failures typical of bureaucracies, whether corporate or government. In areas of such moral mandates, the need of the individual recipient, as determined by a bidding process, should determine the amount of restricted financing provided to the individual. This is in contrast to the even distribution of unrestricted appropriations. In essence, "market democracy" allows the people to direct their portion of the government budget directly rather than going through a political or bureaucratic process. Market democracy synthesizes a competitive market from public demand for goods and services. This motivates the risk of private capital in the provision of services and cost containment. It avoids not only the central planning fallacy of communism, but also the political failures that have so plagued our system of government in recent decades. NAT ASSESSMENT In general, all assets are subject to assessment in computing taxable net assets. Payment of taxes may be deferred with interest on the unpaid balance equal to the taxation rate. The unpaid balance is counted as a liability in the calculation of net assets. When one's tax liability grows to the point that one has no net assets in excess of bankruptcy protection levels, forced liquidation or transfer of assets takes place to cover the tax liability. The only privately owned assets not assessed are the Constitutionally defined intellectual property rights of patents of invention and copyright, when owned by their creators. In order to avoid creating a bias toward debt financing and to treat economies of scale rationally, corporate assets should not be subjected to double taxation. As with current systems of taxation, there are practical limits to assessment. For example, in theory every agreement in which value is exchanged is subject to taxation. In reality, life is filled with "quid pro quo's", including cash transactions, that are never reported to the Internal Revenue Service, nor would it be practical to do so. The practical realities of tax assessment and auditing dictate that large portions of any tax base be ignored, concentrating only on the most visible and accessible aspects of the economy. In the case of the NAT, only assets whose existence is legally recorded in titles, insurance documents, etc., or that are currently reported for capital gains and losses would be individually assessed. Since most households own few major assets changing little from year to year, the NAT would greatly simplify tax computation. The actual value placed on an asset can be determined in a number of ways, including self-assessment with mandatory and timely sale if an offer to buy at the assessed price is made. The present systems of appraisal such as those already used in real estate taxation could also be used. In any case, the exact method of assessment is secondary to the requirement that errors in the estimate remain unbiased. Under no circumstances should there be an "assessment day" upon which all assessments for the year depend. What is assessed is NOT one's possessions and liabilities on some arbitrary day, but rather the time over which one owned various assets or held liabilities during the prior year. CURRENT ECONOMIC CONDITIONS AND RISK INVERSION A fundamental problem with our economy at present is what might be called "risk inversion" where households with high net worth disproportionately invest in low risk instruments while households with low net worth find their savings unwisely invested at high risk by deregulated but relatively unskilled financial institutions. New technologies and job-creating enterprises find it difficult to obtain capital because they are caught in the horns of a dilemma: The wealthy, who have the business experience needed to manage the risks of a new enterprise, have given their money to government or corporate bureaucracies to manage while small savers find their savings accounts squandered in speculative investments by institutions which are, in reality, qualified to do little more than purchase Treasury paper, which is what they should, in fact, be doing. Even more perverse, the government finds itself stepping away from its traditional low-risk investments in mature infrastructure in order to perform functions for which it is particularly ill-suited, such as technical innovation, while private sector businesses retreat from the very technical risk it is most suited to manage. The government then finds itself bailing out the failed investments of insured, but deregulated, financial institutions, thus creating even more government debt which is purchased by those most qualified to capitalize business enterprise. The current hue and cry for saving the "middle class" arises from the failure of our deregulated financial institutions to focus on their original purpose, which was the creation of affordable home ownership. Instead, they speculated in the creation of large amounts of theoretically profitable commercial real estate as young families were being crushed under the weight of sky- rocketing home mortgages and declining real wages. The "middle class" it is currently in vogue to worry about are those people, primarily people born in the 1950's (middle to late baby boomers), whose family stability and household net worth suffered greatly as a result of these housing shortages combined with lowering real incomes. Throughout the 1970's and 1980's these 50's babies were locked out of homes in perpetual courtship behavior. The relative unaffordability of housing delayed the onset of nesting far longer than those born before 1950. Courtship behavior is notoriously consumptive and exhausting. Nesting behavior is investive and constructive. Thus 60 million Americans born in the 1950's are now suffering from low equity