Beyond Capitalism

Capital. The rich have it and the poor need it. The poor work for wages while the rich can sit back and collect dividends and interest. Karl Marx declared the arrangement unfair. He had a point. But Marx’s solution was worse than the problem. Take capital out of the hands of the capitalists and put it in the hands of a central bureaucracy and alienation increases. Plus you usually get a capricious god-emperor and a few years of mass starvation. Gulags and slave labor camps make capitalist sweatshops look pretty good.

Of course, many modern Marxists would claim that Marxism has never been tried, that what the Soviet Union and similar states practiced was State Capitalism, not Marxism. Well, the Soviets never got to communism, but Marx thought something akin to what the Soviets tried was the next step to communism. Methinks these modern Marxists are closer to the truth than Marx himself.

Freedom for all requires pushing capital down to the masses. A worker with his own tools is a free agent. The Marxist and the Bible agree on this: freedom of speech, religion, voting, etc. are mere “bourgeois freedoms” – important but incomplete. Freedom includes financial freedom, owning your own farm or business – or at least being able to shop employers so you are not a wage serf. A truly free society is one with an economy dominated by sole proprietorships, family businesses, partnerships and human scale corporations.

Capitalism will always be with us. Where tools are expensive, we must concentrate capital. And capitalism is usually the better way to allocate and manage these capital concentrations. Large scale worker democracy is often inefficient, and government ownership downright dangerous.

But both Marx and defenders of modern capitalism overestimate(d) the inherent power of centralization. Adam Smith wrote at a time when economic centralization was just getting started, when the returns on centralization were enormous. Marx extrapolated from Smith and assumed that the optimal economy was complete centralization – a gigantic error!

The need to centralize waxes and wanes by industry. Consider flour. Once upon a time, people ground grains by hand between stones. Then waterwheels powered the process, so people brought their wheat to central milling facilities to grind it into flour. We generally do so today, but more out of habit than necessity. With electric motors, you could have fresh flour ground on demand by an affordable kitchen appliance, and some hardcore foodies go that route. Most people don’t bother because they are used to bread made in giant automated bakeries. But once again, technology is turning full circle: you can buy an automated bread bakery that fits on your kitchen counter.

Computers were once centralized. Then the technology became cheap and personal computers became the norm. I am writing this chapter on a machine more powerful than the multimillion dollar supercomputer I shared time on in graduate school.

The music industry was centralized until recently because recording studios were expensive, and distribution channels limited. Top musicians put themselves under contract in return for recording facilities and promotion. Nowadays good quality recording equipment is within the range of high school students who flip burgers during the summer break. Distribution is trivial over the Internet. CD burners are standard equipment on even cheap used computers. Music is becoming a freelance business again.

Computerized machine tools and computer aided design tools have plummeted in price. Were it not for cheap labor in China, we might already see human scale manufacturing businesses displacing the industrial behemoths of old. We used to have over a hundred auto manufacturers in this country; we might again. The collapse of GM and Chrysler could be the start of something good.

We could have an economy which is neither capitalist nor socialist. We could have an economy which is dominated by human scale firms: family businesses, partnerships, small corporations, etc. It’s a matter of taking advantage of technological trends which have already happened, and discontinuing government policies which lock in the 20th Century economy. (This is not to say that large scale capitalism can or should be eliminated. Big business has is place. Likewise, some large scale government owned enterprises have their place as well. But both could be relegated to being minor features of the economy.)

To get back to a human scale economy we need to get rid of artificial economies of scale: unnecessary bureaucratic overhead and high transaction costs. We need to rethink our education system to prepare the average person for the possibility of being a free agent; the basics of business should be part of the core academic curriculum. We need to reform the tax code so it doesn’t encourage people to be wage serfs their entire lives; most especially, we need to disconnect health insurance from employment. Finally, we need to get cheap capital down to the smallest businesses. The big corporations succeed in part because they can afford to be less efficient, since they have access to cheap capital. Smaller businesses pay higher interest rates; startup corporations need a huge upside to justify venture capital or an IPO.

And the poor pay high interest rates on just about everything.

(This article was originally the intro to my updated Loans for the Poor. I decided it was a bit too long as an intro for said chapter, but it kind of stands up well on its own. Could even start new series…)

Marginal Tax Rates

I have been toying around with the idea of a free money allowance as a prebate for a unified flat income tax. The numbers are interesting, if a bit disheartening. I had hoped to push a 25% flat rate with possibly a higher rate for the really rich. (As long as Warren Buffet, George Soros, and Hollywood vote Democrat it is fair to say the really rich could use a bit more taxes.) Alas, it looks like a higher rate would be needed to break even for the well off.

