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20 Jun 2016 | Written by

The Agenda for Progressive Policy: Social Offsetting can make Capitalism more socially responsible

Further Reading:

From Here to Prosperity

From Here to Prosperity
by Thomas J. Burgess

Businesses bring together land, capital and labour to generate profits, so building wealth. Currently after retention for investment and cashflow, this profit is generally allocated to shareholders, but not all the stakeholders. The wealth that we have jointly created could be shared more equitably through encouraging greater corporate responsibility. This can be achieved by changing the way public revenue is raised from business, so that the wealth created can benefit all, not just the few.

A charge on corporate wealth seems entirely justified as it returns benefits to the community and it is the basis behind our current system. However more can be done to minimise greed, and maximise success for the benefit of all. I propose a scheme whereby the tax on company profits becomes a Corporate Social Contribution (CSC) where companies make a contribution to government funds based on their corporate wealth (measured by profits and value) but where social responsibility is encouraged through ‘social offsetting’.

Socially responsible companies will have the opportunity to pay less of their profits/wealth to public revenue. This encourages social responsibility while still respecting the profit motive. It could put an end to low wages, excessively high salaries, and the distorting influence of lobbying and vast political contributions, as well as eradicating tax avoidance and many more ‘anti-social’ corporate activities that have made so many both metaphorically and literally sick. This would encourage business to act in the interests of the wider community not just the shareholders.

The taxes due can be reduced or offset according to a clear code of proven social responsibility compliance undertaken by the company. This would improve the lot of the real wealth-creators, it would also encourage companies to fulfill their responsibilities to society. Their stakeholders include not only investors, lenders, employees, suppliers and customers, but also the community, including government, which makes it possible to do business by supplying infrastructure, maintaining law and order, providing education and health services.

The wealth gap is evidence that the current system is flawed, out of date and fails to meet the needs of a multi-stakeholder society. So I am proposing that companies make a corporate contribution to the public services and infrastructure that is vital for them to thrive. This does not mean taking from a company what rightfully belongs to it, nor does it overlook the need to acknowledge and applaud companies that are already socially responsible but, in essence, the aim is to harness enlightened self-interest: doing well by doing good.

The main method of raising government public revenue from business will continue to be based on profits. The road to profitability can be a long one and there is no point in choking off a company that is slowly building a new market, but once it is making a profit, the next decision is how that profit should be used. It could just go to shareholders; it might be used to build savings or go into research and development, or it might fund new equipment or expansion. All and any of these are perfectly legitimate but it should also be used compensate stakeholders. Short-termism is generally bad; it fosters exploitative employment practices and rewards rapacious speculation, and is directly at odds with the concept of ‘Income for me/ wealth for we’. By cutting payroll tax, introducing a Land Usage Charge, which both acknowledges the social contribution to existing site values and also captures the uplift in site values from new infrastructure improvements, making them self-funding, and using mechanisms such as ‘social offsetting’, we would aim to create the conditions for profitability and corporate social responsibility.

Wherever possible, covering the social and environment costs of doing business should be achieved through financial incentives rather than greater regulation. Some taxes are levied to improve or compensate for carbon emissions or waste and these are linked to mechanisms such as carbon offsetting. Thus we already link tax and corporate social behavior but we could go further using ‘social offsetting’ to help close the wealth gap.

Instead of perpetuating payroll taxes and corporate welfare such as the government topping up poor wages, a charge on company profits could be used to rebalance employment and compensation practices. For example: by linking their contribution to the proportion of employees on below an accepted living wage; the greater the number below the living wage, the higher the tax charged, and vice versa. Since the money would have to be spent one way or the other most employers would opt to increase wages rather than pay more tax. This would alter the perception that restricting earnings to the statutory minimum is somehow sanctioned by the state and society. It would improve the lot of many poorly paid workers, helping to narrow the pay and wealth gaps. At no extra cost this would bring money into the economy helping to fuel commerce. And, importantly, it would reduce calls on welfare and in-work benefits paid for through the tax system. The provision of training, child care and other facilities at work could also be rewarded by lower tax, to reflect the resulting benefits and savings to the community.

Similar mechanisms could also be used to counter corporate behavior that exacerbates the wealth gap, such as making huge bonuses part of general compensation packages or giving institutional shareholders massive dividends while cutting pay. At its crudest, this could be done by mirroring these payments with an impost: matching bonuses or dividends with an equal amount in tax. For every extra million paid to an executive or shareholder a million would go to the community. Shareholder pressure would then be far more likely to curb the excesses of fat cat directors (we are starting to see some kick back here), who are often in control of their own pay and rewards but also remain answerable to general meetings. If these rises and bonuses were paid anyway, the public would benefit from the ‘greed tax’. Deferred equity is often used to avoid paying income tax on golden handshakes, golden handcuffs and other gold-plated arrangements typical of the ‘heads I win, tails you lose’ approach to remuneration that helps concentrate wealth. These shares carry no real risk to the holder because they make no real investment. Shares and options used this way have a face value and would be covered by an asset tax. While any rise in their value would be treated as capital gains, any fall would be an opportunity loss, not a real one.