for their ages, and little hope for the future. In reality, it is too late to do anything for the members of this group since most of its females are now leaving their childbearing years -- some desperately risking late pregnancies. Most families have already been irreversibly damaged, assuming they were formed at all. The best we can do now is attempt to rebuild the middle class for future generations and try to allow those we have decimated to build some equity for retirement with their productive years.4 Starting in the 1960's and early 1970s', in order to hoard assets that would soon be in demand by the 50's boomers and to enjoy the resulting capital gains, it was necessary for speculators to borrow large amounts of money prior to the earning power of boomers reaching "buy in" levels. The boomers were then forced to borrow even more money at higher real interest rates, while the speculators liquidated and moved on to ownership of the corporations which were paying the boomers lowered real wages and therefore enjoying higher profits and capital gains because of the increased experience level and productivity of the 50's boomers. Centralization of the growing asset base, with values inflated by debt, were the result. Little was done in government policy to get boomers into ownership of their own businesses during their years of peak productivity. This is because the profits on this huge influx of highly productive man-hours could more easily be captured from increasingly centralized and anti competitive corporations. Naturally, many boomers revolted against this trend and attempted undercapitalized "self employment" instead of working long hours for a large corporation that offered them little or no security. The end result of this risk inversion is a low rate of return on the U.S. economy's highly centralized assets, compounded with debt. This low rate of return is even more significant given the potential of the 50's boomers during their peak years of productivity. We are now seeing an increasing social burden from 60 million people born in the 1950's no longer willing and able to exert themselves, during their peak years of productivity, for what they see as a life-long Ponzi scheme which continually dangles the American Dream before their eyes and never delivers. Many have postponed childbearing and nesting too long. Millions of potential families, not to mention tens of millions of children aborted for financial reasons, have been lost to our society forever. In short, our social contract has been breached and the angry plaintiffs are about to realize they can sue. This is a politically explosive situation. Although decisive action is needed to stave off the explosion, it will probably not be taken until too late since those controlling policies have benefited from this breach ever since the 50's boomers began entering the workforce in the 1970's. However the increasing demoralization of this group combined with its increasing age and experience is leading to an inevitable collision with destiny. Those who helped concoct the current situation will continue to point in all directions, including at the 50's boomers themselves, in their panic to appear to be doing something. But someone, probably a destructive demagogue, is bound to call their bluff sooner or later. At that point, a political catastrophe will occur. Adoption of the NAT and market democracy can avert this tragic outcome and resurrect the American Dream. CONCLUSION This proposal is timely because the supply-side exploitation of capital welfare has made this flaw in the foundation of our economic system obvious, and its correction urgent. Our tax policies have increasingly violated basic moral principles during the 1980's and threaten to continue doing so in the 1990's. The symptoms are many and varied, including a heavy consumer debt load with corresponding over centralization of net assets. A Keynesian collapse in demand and therefore a collapse in the incentives for entrepreneurial investment of the capital that was centralized by supply-side policies during the 1980's, is creating a classic depressionary scenario. Coming at a time when we must convert our industrial base from a Cold War configuration to commercial competition, this collapse in investment incentives is particularly damaging. The resulting demoralization of our society is everywhere evident. Of all the proposals for economic renewal, the NAT is the only one that can provide immediate relief of our worst economic symptoms while, at the same time, providing a solid foundation for long term economic conversion and robust economic growth rooted in basic moral principles. APPENDIX I U.S. WEALTH DISTRIBUTION BY PERCENTILE AND ASSET TYPE, 1983 Source US Congress Joint Economic Committee "The Concentration of Wealth in the United States Trends in the Distribution of Wealth among American Families" Washington Joint Economic Committee 1983 p. 24. Some figures are provided to us by the Federal Reserve Board following publication of the Joint Economic Committee Report. Total Top Top Top Type of asset Amount(1) .5% 1% 10% Trusts 495.7 77.0 81.6 95.1 Corporate stock(2) 1,005.0 45.6 58.4 89.8 Bonds 328.1 41.3 49.6 88.0 Business assets 2,274.6 39.0 51.6 90.9 Money market accounts 285.0 15.9 22.5 58.8 Real estate 5,355.0 14.9 19.3 49.2 Land contracts 111.0 13.9 15.2 50.4 IRAs and Keoghs 142.2 13.0 21.1 67.3 Checking accounts 115.9 9.7 17.2 46.3 Insurance cash value 259.0 6.7 10.5 34.9 Certificates of deposite 383.1 4.8 10.7 49.9 Savings accounts 189.5 2.1 5.2 31.1 Automobiles 359.5 1.6 3.0 20.1 Miscellaneous 201.1 15.2 22.1 70.2 Gross assets 11,486.4 24.6 31.6 63.5 Net worth 10,038.9 28.7 34.3 67.92 (1) In billions of dollars (2) Including stock owned directly or thorough