**PROGRESSIVE IS REGRESSIVE ON INCOME TAX AND ONLY PROGRESSIVE ON BALANCE SHEET

**PROGRESSIVE IS REGRESSIVE ON INCOME TAX AND ONLY PROGRESSIVE ON BALANCE SHEET TAX**

April 14th, 2009

James Kroeger, in a comment on Economist’s View in response to “Just How Progressive Is the Tax System?” makes the point that the Republicans are producing worse self-taxation by their policies. My first objection is that people don’t make purely economic decisions, they make decisions that perpetuate their ability to produce income for their alliances and perpetuate that alliance. Prices are sticky, but so are organizations. (Which economists don’t seem to recognize often enough: value-neutral economics, or solutions that emphasize efficiency, miss the point of human cooperative activity altogether.) Traders seek profits from transactions. But business people seek to perpetuate the revenue stream from their alliances, because their highest cost is in developing those alliances and creating the habits within those alliances. Too much of economic theory has evolved either from traders or in response to political activity and at the expense of understanding entrepreneurs who are, disproportionately as members of the population, the people who PRODUCE that economy.

To: James Kroeger

James, I don’t disagree with your political point, but tax on an income statement is not progressive, while tax on a balance sheet is.

Many small business people suffer great risk and deprivation and reap the rewards of their investment all at once, then we penalize them for that hard work UNFAIRLY because of progressive taxation. If we taxed on balance sheets, allowing people their windfall so that they could secure their retirement, then taxed MUCH MORE AGGRESSIVELY those who accumulate wealth – NOT INCOME but WEALTH – then the entire Republican Party base would would happily turn to the Democrats. There would emerge a productive alliance in the country instead of an expanding divergence between the people who produce most of the jobs and take almost all of the risks (the small and medium business owners) and the majority of laborers – white, blue, and gray collared – and the capital, large business, and political classes, who are a minority playing a class warfare game simply because we tax income rather than real wealth.

Most economists still analyze income instead of wealth and refer to income as wealth, which is fallacious. It’s another side effect of the fact that taxation produces data that can be analyzed, which leads to more analysis and deduction based on faulty logic purely because the data to produce faulty logic is readily available.

Progressive taxation, if it prevents people from retiring on their own merits and loaning their money to younger generations so that the power of compound interest is preserved, is not progressive (redistributive is the right term). It’s actually destructive – socially and economically destructive.

This single issue is the primary source, known or not, understood or not, of the small- and medium-sized business community’s support of the Republican Party. Income taxation is a relic and a destructive one. Progressive taxation is sensible only if it is not actually destructive. It is only not destructive if it is based upon accumulated wealth, not income.

I’m entirely in favor of soaking the rich as long as it’s actually the rich we’re soaking, not the middle-class entrepreneur who has sacrificed for a decade to secure his retirement and with full knowledge of how important securing that retirement is. (There are also enormous side effects that distort capital throughout the economy because of this error in taxation.) Income has almost NOTHING to do with wealth. Wealth is important only because it can be used to lend money to younger workers, or to create jobs by funding more profitable status-related products and services.

Another politically important point: Entrepreneurs are in their roles primarily because they are better able to forecast the future and habituate activities that manufacture it. They are EXTREMELY sensitive to security because they live in a world of much higher personal risk-taking, inordinately higher total work hours, and much more emphasis on long-term horizons. They are entirely cognizant of taxes and are anti-government for this one reason: income versus accumulated wealth. Again, this single issue is what causes the Republican-small business alliance.

I might argue that we are really, by the process of progressive income taxation (which I’m arguing is regressive in practice) rather than progressive balance sheet taxation, unjustly taxing the middle class and depriving them of comfortable retirement, depriving the economy of its most knowledgeable investors in small business, which creates the majority of new jobs, and concentrating wealth in large corporations that become political rather than economic entities and who are, by virtue of their size, able to disrespect consumers and perpetuate market conditions that, we expect, should and could be neutralized by competition from smaller entrants. And what’s really horrendous is that we accomplish all of this destruction as a ruse to mask the fact that what we are really doing is taxing the middle class at an accelerated rate in order to prevent capital flight by the truly wealthy and in order to create class warfare from which the state can benefit by usurping freedoms in order to resolve disputes that have been created precisely by the process of taxation. At least, that’s how it appears.

From that viewpoint, the imbalance is HEAVILY slanted in favor of the ultra-wealthy and horridly, immorally against the middle class.

If, further, we look at the accumulation of wealth from the financial sector, which is created by the act of redistribution via fiat and credit money, then we are actually paying the wealthy to become wealthier at the expense of both the middle and working classes. We are privatizing wins and socializing losses on a massive scale.