It should be the aim of us all to encourage corporate social responsibility. Companies will be able to reduce their Corporate Social Contribution through social offsetting if they implement socially responsible practices. These could include:

• Diversity in pay levels

• Payment of living wage

• Company shareholding schemes

• Active schemes to reward other stakeholders

• Disproportionate political contributions

• Flexible working options

• Positive practices regarding part-time workers

• Use of renewable energy

• Staff welfare, pensions, birth leave, compassionate leave

• Fair dividend levels/shareholder distribution

• Training plans

• Childcare facilities/funding

• Retaining profits in countries where it was created

• Signing up to an international fair tax agreement

Basically ‘good’ companies will contribute less in public revenue as they are making a social contribution which otherwise the government would have to undertake. These ‘good’ companies are saving the government and taxpayers money by taking on responsibilities themselves and giving their stakeholders, mainly in this case the workforce, more freedom. It would not be too difficult to set these socially responsible standards as there are already many rating companies set up to do just this. This could be the basis for a code for a compassionate and socially responsible capitalist system and provide significant incentives for companies to act in the best interest of stakeholders not just the shareholders.

If you would like more details of exactly how this could be done and how we could all work together to create a sustainable economy with greater social justice then have a read of my new book: From Here to Prosperity

Read the introduction to Tom’s series of blog posts here.

Read Making Wealth Fair, Tom’s first blog post here.

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13 Jun 2016 | Written by

The Agenda for Progressive Prosperity: Making Wealth Fair

Further Reading:

From Here to Prosperity

From Here to Prosperity
by Thomas J. Burgess

public revenue without taxation

Public Revenue Without Taxation
by Ronald Burgess

The State of Freedom and Justice

The State of Freedom and Justice
by Michael Horsman

In the first in a series of five posts introduced here, the author of our latest release, From Here to Prosperity, explains how to reduce wealth inequality by shifting to a more fair tax code.

There is plenty of rhetoric about the wealthy paying their fair share of taxes, but there is very little about what is fair and the details of how we could make this happen. The way to be fair is to shift the tax base away from income and more to wealth. I outline here one approach as to how such reforms could be implemented.

The wealth of a country is not created just by entrepreneurs, shareholders and landowners but by the real stakeholders: the majority. We are all the wealth creators. We do the work, take the risks, increase the jobs, grow the demand. In short, we create wealth.

This is why a fair economic system needs to ensure that those who create the wealth, share in the wealth. There is moral argument that we all create the wealth and therefore it should be shared more equitably. The tax system can be a tool to achieve this.

If everyone had an opportunity to share in the wealth they created, they would be able to accumulate wealth and feel more secure about their future. Once you have accumulated wealth, you have choices, you have freedoms; you are in position to financially contribute to society to make it better for all. The quality of life for many would be improved even with just a little wealth.

There is a big difference between creating wealth and accumulating wealth. People can accumulate wealth by buying assets especially those that that rise in value. In order to buy wealth you have to have money, you have to have enough money to live off so that you have some left over to buy wealth!

Under the current system this then entitles you to be the beneficiary of any increase in value of that wealth asset even though the increase in value has nothing to do with your effort and has in fact been increased as a result of the work of others. So it would be fair that some of the wealth you have accumulated is in fact returned to those that helped create it.

If we agree on the principle that we all create the wealth but it is currently accumulated by a few, then a convenient way of returning the public share back to the public is through taxation. This could be achieved by what has often been described as wealth tax, a contribution to public revenue based on the value of personal assets which I would prefer to call a Personal Asset Contribution (PAC). The top 1% own assets worth $30 trillion, that’s 35% of US household wealth, that’s the folks with over $8.4million in assets so an annual tax of just 2% on these assets could raise $600 billion. This proposal causes no hardship and helps share the wealth we all help to create instead of too much being accumulated by too few.

Private wealth is expected to grow 4% by 2019, so if you have $8.4 million in assets you could realistically expect that to increase in value by $336,000 per year, 6.5 times the median wage. Then if half that (2% of net asset value) $168,000 went in tax that is hardly any hardship or impact on lifestyle. This will cause no adverse effect on daily living standards, as it will only affect those who already have a very comfortable lifestyle. At the same time it would enable considerable relief to the majority of the population and contribute towards the wealth they all created, being shared more equitably and take funds out of storage significantly boosting the economy, creating jobs and opportunity for all by returning funds into circulation. It will also mean that the level of public revenue is maintained but without the “squeezed middle” paying a damaging percentage out of their earned income.

Such a proposal is not restricted to those with the most progressive views. Professor Ronald McKinnon of Stanford University outlined the “Conservative Case for a Wealth Tax” in the Wall Street Journal, January 2012. He wrote that “there is a strong case for reforming income taxes—both the personal and corporate—to increase efficiency and generate more revenue. Because wealth will generally present a much larger tax base than income, tax rates can be kept very low and still raise substantial revenue.”

As Franklin D. Roosevelt said in 1936 “Here is my principle: Taxes shall be levied according to ability to pay. That is the only American principle.”

The other aspect of ensuring wealth is shared more equitably is through the reform of property taxes which could enable infrastructure investment to be self financing. This can described in more detail in another article.

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