mutual funds but excluding holdings of pensions and trusts In 1985, the accuracy of the above table was challenged by the Federal Reserve Board whose estimates indicated a more even distribution of wealth. In 1991, independent studies based on the 1990 census indicated that the Federal Reserve Board's methods were inaccurate and significantly underestimated the skew in wealth distribution by percentile. At present, the Federal Reserve is the dominant source of data on wealth distribution in the U.S. with only 2 comprehensive independent studies having been conducted in the last 20 years, both indicating wealth is more concentrated than typically indicated by the Federal Reserve. This checkered history indicates a serious gap in the credibility of wealth distribution estimates. As of 1990, total U.S. net worth is estimated by various sources including the Brookings Institute, Federal Reserve and First Boston Bank, at between $20 trillion and $30 trillion dollars. Depending on the impact of Resolution Trust Corporation liquidations on real estate values, this range could be as much as $5 trillion dollars too high. APPENDIX II CALCULATIONS Tax Liability The simplified tax calculation is as follows: tax_liability = maximum(net_assets - bankruptcy_protection , $0) * treasury_rate net_assets = assets - liabilities bankruptcy_protection is set at approximately $100,000 per household to be conservative. Assets, as well as liabilities are calculated as 12 month averages. Expected Federal Tax Revenue From the data in Appendix I, the following inferences can be made: As of 1990, with a higher concentration of wealth than in 1983 or 1985, households with $100,000 or more in net assets start at between the 50th and 75th percentile. Those tax-paying percentiles own between 80% and 90% of all net assets. Assuming there are approximately 50 million households represented in the asset distribution table, the average per-household assets of taxable households is between $640,000 (at 25 million households) and $2,160,000 (at 12.5 million households). Average taxable assets per taxable household are between $540,000 (at 25 million households) and $2,060,000 (at 12.5 million households). The interest rate on the national debt is approximately 6%. Average tax liability per taxpaying household is therefore between $32,400 and $123,600. TOTAL FEDERAL TAX REVENUE is therefore between $800 billion and $1.5 trillion. These calculations are very rough due to the dearth of asset distribution studies, but they do demonstrate that the NAT generates revenues similar to those generated under the current tax system. ----------------------------------------------------------------------- APPENDIX III FREQUENTLY ASKED QUESTIONS AND ANSWERS ABOUT THE NAT REFORM ----------------------------------------------------------------------- Q: Won't the savings rate go down under a Net Asset Tax? A: Savings rates will increase along with the increased after-tax rates of return on savings for households. Most households will be well below the standard exemption and can, therefore, put their savings into government- backed debt instruments and receive an even higher rate of after-tax return than they can get now. They'll have more disposable income to save as well. ----------------------------------------------------------------------- Q: I thought only rich people could invest in T-bills. A: Since only middle class people will find government debt instruments attractive, financial institutions will offer savings and checking accounts backed by government debt instruments. This has a very important side effect: Under the NAT, deposit insurance can be eliminated and along with it, the most burdensome regulations of financial institutions. ----------------------------------------------------------------------- Q: How with the NAT affect retirees? A: The AARP's figure for median net worth of retired households is just under $70,000. Since the NAT household exemption would be on the order of $100,000, not only would most retirees pay no taxes at all, but even some wealthy retirees would find themselves paying LESS tax than they pay at present. Doing a bit of algebra: NAT_liability ~= (household_net_assets - 100,000)*.06 CURRENT_liability ~= income * .28 (Assuming 28% tax rate.) income = household_net_assets * .06 (This assumes all their assets are bearing income at an average of 6%.) Setting CURRENT_liability = NAT_liability and substituting "income": (household_net_assets - 100,000)*.06 = household_net_assets *.28 *.06 Solving for household_net_assets: household_net_assets = $138,888 (This is around the 80th percentile.) So you have to have more than about $140,000 in net assets before you will end up paying more in NAT taxes, as a retired household, than you currently pay in productivity taxes. This makes the pessimistic assumption that you will leave all your assets in low yield instruments instead of using your years of experience at accumulating all those assets to help young people start their own businesses, or help your children start their families, a la SBA's SCORE and the extended family. ----------------------------------------------------------------------- Q: What about the impending collapse of the Social Security system that baby boomers are so worried about? A: This NAT reform is the best hope boomers have for a happy and secure retirement. The NAT was developed by boomers motivated to deal with the lack of economic equity experienced by those born during the 1950's resulting from the stress they placed on the job and housing markets. By causing the long-term growth rate of productivity to increase, the boom generation's retirement will be secured and the Social Security trust Fund kept solvent. The NAT will head-off a