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The Case for an Economic Democracy Act

In today’s US economy productive capital is growing annually in both the public and private sectors at a rate exceeding $12,000 for every man, woman and child. On our present path, that new capital, the source of America’s capacity to produce in greater abundance than other economies, will continue to be financed in traditional ways. That means few, if any, new owners will be created by those traditional processes.

Over the years this has led to an enormous and growing wealth gap, illustrated by the fact that the two wealthiest Americans had greater accumulations than half the American people combined and the top 10% own 90% of all directly-held corporate stock. Most citizens have not accumulated enough assets to meet their household needs for more than a month or so, if they become disabled or lose their jobs. They are wholly dependent on jobs, welfare or charity to meet their needs from birth to the grave. The non-rich have no independent source of an adequate and secure income.

The Economic Democracy Act (formerly called The Capital Homestead Act) is designed to close this growing wealth gap, consistent with free enterprise values of private property, free market competition and minimal government intervention with voluntary choices among producers and consumers. In other words, it aims to lift barriers so that the poor and non-rich people can lift themselves up into capital ownership, uniquely without taking existing property away from the rich.

Building upon Lincoln’s Homestead Act of 1862 (which democratized ownership of the land frontier), the Economic Democracy Act (aka Capital Homestead Act) is oriented to the limitless frontier of the future — the technology frontier — which can and should be made equally accessible to all propertyless persons as a fundamental right of citizenship. This is the essence of the American Dream that inspired the lovers of freedom and justice everywhere.

A New Path

The Economic Democracy Act (EDA) is a proposal to provide a package of integrated income, gift, retirement and inheritance tax reforms, combined with monetary policy changes and other structural improvements to national economic policy. These are designed to provide every citizen an equal opportunity to own, control and share profits from productive capital.

The political rationale behind the Economic Democracy Act is that there is no reason that those who already have capital (and collateral to qualify for capital loans) should have a monopoly or be the exclusive beneficiaries of the government’s control over “social goods” like money and credit that largely determine who will own future capital. A political democracy cannot rest comfortably and sustain itself on a foundation of government-supported economic plutocracy. Decentralized wealth would counter the corrupting influences of concentrated wealth in campaign financing, as America experienced in its recent elections.

An essential premise of this proposed legislation is that those who have no capital should have equal access to credit to acquire capital, and that that credit should be made available by the government’s central bank and allocated through local lenders for financing the capital needs of the productive economy. (In today’s US economy productive capital is growing annually at a rate exceeding $7,000 per capita.)

To address the growing wealth gap in market economies, the Economic Democracy Act would end the monopoly by those who already have capital (and thus collateral to qualify for capital loans) and who gain when the government fosters the creation of more wealth through extension of capital credit and tax incentives for investment.

How the Economic Democracy Act Would Work

Facilitated by the monetization of capital credit under Federal Reserve policy and reinforced by capital loan default insurance as a substitute for traditional collateral, Capital Homesteading reforms would enable every citizen to establish a tax-sheltered Capital Ownership Account (COA) at a qualified local lending institution.

This would allow every citizen to purchase and accumulate dividend-yielding, full-voting shares to supplement retirement income, relieving the burden on Social Security as the aged population expands. As with most ESOPs and in contrast to IRAs, the citizen would put up none of his own money. Through the EDA, he would gain access to self-liquidating capital loans at low service charges to buy equity shares. These shares would be expected to recover their purchase price out of future pretax dividends. The loan insurance, with premiums paid out of dividends, would cover the risk that the loan failed to be self-liquidating.

EDA loans could be invested in shares of: 1) the company where the citizen or a family member works, directly or through an ESOP; 2) the companies in which the citizen is a regular customer or supplier, directly or through a CSOP or SSOP; 3) a Citizens Land Development Cooperative (CLDC) to link the citizen-owner to profits from and control over local land planning and development; 4) a Homeowners Equity Corporation  (HEC) whose shareholders are homeowners in danger of losing their homes to foreclosure, or renters seeking to become owners; and 5) a variety of blue-chip growth companies with a track record of profits.

To encourage the issuance of new shares for meeting the financing needs of an enterprise, the double tax on corporate profits would be eliminated for companies that sell full dividend payout, voting shares to COAs. To secure his economic independence, like homestead exemptions on homes, the citizen would be sheltered from taxes on his COA accumulations below, for example, $1 million.

To further promote COAs, a “National Capital Credit Association” (NCCA) would be set up, to do what Fannie Mae and Freddie Mac do in facilitating and securitizing home mortgages. The NCCA, which could be owned and controlled by COA lenders and citizens, would package insured COA loans, create software for helping lenders to scrutinize the feasibility of COA loans, and set uniform standards for COA insurers, reinsurers, and lenders.

The NCCA and competitors qualified by the Federal Reserve would then bundle and take these securitized COA loans to the discount window of the regional Federal Reserve Banks. The Federal Reserve bank would treat these insured dividend-backed securities (DBSs) as it currently treats government debt paper, using them as substitute backing for the currency. Then as the Federal Government pays down the national debt, the productive assets of the economy — the real economy — would stand behind the nation’s currency.

Currency linked to productive capital owned and controlled broadly among the people would replace gold as a measure of value and as a safeguard against inflation and irresponsible or non-democratic policies by the nation’s central bankers. Under the Economic Democracy Act, money will again be a servant of the people, not their master, and will become an instrument to promote humanity’s creative potential and quest for a just market economy.


Also see:

Reforming the Tax System

 Reforming the Money and Credit System

Reforming Inheritance Policy