Anyway, I think you will find the current tax rates to be instructive. I took five of the federal income taxes collected on working class. (I omitted unemployment insurance.) Then, I did a bit of algebra in order to to treat employer portions of FICA and Medicare as part of salary in order to be able to compare a single flat tax with the current array. For tax filers who simply take the standard deduction and personal exemptions, the following tax rates hold.

For single taxpayers:

Nominal Income Total Income Payroll Tax Income Tax Total Tax Average Rate % Marginal Rate %
14500 15609 2219 1209 3427 22.0 28.1
25000 26913 3825 2784 6609 24.6 28.1
30000 32295 4590 3534 8124 25.2 28.1
40000 43060 6120 5269 11389 26.4 37.4
50000 53825 7650 7769 15419 28.6 37.4
60000 64590 9180 10269 19449 30.1 37.4
75000 80738 11475 14019 25494 31.6 37.4
100000 107650 15300 20687 35987 33.4 40.2
200000 209522 19043 49912 68955 32.9 35.4
300000 310972 21943 82912 104856 33.7 35.4
500000 513872 27743 151366 179110 34.9 37.4
1000000 1021122 42243 326366 368609 36.1 37.4
2000000 2035622 71243 676366 747609 36.7 37.4
5000000 5079122 158243 1726366 1884610 37.1 37.4

For a couple without children:

Nominal Income Total Income Payroll Tax Income Tax Total Tax Average Rate % Marginal Rate %
14500 15609 2219 720 2939 18.8 23.5
25000 26913 3825 1818 5643 21.0 28.1
30000 32295 4590 2568 7158 22.2 28.1
40000 43060 6120 4068 10188 23.7 28.1
50000 53825 7650 5568 13218 24.6 28.1
60000 64590 9180 7068 16248 25.2 28.1
75000 80738 11475 9318 20793 25.8 28.1
100000 107650 15300 15538 30838 28.6 37.4
200000 215300 30600 42200 72800 33.8 40.2
300000 317593 35186 74372 109558 34.5 35.4
500000 520493 40986 142753 183739 35.3 37.4
1000000 1027743 55486 317753 373239 36.3 37.4
2000000 2042243 84486 667753 752239 36.8 37.4
5000000 5085743 171486 1717753 1889239 37.1 37.4

And for a family of four (with no child tax credits applied; I am not up to date on the latest law on this score):

Nominal Income Total Income Payroll Tax Income Tax Total Tax Average Rate % Marginal Rate %
14500 15609 2219 0 2219 14.2 14.2
25000 26913 3825 1040 4865 18.1 23.5
30000 32295 4590 1540 6130 19.0 23.5
40000 43060 6120 2973 9093 21.1 28.1
50000 53825 7650 4473 12123 22.5 28.1
60000 64590 9180 5973 15153 23.5 28.1
75000 80738 11475 8223 19698 24.4 28.1
100000 107650 15300 13713 29013 27.0 37.4
200000 215300 30600 40156 70756 32.9 40.2
300000 317593 35186 71963 107149 33.7 35.4
500000 520493 40986 140198 181184 34.8 37.4
1000000 1027743 55486 315198 370684 36.1 37.4
2000000 2042243 84486 665198 749684 36.7 37.4
5000000 5085743 171486 1715198 1886684 37.1 37.4

As we can see, the marginal rates get up to 28% rather quickly, and peak at a bit over 37%. Dick Armey’s call for a 17% flat tax is a huge giveaway to the rich compared to current law.

I crafted a flat 40% tax plan which merged all these taxes which comes out as a tax cut for everyone short of around $200K/year/individual by having a $12,000/year prebate. Not sure how this would come out for the treasury, but if we count the prebate against all welfare and Social Security benefits, we could get most people off those other programs.

Of course, those who game the system pay less than the rates above. For example, state income taxes alone take many high income earners above the standard deduction. Throw in mortgage interest and property taxes and my estimate for the professional class (doctors, lawyers, full professors, engineers, etc.) is low. Furthermore, pay in the form of health insurance is not taxed. (Or is that was? I am not up on the details of Obamacare.) And professional class workers can defer income through 401(k) plans, HSAs, etc.

So my evil plan may be a wash for professionals. But even if it is a wash monetarily, it eliminates the need to play the government’s game to keep your cash. Those who want to save to start a business instead of save for retirement. We could expect a mini boom in entrepreneurship. Furthermore, employing others would much easier. One simple tax to collect. Multiply by 0.4 and send it in.

What think ye?