fiscal and monetary disaster which now looms over the retirement of those born in the post-World War II baby boom. Enemies of the boomers (typified by Federal Reserve economists who represent capital welfare interests) have already started to fight the NAT by misrepresenting it as a tax which will target the pensions of boomers 30 years from now. If the NAT is adopted soon, boomers (especially the 60 million born in the 1950's who have few net assets) can use their peak productive years to prepare themselves and our country for their retirement. Indeed, since there is no such thing as a free lunch (except capital welfare), timely adoption of the NAT reform is the only realistic means of assuring boomers of a happy and secure retirement for boomers.. ----------------------------------------------------------------------- Q: What about the federal deficit? A: The federal deficit will come under control as the tax rate is tied to the treasury rate. This doesn't eliminate the federal deficit -- it merely ensures the deficit will remain at reasonable levels. Further, the NAT links spending to the tax rate, through the aggregate interest rate being paid on the national debt. If Congress goes on a spending spree and drives up the Treasury rate for a period of a few years, the aggregate interest rate being paid on the national debt will rise noticeably. This will create the same kind of constituency to control SPENDING as now exists to control TAXATION, but it still gives the government the flexibility to borrow and spend large sums of money in times of emergency. ----------------------------------------------------------------------- Q: What about loopholes? A: There are several things that make this tax system far better at closing loopholes than the productivity tax system. From most to least significant: 1) Unlike the NAT, it is impossible to construct a productivity tax system without a labyrinthine system of loop holes, simply because the economy would grind to a screeching halt without them. For example, a big problem with "flat tax" proposals is the fact that businesses have expenses which must be deducted. A productivity tax without business deductions would favor conglomerates and wipe out small businesses or businesses that have high dollar volume with small value added. Once you admit the need for deductions, the rich hire armies of lobbyists and make sure that hidden in that mountain of rules and regulations defining how deductions are to work, are their special little loopholes that they can drive a Rolls Royce through. Under the NAT, activities are not taxed, therefore there is NO NEED FOR DEDUCTIONS. It can be a genuine flat tax. 2) Assets are harder to hide than transactions. Transactions are EVENTS which means they don't necessarily leave a trace or record. Assets are POSSESSIONS which exist across time. Even abstract properties like stocks and partnership shares are meaningless as assets without some sort of legal record. Most highly valued assets are insured and/or their titles are recorded. 3) By eliminating productivity taxes, the NAT creates a great positive incentive to put assets to productive use. Once in productive use, it's hard to hide them. 4) The last resort of the incompetent and nearly brain-dead would be to sell off everything they can't make use of at reasonable prices to people who CAN make use of them (which is one of the main purposes of the NAT) and either move the money to Swiss banks or purchase diamonds and other easily- hidden assets of high value. This is actually a very good thing. What you are doing in the final analysis is removing domestic power from capital welfare. A bag of diamonds sitting around in a secret safe isn't power -- control of assets needed for production and life is power. Other countries might not be too happy with the U.S. for dumping our parasites on them, but then they are getting cash at the same time as compensation. In reality, many foreign banks will receive these deposits and decide to simply turn around to reinvest them in the U.S. due to the greater investment opportunities of the NAT economy. ----------------------------------------------------------------------- Q: How does one value net assets for tax purposes? A: Recalling the NAT reform: The government should tax net assets, in excess of levels typically protected under personal bankruptcy, at a rate equal to the rate of interest on the national debt, thereby eliminating other forms of taxation. Creator-owned intellectual property should be exempt. Net assets are simply the assets you own minus the liabilities you owe. The liabilities you owe are counted as assets owned by those to whom you owe the liability. There are a number of ways to solve the NAT assessment problem. The literature on property value assessment is voluminous and easily available. Real estate is only one kind of asset. Just about any approximation of asset value in a NAT would yield a tax system superior the current forms of taxation. Of course, some methods of assessment would yield NATs that were superior to others. An interesting method used by the Chinese was to allow the owner to self- assess. If the government thought the owner was undervaluing the asset, it could purchase the asset at the owner-assessed price. This "fair compensation" is at the basis of the right of eminent domain. Such a NAT assessment system has a constitutional basis (in the 5th amendment). Something which is more difficult to say about the income tax considering the shady circumstances surrounding its enabling amendment. However, it would be better to leave the government out of the decision. Simple market dynamics are probably the ideal method of asset valuation. You estimate your assets' values and then if someone wants to