The Chief Threat to our Great Experiment: Can we reduce disparity without killing market enterprise?

The difficulty of maintaining a civilization of empowered citizenship -- the "diamond-shaped social structure" about which I often speak -- was well described by the famous historians  Will and Ariel Durant, in The Lessons of History.  

"…the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”   

Consider the efficiency with which the Durants convey multiple ideas there! First, that an open, citizen-based system that I call "diamond-like" may have many of the advantages that Adam Smith wrote about -- e.g. vigorous competitive-creativity and the rapid delivery of positive-sum outputs. But such enlightenment systems as markets and democracy and science are inherently unstable. Unless carefully tuned and maintained, competitive systems inevitably get suborned by cheaters.  Those who may have gained power or position through legitimate competition, but who then connive and use that power to warp all further competition in their favor.

It's called human nature and it is what Adam Smith and the American Framers tried new methods to prevent under moderate regulation, so that mild-creative-competition might continue.

Durant and Smith knew the natural outcome of such cheating, which happened so often in human history that it is the default -- that flat diamonds of egalitarian-competitive citizenship collapse into traditional pyramids of inherited power -- e.g. feudalism -- as happened in  99% of human societies across 6000 years..

Durant went on to say, however, that the people themselves can choose to resist!  When they see this slump taking place, they can either choose calm deliberation or simplistic anger. Reform or revolution.

History shows far more cases of the latter.  And the vast majority of emotional, violent revolutions do not turn out well for Smithian Enlightenment.  Dogmatists rage and raise the ante of ideological fervor, stoking heat instead of light.  The French, Russian, Chinese and most African revolutions followed this pattern, killing the oppressor oligarchs, only to establish new ones, and one result was to spread misery for benighted generations.

Those who are pushing hard to smash our Smithian diamond into a feudal pyramid should take note, and consider that they are not as smart as they think they are, if they are blithely ignoring the possibility of tumbrels.

The alternative that Durant cites would be the relatively rare examples of calm reform that can occur when mature deliberation takes hold, as when Cleisthenes (508/7 BC) led in the creation of the Athenian democracy, or when Themistocles and Pericles kept that democracy laser-focused on the greater good.  Or when the American Framers performed acts of severe 'leveling,' seizing and redistributing a third of the land in the former colonies, so that the new republic would be born in a spirit of lively egalitarianism, instead of cloned-European lordship.  Or when the slave-o-crat plantations of the South were likewise redistributed, in ways that did not undermine the competitive spirit.  Or the far more modest diamond-building activities propelled by Franklin Roosevelt, that left the U.S. both rather-flat and spectacularly entrepreneurial, at the same time.

We face Durant's choice, as that flat social structure -- emphasizing a dominant-empowered middle class -- is now under harsh pressure and threat from all directions. When the pressure becomes unbearable, will Americans respond as their ancestors did?  By calmly performing the next necessary tweaks and fine-tunings… while keeping faith with the framers and with Adam Smith? Encouraging the cornucopia that spills from open, joyful competition?

When disparities get much worse, the other option, of vengeful radicalism, will rear its head, especially among those masses on today's right who Rupert Murdoch believes (naively) he has under tight rein and permanent control. He should know better… but human nature is what it is.

It's not too soon to be working hard on those moderate, rational reforms.

== Stormclouds ==

In a harbinger of things to come, an op-ed piece in the Wall Street Journal, by Roman Hatchuel, describes growing calls -- even among the world's financial elite -- for a re-adjustment of taxes to demand more from the very rich.

Very few intelligent people any more assert the never-right and always-wrong nostrums of Supply Side "economics" - asserting that mega tax largesse for the top 0.01% will translate into high velocity investments in new goods, services and productive capacity. All sane economists can see that the supply side experiment (sometimes misleadingly called "trickle down") has miserably failed. Spectacularly failed, contributing the western nations' fast-rising indebtedness -- now at an average of 110% of GDP.

Some, such as billionaire investor Bill Gross, have been calling for marginal, top-earner income tax rates to return to levels that existed when the economy did best, when entrepreneurship peaked and when the middle class was growing healthier yearly -- not quite the levels of Franklin Roosevelt, but in that range.  A partial measure would be to accept the end of special, fat-cat tax breaks which Democrats in Congress have asked-for in exchange for the GOP's demanded entitlement reforms.  (The demmies are willing to horse-trade, but the goppers are intransigently defending their sponsors, knowing that infamous resource-extraction tax-breaks would be first on the block.)

