Tax Quid Pro Quo (TQPQ/SQPR)

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

Dear Homestead Group

A note or clarification in regards to Michael Harrington's response when he
said:

"I can't understand why our society does not advocate
high inheritance taxes, which I assume is what Shann means about "unlimited
life rules,"

I do not advocate inheritance tax in any form as this takes away a valuable
incentive for families to build up wealth creating businesses and to
accumulate wealth.  

What I am advocating is a Tax Quid Pro Quo (TQPQ) for distributing
ownership.  This is a different name for what Deborah Olson describes as a
Stock Quid Pro Quo (SQPR).  A TQPQ would make it more profitable for people
to transfer, without cost, the ownership of corporations or realty to the
stakeholders who are responsible for adding value to corporations or
realty.  It is in this way the ownership of corporations and land would
become time limited rather than being unlimited.  Only the right of
stakeholders to accumulate entitlements to property would expire on their
death, not their equity claims already accumulated.  However, as they could
no longer use land, housing and other services or make a contribution as a
customer, employee or supplier, their accumulated rights to property would
in turn begin to transfer to those people who still could make a
contribution to enhancing economic values.  

The tax system could be used to change the rules of ownership from being
static, exclusive and unlimited to being dynamic, inclusive and time
limited to involve stakeholders.  In this way the rules of ownership would
spread wealth to all stakeholders who contributed the creation of wealth by
their custom, employment, service or need.  

Wealth could only be accumulated by running up an escalator which is going
down!  The current system provides a free ride to those creating wealth by
allowing them to ride an escalator which is going up!

Michael says that economists cannot understand why poverty exists.  One
reason is the rules of ownership which give a "free ride" to those that
already own property.  Another contributing reason is that it is the poor
who make land owners richer by needing to use their land, houses and
services.   Corporations and realty have no value if their product is not
wanted!  It is the have nots which create value for the haves with the
present rules of ownership!  The solution is to change the rules.  Other
approaches like ESOPs may ameliorate but not solve the root cause of
inequality.

I do not accept Michael's claim that economists can fully understand how
the rich get richer because they do not have an economics of ownership.
Specifically, economists do not now use the concept of procreative assets
and they have no equivalent concept to what I describe as surplus profits.
Economists base their research and analysis on accounting information which
cannot detect or report surplus profits.