buy them at that value, the government exercises its right of eminent domain to force the transaction. Naturally, these transfers of ownership must be allowed to occur in a commercially reasonable manner in all other respects. Also, the fact that people would tend to over-value their assets, so as to discourage purchase by others, is NOT a flaw in this form of assessment. Everyone would experience the same incentive and would, therefore, share about the same burden of taxation as they would under a "perfect" assessment system. There would be some differential tax relief enjoyed by those who were actively trying to liquidate their assets, since they would lower the assessments as a means of expanding their market. But I want to reemphasize, the chosen method of assessment could be no better then the current, highly politicized, methods of real estate assessment for property taxation, and the NAT would STILL be superior to the current tax system. ----------------------------------------------------------------------- Q: Taxing wealth seems to be an obvious thing to do, yet I've never heard of it being seriously considered before. Why not? A: To quote from "A Tax On Wealth: An Alternative to Revolution in America" by Mortimer Lipskey: Income is taxed; wealth is ignored as if it never existed. It is all a reflection of the cloak of sanctity that has been thrown around wealth -- wealth the unmentionable, the ineffable. Perhaps that is the reason why there has been so little discussion of wealth taxes compared to other sources of revenue in the United States. This writer knows of only one serious book that deals with the subject. That book is "Taxation of Personal Wealth" by Alan A. Tait published in 1967 by the University of Illinois Press.... "The April Game: Secrets of an International Revenue Agent", published in 1973 by the Playboy Press, devotes a small section to a wealth tax. In 1963 there was one article by A.T. Peacock in the British Tax Review on the subject and one by M. Stewart in "Bankers Magazine". Peter Barnes made a passing reference to an annual wealth tax in a 1972 article in the "New Republic". That is about the sum total of bibliography on the subject of wealth taxation appearing in the last decade or so. Yet, the concept of a wealth tax is as old as civilization itself." This book was published in 1977. Recent searches have been only a little more fruitful. Conversations with economists about the NAT have consisted of one of two interactions: "No one is thinking along those lines. It must be a nonstarter." or "It's a great idea and you are doing a tremendous public service by promoting it, but we don't dare study it here." There really does appear to be a conspiracy of silence concerning wealth taxation, enforced by the wealthy who control those whose job it is to study economic options. Indeed, in economist Ravi Batra's book "The Great Depression of 1990" the author describes the solution to depression as a wealth tax but despairs of seeing it implemented short of revolution due to the kind of control excerised by wealthy individuals over the institutions that pay economists. ----------------------------------------------------------------------- Q: Has the NAT reform been tried anywhere? A: No. There have been various "wealth tax" systems proposed and some wealth taxes have even been implemented, but these have been very limited in scope. Interestingly, the countries with the highest standards of living in the world, such as Sweeden and Switzerland, also have the highest net wealth tax rates. ----------------------------------------------------------------------- Q: What are the advantages? A: We recover from our current economic downturn within months of enactment. Economic activity is no longer taxed. Monopolistic or hoarding behavior is strongly discouraged. No more depressions or extended recessions. Families are nurtured as are small businesses. Greater return on entrepreneurial investment. Greater investment in human capital. Greater investment in technology and intellectual capital. A more just and humane society. Tax simplification. Greater privacy (less total information reported to the government). A greater middle class savings rate. A more enterprising upper class. A restoration of the American Dream's credibility to the lower class. The U.S. budget, tax rates, net asset distribution and interest rates are linked together in self-correcting control system, without the need for political intervention. ----------------------------------------------------------------------- Q: What are the disadvantages? This is a radical reform. It will require a major readjustment of our business and legal system. Politically, it will be attacked, is represented and amendments will be pushed to make it as destructive as possible so that actual experience with the NAT is negative. In that way the NAT can be permanently discredited by those who are threatened by its disciplinary pressures. Other than that, most apparent disadvantages have immediately obvious counterbalances. For example, although the government ends up knowing a lot more about what you OWN, it also ends up knowing a lot less about what you DO, and since the things you do provide more information than the things you own, there is a NET gain in privacy. Another example is the loss of what might be called, for lack of a better word, our "royalty" or "nobility". The exquisite traditions and knowledge of old wealth do posses value which is protected from generation to generation by capital welfare. The loss of that "nobility" is replaced by the nobility of the creator in the form of the intellectual property exemption. On balance, it is the unique privilege and burden of America to be creative. We should treat the