So if your argument is a political one, I think that it is also a solvable one. Change to progressive balance sheet taxation rather than income taxation, then unify the country around a single majority political movement (at least fattening the middle and marginalizing the ultra-socially-active on both left and right), return the value of compound interest, secure more retirements, create more and better investors, decrease capital concentration in large corporations that don’t suit the wants of consumers because they create barriers to entry, and reduce redistribution to the finance class at the expense of the middle and working classes.

Small things in large numbers have vast consequences. (So to speak.)

Curt

2 COMMENTS

Erick

April 14th, 2009 at 11:29 pm

Taxing balance sheets is an interesting idea.

How will this impact speculative activity and venture capital? VCs tend to invest small amounts in many projects hoping that one creates a huge payoff. Do you see more people switching to this type of compensation structure?

Is the goal here to stimulate people with a large savings into creating structures and organizations that invest that wealth?

After a person saves enough for retirement, what role do you see him playing in society?

CurtD

April 18th, 2009 at 8:01 am

EricK

RE: “…After a person saves enough for retirement, what role do you see him playing in society?…”

I see that person using accumulated knowledge to apply that knowledge in the form of capital to his industry so that we may increase productivity. In other words, what people have been doing for a very long time: lending to the generations that follow, so that in youth we have opportunity, and in age we have security. Much more than this, but it’s the most direct answer to your question. People would band together, just as they do now, but even more so.

RE: “…Is the goal here to stimulate people with a large savings into creating structures and organizations that invest that wealth?…”

Yes. The emphasis is on the people with the KNOWLEDGE of industries needed to make such investments. WHat we’re doing now is putting our investment criteria in increasingly ‘ignorant’ hands. “Financializing” the process of investment, rather than developing knowledge necessary to make great investments. Or, as fellow Hayekians would say: “it’s a knowledge problem.”

RE: “…Taxing balance sheets is an interesting idea…”

Yes. It isn’t something I expected. The risk is of capital flight, which will keep downward pressure on taxation, but individuals who are social contributors, not by charity but by their tax payments, can claim status, and create a status competition. I don’t want to get into the sociology of urban environments but we have destroyed that social process over the past century and we probably need to recreate it, if we are going to have any society at all. This may not seem a ’scientific’ ambition, but it is. I’m just a bit short of time right now and can’t make that argument here. Taxing balance sheets rather than income statements is a better way of capitalizing the society. Also, the vast majority of people are subject to a taxation process that is highly costly, and where they don’t actually pay taxes at the end of the process.

RE: How will this impact speculative activity and venture capital

Capital becomes less expensive for everyone in the lower three quintiles, because there is less risk and more reward to the investor in the risk stages. (I’m assuming you understand the various investment strategies employed by the venture industry.) This should produce an environment where more risks are taken, in more industries, with lower herd behavior, and where each risk requires a lower return.

RE: “…Do you see more people switching to this type of compensation structure?…”

I’m actually trying to solve the credit-money versus sound-money conundrum: where credit money produces speculation and booms, but makes it possible to sized more opportunities to decrease prices and increase production than does sound money. Where credit money allows a citizenry in a nation state to compete against other citizens in other nation states without paying bankers the majority of the wins from production increases simply because of the scarcity of hard money, and instead capturing those wins in order to fund the government and social services. (The relationship between these statements may not be very obvious but it’s very important.) I would much prefer that the compensation structure be weighted toward productivity increases and profits than to speculative gains. Again for a variety of reasons. But I’d like to do that by decreasing downside costs, so that we can spend most of our efforts not on profiting from shifting around each other’s investment money, and siphoning off the herd, but by accumulating productivity increases in more places in the economy more quickly. (I hope that makes sense. I’m assuming a lot of knowledge on your end.) We have produced huge paper increases in wealth recently without those same increases in productivity. Therefore that wealth cannot actually produce what the ‘prices’ (asset values) tell us that they can. It’s just not possible.

An aside:

Politically, the divide between republicans (small business and social conservatives) and democrats (large business and labor, and social progressives) can probably be drastically narrowed if we converted from the Law,Tax and Income society to the Credit, Interest and Balance Sheet society. THe first is for farmers. The second for complex societies. And if we resolved that conflict of interest, by moving away from our existing model to the model I’m recommending, then it at least appears we would marginalize the radicals on both ends of the spectrum. It’s not like we’re doing anything new here in the contemporary world. These processes have been understood for a very long time. Class warfare of this nature simply leads to despotism and chaos. I’m suggesting that I might have produced a solution to the problem of the urbanization of man.