Shann Turnbull
How can politicians win government to cure the current levels of inequality, identified by Thomas Piketty[1]? A compelling counter-intuitive approach that is not considered by Piketty is to reduce taxes. However, the reduction would be conditional upon the rich sharing their assets with the poor.
The distribution of assets rather than income is not taught in economic courses. However, it has been practiced from ancient times. The Bible describes the year of Jubilee where debts are forgiven and land ownership redistributed. Over the centuries investors have built and owned infrastructure projects like toll bridges and roads that are later transferred to public ownership. They are described as Build, Own, Operate and Transfer (BOOT) projects.
As a serial entrepreneur the author has obtained millions of dollars offering investors limited life investment contracts[2]. Limited life is normal in business. Most productive assets wear out and all intellectual property rights terminate. Patents may only last 20 years.
Corporations are a crucial business exception. This is because corporations were developed by English Sovereigns in the 17th century to privatize the cost of empire building. After their war of independence, US states adopted time-limited corporations as then found in Europe. This was to avoid corporate re-colonization[3]. It also avoided overpaying investors to generate inequality.
Around 40 per cent of Australian business is foreign owned. This can drain cash out of the economy many times greater than the money invested. As noted by Professor Penrose it introduces 'acceptance of an unlimited, unknown and uncontrolled foreign liability'[4].
It means investors can get overpaid in perpetuity. Domestic national income available to Australian citizens is reduced and so inequality exacerbated both domestically and internationally. To makes matters worse the Reserve Bank notes: 'that income accruing to foreigners is understated and national income is overstated'[5].
Another fundamental problem is that accounting doctrines do not identify and so report investor overpayments. What is not reported is not noticed by economists or managed by politicians. An exception was Dr Evatt. He stated that General Motors Holden dividends were 'about 8 per cent of the dollar export receipts in the Australian balance of payments for 1954-55'[6]. They were over 20 times the value of what GMH had invested[7].
Inequality could be substantially reduced to increase the wellbeing of all Australians by 'buying back the farm'. This could be achieved on a basis that would still attract more foreign investment by using tax incentives. The tax incentive would only be available to foreign or domestic investors that entered into BOOT type investments. Instead of ownership being transferred to the government ownership could be transferred to voters to reduce the cost of welfare and so the need for taxes. Privatising welfare decreases the dead weight cost of government and increases personal freedom.
To become eligible for the tax incentives, corporations would need to create a stakeholder class of share. Ownership rights of the shares issued to investors would automatically transfer at say 5% per year to the stakeholder shares. In this way 100 per cent ownership would transferred to Australian voters in 20 years to eliminate any 'unlimited, unknown and uncontrolled foreign liability'.
It would make good business and political sense to allocate some stakeholder shares to employees of the firms and those employed in supplier or customer firms as well as directly to citizens who were suppliers or customers. Stakeholder entitlements could accrue according their economic interest like fly-buy points. As many citizens pay tax at a higher level than corporations, tax revenues could increase more than were lost through the providing the tax incentive. In addition, welfare costs could reduce from stakeholder shares being used to provide a universal minimum income for all citizens.
The reason why investors would elect to invest in such Ownership Transfer or 'Endowment' corporations is that investors never rely on the unforeseeable future to recover the cost of their investment with a competitive return. Except for real estate and some infrastructure projects, investment time horizons are typically less than ten years. The ownership transfer tax incentive would provide investors with a quicker return of the money they put at risk to reduce their risk, while also increasing their profits.
The tax incentive would be made available not just to new investors but also to existing corporations. Existing corporations would need to obtain the approval of their shareholders to create stakeholder shares. The incentive for shareholders to vote for their adoption would be the ability of their investment to earn a bigger, less risky return sooner. Institutional investors have a duty to maximize returns for their beneficiaries. So they would be obliged to approve conversion of their investee companies into endowment firms.
The size of the tax concession required for shareholders to approve the formation of Ownership Transfer corporations (OTCs) is described in the Appendix of my 1975 book Democratising the wealth of nations[8]. The Deputy Prime Minister and former Treasurer Dr Jim Cairns launched my book. His review of it was published in the stockbrokers technical journal Jassa in January 1976[9].
The second last chapter of my book describes how its proposals create a community dividend to underwrite a minimum income for all citizens. The book represents the manifesto of 'Social Capitalism' described in the last chapter. Instead of promoting policies of full employment it proposes policies of 'fulfillment in employment or leisure'. Today this becomes more important for achieving an environmentally sustainable society.
The credo of Social Capitalism is: From each according to their interest, to each according to their contribution - in use, consumption and/or production, provided the basic needs of all are fulfilled.
The technical analysis of the business case for investors to give up long-term ownership for short-term gains has been accepted in peer-reviewed articles[10]. One article was selected for republishing with the seminal contributions of leading scholars in the Corporate Governance volume of The history of management thought[11].
International recognition of how tax incentives can reduce inequality should be attractive to democracies around the world. Other countries may find OTCs compelling without tax incentives.
Dr Shann Turnbull is the Principal of the International Institute for Self-governance. Bibliography and Academic CV posted at: https://independent.academia.edu/ShannTurnbull.
NOTES [1] Piketty, T. 2014, Capital in the twenty-first century, Translated by Arthur Goldhammer, Belknap Press.
[2] The contracts were no longer than 15 years were used to finance high-risk start-up enterprises such as Saxonvale Vineyards, Barwon Cotton and films produced by Australian Film Underwriters.
[3] Grosman, R.L. & Adams, F.T. 1993, Taking care of business: citizenship and the charter of corporation, Charter Ink, available at: http://www.ratical.org/corporations/TCoB.html.
[4] Penrose, E.T. 1956, ‘Foreign investment and the growth of the firm’, The Economic Journal, June, pp 220-235.
[5] Downs, P., Hanslow, K., & Tulip, P. 2014, ‘The effect of the mining boom on the Australian Economy’, Research Discussion Paper 2014-08 available at: http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-08.pdf
[6] Op. cit. n.4, p. 221.
[7] Turnbull, S. 1973, Time Limited Corporations, ABACUS A Journal of Accounting Business and Finance, 9(1): 28-43, at: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6281.1973.tb00173.x/abstract.
[8] Available at: ssrn.com/abstract=1146062
[9] Available at: https://www.finsia.com/docs/default-source/jassa-new/jassa-1976/a-review-of-shann-turnbull%27s-book-mdash-democratising-the-wealth-of-nations.pdf?sfvrsn=4
[10] Turnbull, S. 2006, ‘Grounding economics in commercial reality: A cash-flow paradigm’, in Kreisler, P., Johnson, M. & Lodewiks, J. (Eds.), Essays in Heterodox Economics: Proceedings, refereed papers, Fifth conference of Heterodox Economics, University of New South Wales, pp. 438-461, available at: http://ssrn.com/abstract=946033.
[11] Turnbull, S. 2000, ‘Stakeholder governance: an cybernetic and property rights analysis’ in Tricker, R. ed. The history of management thought – corporate governance, Ashgate Publishing: London, available at: http://ssrn.com/abstract=11355.
Suggested citation
Turnbull, Shann, 'Winning government by reducing inequality', Evatt Journal, Vol. 14, No. 1, December 2015.<https://evatt.org.au/winning-government-by-reducing-inequality>