creator, not the acquisitor, as nobility in America. ----------------------------------------------------------------------- Q: When they taxed bank deposits in Texas, the bank deposits used to be pulled out of state before the tax date. What is to keep similar things from happening with the NAT? A: Assessment should be integrated over the course of the year. Having an "assessment day" is ridiculous. Any such date will lead to all sorts of pathological business practices. A NAT on a statewide basis isn't so pathological but since the total tax burden at the state level is small compared to the federal taxes (including FICA) one wouldn't expect to see a huge impact on the economy of those states. It is easy to make a mess of anything if you want to. Believe me, powerful interests don't want this tax because it makes them get off the usury dole and back to work with their capital. They will want to hang all kinds of destructive features on the NAT so they can portray it as an economic disease instead of a cure. When the NAT is being legislated, watch out for lobbyists advocating an "assessment day" or the removal of language specifying that assessment shall be integrated over the course of the year. They represent the enemy. ----------------------------------------------------------------------- Q: Most taxes are based on "ability to pay." With the NAT you tax assets, but you PAY in cash. How can you pay with some acres of land, a share in a building, part ownership of a corporation? A: The net present value calculation states that an asset's value is proportional to its combined casflow and appreciation rates, discounted for risk and the Treasury rate. All of the assets you mention produce either the cashflow or the appreciation predicted by the net present value calculation. The taxpayer can pay directly or leverage against the appreciation. The taxpayer can even opt to defer payment and, in effect, borrow from the government at the treasury rate with that counted as a liability. Forced liquidation only takes place when the net assets of the taxpayer, including tax liabilities, approach the level of bankruptcy protection. ----------------------------------------------------------------------- Q: If you want too really go into theory, why not tax personal abilities, figuring that is an asset (divorce courts sometimes do)? In fact this is an old idea-the way it was originally done in the British colonies. A: This violates the principle of not treating people as property. People are not assets and have not been ever since we abandoned slavery, feudalism and debtor's prisons. Any investments made in people, such as education, health improvement or skill acquisition, would not be taxed under a NAT that is consistent with the founding principles of this country. The close association of bankruptcy protection to these basic American values, and the ability to obtain a statistical measure of its level, is why that is the definition of the personal exemption. The case of divorce is interesting because of the unique nature of the institution of marriage. It is not a normal legal contract -- but a binding together of two lives. When a wife becomes a mother and gives up a career in support of her husband's family, it is quite clear she has a claim on his person. But this relationship is unique and definitely not the relationship between the government and the individual. ----------------------------------------------------------------------- Q: Aren't property taxes regressive due to the fact that small properties tend to be valued at closer to true value than properties of great value? A: The current real estate property tax is regressive for much more profound reasons than that: 1) It is a tax on GROSS assets, i.e.: regardless of your equity. 2) It taxes property that would typically be protected under bankruptcy proceedings -- i.e.: assets which are essential to one's life and livelihood such as housing and small business property. Number 2 is actually a special case of 1, because the maintenance of one's own person can be seen as a "liability" imposed by nature -- a debt that one must service in order to remain alive and healthy. This is ultimately the cleanest theoretic justification for a large personal exemption in a NET asset tax system and it eliminates regressivity. Income taxes, by taxing one's abilities, and sales, by taxing one's needs, and value added, by taxing one's productivity in the most direct sense, are far moreregressive than the proposed NAT reform. ----------------------------------------------------------------------- Q: Wouldn't this be a one time tax? No. The net present value calculation proves otherwise. Assets don't have a market value if they aren't capable of producing value over time. The NAT may be a "one time tax" for those who posses assets that are highly valued by others, but the owners don't have any idea what to do with them. The NAT will simply cause them to do what they would normally do in a "perfect" market -- sell. Their cash, or other form of payment, will then become subject to the NAT. ---------------------------------------------------------------------- Q: Aren't "the rich" those who have high spending power, which comes both from income and assets? If so, why not tax income? A: Only if the income isn't committed in debt service and if the assets aren't offset by liabilities. But even so, the person who is currently serving the marketplace and is therefore enjoying high income is proving that he is being productive with his assets. This is a desirable stateof affairs and one which we should not tax. ----------------------------------------------------------------------- Q: This sounds like Henry George's "Single Tax" on unimproved land. Hasn't this already