Some degree of consumption or VAT tax may be an important part of the mix, though this not only affects the already-hurting middle class and poor, but also has the unfortunate effect of reducing the velocity of money.

Much more helpful would be to go after the lowest velocity money of all.  Not so much high incomes as existing and passive pools of staggering wealth.

In October the International Monetary Fund or IMF - not exactly a center of socialism - floated a bold idea that didn't get the attention it deserved: lowering sovereign debt levels through a one-off tax on private wealth. As applied to the euro zone, the IMF claims that a 10% levy on households' positive net worth would bring public debt levels back to pre-financial crisis levels. Indeed, this notion was broached in the US by several billionaires including -- shockingly -- Donald Trump.

The reason to go along is simple. Your billions become worthless if the society that helped you win them collapses. Of course, this is one of the chief determinants as to whether a billionaire votes for and supports Democrats (Gates and Buffett, for example) or actually believes that all the goodies will still flow, once democracy has been stifled into a feudal social order.

== A transparency alternative ==

The wealth tax is interesting, though my own suggestion is a bit different. Instead of seizing assets (which the American Founders did) or raising rates dramatically (per Franklin Roosevelt), let's try something uniquely modern, with-it and in tune with transparency.  It must be done worldwide, but it would not be considered quite as radical as asset taxation.  Indeed, it is blatantly the fairest reform possible. 

Simply pass a universal world treaty declaring:

If you own something, you must openly avow and say that you own it. 

That's it. Any property that has not been claimed by a human being, family, or clearly tracked group of humans within three years will revert to the state and be re-sold to pay down the public debt.

Think about it.  What does "ownership" mean, if you are unwilling to state, openly, "I own that"?  So many problems in the world can be attributed to murky title, from peasants abused by a nearby lord to an oil tanker that befouled beaches in Brittany with no owner ever held accountable, because of deeply nested shell companies.

Indeed, no act could ever benefit small stockholders and market capitalism more than for shell corporations to be banned if they are more than three layers deep, forcing hidden puppeteers to come into the open. In other words, no object or land on Earth should be considered owned unless -- just three or less layers down -- you find real, accountable human beings.

Naturally, this reform-treaty would have immediate effects:

1) A whole lot of property would simply be abandoned by owners with murky, illicit or coerced title, or by those who acquired it inappropriately. Like drug lords. The immediate effect would be that one-time pay down of debts.  Indeed, by some estimates the pay down would be so great that tax rates could go down rather than up.  In other words, legitimate property owners should love this plan!

2) The second beneficiary would be many of the world's poor, who would suddenly find themselves vested in land and goods that local lords did not want to publicly claim (for a wide variety of reasons.) Sure, there would be backhanded deals and many of those poor men and women would remain beholden under some degree of informal fealty-compulsion. Still, despite all the nods and winks and collusions, the fact remains; a whole lot of poor people will be better off than before. Especially if many nations respond by enacting reforms like those promoted by the great Hernando de Soto.

3) Okay okay. The third beneficiary group is obvious.  Lawyers.  Just openly declaring "I own that," will result in plenty of other humans declaring "Oh no you don't; that's mine!"  The treaty would have to carry an accompanying onus for all nations to set up fair methods for arbitration of a tsunami of disputes.

And yes, libertarians and conservatives would be right to fear that -- in some nations -- a spirit of radical leveling might take advantage of this sudden transparency of ownership.  To which I respond… so?  Those who try to handle it smoothly and fairly will experience a burst in active market enterprise, as happened in Peru, when de Soto's property vesting reforms took hold.

Those who cater to socialist mobs will experience a few years of recession… then human market forces will re-assert.  BFD.

4) We all would win, however, as capitalism starts to work much better!  As state taxation regimes that are based upon open and publicly accountable knowledge take over from murky cheating.  As Swiss-style banking secrecy is shattered and developing nations get back trillions stolen by kleptocrats.  As the theories of Smith and Hayek finally see fruition in an open system in which all of the players know most of what they need to know, in order to make good decisions.

Of course, any wealth tax would need a reform such as this to happen first, in order to work at all!  The irony being that, once this "I own that!" treaty was in play, the wealth tax would probably prove unnecessary at all.

See also: Solving World Debt Through Radical Economic Transparency.

== One more absolutely necessary tax ==

Oh… I'd also institute worldwide a very tiny, 0.1% financial instruments transaction fee.  It could save the human species from extinction and do more for our children than any other levy!

And you can read the reasons here.