been tried in much of Australia, New Zealand and western Canada? A: Henry George ignored all of the things, tangible and intangible, provided by the existence of civilization. He also ignored all of nature's assets except unimproved land. His was a reasonable attempt at a morally defensible tax system during an era in which most new wealth was being generated in the American West. However, it is entirely inadequate today. ----------------------------------------------------------------------- Q: What about double taxation? A: Since the NAT is a NET asset tax, you subtract all your liabilities from your gross assets. Assessing one's liabilities is nothing more nor less than going to the party to whom the liability is owed, and finding what they assess that liability at. In the case of corporations you do one of two things: 1) You simply don't treat corporations (or any businesses) as taxable people or households for tax purposes (although ownership shares in them would still be assessed). OR 2) You allow the outstanding shares, as well as debts, to be counted as liabilities. The first option is superior to and simpler than the second. ----------------------------------------------------------------------- Q: How will this affect our technology competitiveness? A: In effect, the NAT has an even greater impact than a universal research and development tax credit system. Commercial technologies will advance rapidly in entrepreneurial businesses started up by inventors. A variety of authorities from supercomputer entrepreneur Seymour Cray to the National Science Foundation, have repeatedly found that small, inventor-capitalized firms are the fountainhead of commercial technology in our society. The NAT elevates technological innovation to the status of a noble pursuit, which is its Constitutional place. As a result, we should experience a tremendous explosion in the rate of technological progress and therefore, our comptitiveness. ----------------------------------------------------------------------- Q: What about antitrust laws? A: Antitrust enforcement will become less necessary as the diseconomies of scale inherent in large corporate bureaucracies are exposed by their poor profit/net-asset ratios. Where economies of scale are actually realized, the NAT will favor the formation of joint ventures and mergers. ----------------------------------------------------------------------- Q: Will there be an impact on unfair discrimination practices? A: There will be many forms of unfair discrimination, not now recognized as such, which will be eliminated by the NAT. Unfair discrimination in the economy will be reduced without specific legislation or programs. Corporations bureaucracies can afford to discriminate against productive members of society only when they are anticompetitive. When mere size is no longer favored relative to unit productivity, businesses choosing to select employees on criteria other than their productivity will simply be put out of business by competitors. ----------------------------------------------------------------------- Q: How about competition with Japan? Can a bunch of small creative businesses really make it in the international market place where Japanese corporations act more like feudal kingdoms? A: Our problem is that we attempt to preserve and extend various remnants of feudalism which is to play the game on Japanese terms. For example, until recently, the "cradle to grave" employment practices of U.S. corporations led to feudal practices such as corporate retirement plans, corporate healthcare plans, etc. We have recently moved away from these benefits of corporate feudalism which would be a movement toward a freer societyexcept for the fact that we had no other institutions set up to take the place of feudalism. When the feudal lords are disloyal to their serfs, feudalism becomes unbearable and the serfs begin "job hopping". This is then taken as further justification to avoid feudal responsibility by the lords. A vicious cycle of decay ensues. In the U.S. this decay of loyalty between corporate lord and serf began in the 1970's when inflation allowed unethical lords to lower the real wages of loyal serfs without appearing to do so. The smart serfs recognized their loyalty was being abused and so chose to abandon their lords for others who were more than willing to take on smart serfs at a fair wage. This was the genesis of the decay of American corporate feudalism. So now we have lost our corporate feudalism and are groping to find something to replace it with in this country. Attempts are even being made to legislate corporate feudalism back into our business community, such as mandatory healthcare plans paid for by employers. Such attempts fail to recognize that feudalism is simply incompatible with the American character. While we are groping around for a new business paradigm, Japanese feudalism is alive and well. Naturally they are gaining on us. The NAT will provide us with the new American business paradigm, which urgently needs acceptance. It is a highly interconnected and redundant network of small to medium sized businesses that form and dissolve based on the requirements of rapidly evolving markets and technologies. In such a system, security resides not in the loyalties of a single feudal hierarchy, but in the social contract and statistics of the economy as a whole. The inefficiencies of bureaucracy are traded off against the inefficiencies of independence. Social mandates against unfair discrimination in the workplace are achieved, not through government regulation, but, through the ruthless justice of fair business competition combined with social programs creating equal opportunity for all children as they enter adulthood. The net gain of the NAT paradigm is in a society of free men with their greater incentives and creativity. APPENDIX IV MICROECONOMIC EFFICIENCY Imagine a sole proprietorship in which the proprietor simply offers advice to people from his home via his home telephone. He has no assets devoted to the business, except the investment he has made in his own education. The taxable assets of this sole proprietorship are 0 hence there is no NAT liability. The owner can simply declare the value of his assets to be 0 since there is nothing to purchase out from under him. He runs his business and makes his profits unimpeded by taxation or takeover of his assets, since there are none. If the business itself is to be treated as an asset, then one has to look at the investment entity that owns the asset, how accurately it calculates the net present value of the asset at the time of purchase, and what it does with the asset to improve on that value after purchase, since the capital gains in the asset aren't taxed under the NAT. Only in that way can you decide whether the relevant business is "efficient" or not. In other words, "efficiency" means you are getting a high return on your assets, however you define them. Here is a mathematical argument: Let's say ROR is the BEFORE TAX rate of return an entity can typically get from its assets including capital gains as well as profits. Let's say ITR is the income tax rate and ATR is the government debt rate and therefore would be the hypothetical asset tax rate. Let's say the entity owns net assets with a market value totaling MV. For simplicity, let's ignore the standard exemption and assume that the capital gains tax rate is the same as the income tax rate: The income I = ROR*MV Income tax IT = I*ITR After income tax income AITI = I-IT After income tax rate of return AITROR = AITI/MV Asset tax AT = MV*ATR After asset tax income AATI = I-AT After asset tax rate of return AATROR = AATI/MV Now we can ask: What how efficient does a business currently have to be in order to prefer the NAT over the current tax system? This is the same as asking: At what values of ROR is AATI>AITI? First let's set AATI=AITI: I-AT = I-IT ; Substituting for AATI and AITI I-MV*ATR = I-I*ITR ; Substituting for AT and IT MV*ROR-MV*ATR = MV*ROR-MV*ROR*ITR ; Substituting for I ROR-ATR = ROR-ROR*ITR ; Dividing by MV 1-ATR/ROR = 1-ITR ; Dividing by ROR ATR/ROR = ITR ; Subtracting 1 ROR = ATR/ITR ; Solving for ROR So if your BEFORE tax rate of return on net assets is greater than the hypothetical asset tax rate divided by the income tax rate, you want the NAT. If it is less, you want the present system. In terms of current AFTER INCOME TAX rates of return, this translates to: AITROR = AITI/MV ; Definition of AITROR AITROR = (I-IT)/MV ; Substituting for AITI AITROR = (I-I*ITR)/MV ; Substituting for IT AITROR = (ROR*MV-ROR*MV*ITR)/MV ; Substituting for I AITROR = ROR-ROR*ITR ; Simplifying AITROR = (ATR/ITR-ITR*ATR/ITR) ; Substituting for ROR AITROR = ATR/ITR-ATR ; Simplifying AITROR = ATR*(1/ITR-1) ; Collecting ATR So under current conditions (approximately) Setting ATR = .06 ; Interest on national debt is about 6% Setting ITR = .28 ; Income tax is about .28% (ignoring social security) AITROR = .06*(1/.28-1) AITROR = .154 In other words, if our current after tax (ignoring social security tax) income (including capital gains) is more than 15.4% of our net assets, we benefit from the NAT. We'll call the AITROR at which we prefer the NAT over the current tax system the "Critical AITROR". For each Critical AITROR there is an implied "Critical AITI" which is simply the level of after tax income one must be making under the current income tax system, in order to prefer the NAT. If we factor in the standard exemption (E) as well (still ignoring social security tax relief) the Critical AITROR is given by the formula: Critical AITROR = (1/ITR-1)*(1-E/MV)*ATR The Critical AITI is given by: Critical AITI = MV * Critical AITROR Now, Setting E = $100,000: Critical AITROR = (1/.28-1)*(1-$100,000/MV)*.06 For various values of MV (market value of net assets), then the Critical AITROR's (still ignoring social security tax relief) are: MV Critical AITROR Critical AITI/YEAR $0 - $100,000 0% $0 $150,000 5.1% $7650 $200,000 7.7% $15,400 $300,000 10.3% $31,200 $500,000 12.32% $61,600 $1,000,000 13.77% $137,700 These are the figures that are most relevant to wealthy retirees and other individuals who pay no social security. The most regressive of all taxes, Social Security payroll tax, is at 15.3% of your income (I) up to $53,400 (split 7.65% for you and your employer half and half). Taking this into account, for incomes (I) up to $53,400, ITR is close to 40%, so adjusting for social security, the critical AITROR without the exemption is only 9%. With the exemption the formula is: Critical AITROR = (1/.40-1)*(1-$100,000/MV)*.06 This formula is a good approximation for MV's up to approximately $500,000. As MV values rise beyond $500,000, the Critical AITROR factor of .40 decays, approaching .28. For each level of net asset ownership, there is a critical after income tax income (AITI) above which we prefer the NAT over the current tax system. This critical AITI is simply the critical after income tax rate of return one one's assets, multiplied by one's assets. Taking into account social security tax relief under the NAT, as well as the $100,000 standard household exemption on net assets, the critical AITI levels needed to prefer the NAT are: For various values of MV (market value of net assets), the levels of income we need to prefer the NAT over the current tax system are approximately: MV Critical AITROR Critical AITI/YEAR $0 - $100,000 0% $0 $150,000 3% $4500 $200,000 4.5% $9000 $300,000 6% $18,000 $500,000 7.2% $36,000 **************