Regards

Shann

At 06:58 AM 13/1/2000 , Michael Harrington wrote:
>Dear Homestead Group,
>
>I don't disagree with Shann's response but do have a few comments to add.
>If I understand correctly, Shann's criticism is of the way the market fails
>in terms of perpetuating barriers to entry for capital accumulation.
>Undeniably this is true, but also passing laws to mitigate this seems in
>conflict with the dominant economic and political ideology in most liberal
>western societies. We don't have to accept this but it is a formidable
>obstacle. For instance, I can't understand why our society does not advocate
>high inheritance taxes, which I assume is what Shann means about "unlimited
>life rules," but the political fact is is that such taxes are extremely
>unpopular. So, the sympathetic liberal economist looks for ways to harness
>competitive market forces to constrain the abilities of monopolists to
>extract rents. This is why Kelso advocated a mechanism for the distribution
>of new wealth rather than fight the battle for a redistribution of old
>wealth. 
>More open and competitive markets for capital serve this end, which is why
>we should push for capital ownership in general in addition to employee
>ownership.
>
>AS for economists, I think they do understand how the rich get rich, what
>they can't explain is why poverty persists. Perhaps they have a blind eye to
>the role of capital endowments and distribution but the pat answer is that
>different endowments explain inequality - education, social and physical
>environment, intelligence, wealth, natural resources, etc. They conclude
>that policy can best address the problems of education and social
>environment but we in COG and any astute observer knows this won't be
>enough. 
>
>It is interesting that skewed wealth and income distributions are fairly
>comparable across countries, across cultures, across races, across time,
>etc. There must be something fundamental about this phenonmenon. 
>My point about human behavior and risk is that I want to argue that
>equalizing endowments (wealth), if possible, would still not even be enough
>to mitigate inequality over time. The phenomenon that is inequality is
>partly rooted in human behavior following survival rules in an uncertain
>world. I can generate growing inequality in a model with just differentiated
>risk preferences, luck, and a few simple survival rules that allow agents to
>adapt their risk preferences. So unless policies affect the risk preferences
>of agents in a positive manner, they will continue to fall behind. Barriers
>to entry in the investment markets are integral to this process by
>constraining the preferences of agents.
>
>Sorry if this seems a bit esoteric or obscure but I'm operating somewhat in
>the world of science...
>
>Regards,
>Michael
>
>
>Michael Harrington
>The Milken Institute
>1250 Fourth Street
>Santa Monica, CA 90401
>mharrington@milken-inst.org
>TEL: (310) 998-2699
>FAX: (310) 998-2625
>
>
>
>
>
>-----Original Message-----
>From: Shann Turnbull [mailto:sturnbull@mba1963.hbs.edu]
>Sent: Tuesday, January 11, 2000 8:11 PM
>To: 'Homestead'
>Cc: DebGrobanOlson; jeffgates@mindspring.com; Dave Wheatcroft
>Subject: Excess returns by chance or design?
>
>
>Dear Homestead group
>
>Michael Harington wrote
>
>"one can actually get an excess return by chance. But if it becomes clear
>that more than chance is involved, arbitrage will drive the risk-adjusted
>rate of return down to the mean."
>
>However, it has not been clear to generations of economists that excess
>returns are inherent in the current rules of property ownership which
>allows the capture of profits in excess of the incentive to bring forth the
>investment.  Arbitrage cannot correct excessive returns when market forces
>cannot overrule the static, monopoly, unlimited life rules for owning
>property.  The capture of excessive returns can be what I describe as
>"surplus profits".   However, these are not measured by accountants and so
>not noticed by economists as described in my postings in the economics of
>ownership discussion group.  It is the capture of profits in excess of the
>incentive to bring forth investment that contributes to the inequality of
>wealth and so the cause of the problem which COG is seeking to correct.
>The solution is to replace the static, monopoly, unlimited life rules of
>ownership with dynamic, inclusive, limited life rules.
>
>Without insight into how the problem of wealth concentration arises, we do
>not have a basis for evaluating which solutions to the problem will be most
>efficacious.  If  the statement made by Michael quoted above represents
>orthodox economic assumptions it indicates why economists cannot understand
>the problem of how the rich get richer.   
>
>Because accountants do not distinguish between profits and surplus profits,
>the theories of finance quoted by Michael have limited relevance to
>identifying surplus profits.  Theories of finance may identify what
>economists may call "excess profits" but these may not be related to
>surplus profits.  Surplus (cashflow) profits can arise with accounting
>losses and excessive accounting profits can arise without any surplus
>profits.  In short, economic theories have little relevance to identifying
>or understanding the problem of wealth concentration.   The problem is
>accounting profits are confined to accounting periods whereas investors and
>business analysts consider profits over the operating life of the
>investment. or their investment time horizon. which ever is the shorter.
>
>Michael is concerned about the relationship between risk and excessive
>returns, but from the perspective/paradigm of a business person, there may
>be no relationship between risk and obtaining excessive profits in the form
>of surplus profits.  Economic theories based on accounting concepts of
>profits may have little relevance to real world investing.  This is why
>business people base their analysis on cashflows rather than profits as
>explained in my "New Strategies for Structuring Society from a Cashflow
>Paradigm" article in the COG library.
>http://cog.kent.edu/lib/turnbull1/turnbull1.html
> 
>The "misinterpretations of what the role of risk plays" which concern
>Michael arises in part because economists describe "excess profits" in a
>way which is quite different from what I define to be surplus profits.
>
>Regards
>
>Shann
>

Shann Turnbull
P.O. Box 266 Woollahra, Sydney, Australia, 1350
Phone: 02 9328 7466 office; 02 9327 8487 home
Fax: 02 9327 1497 home & office.  Mobile 0418 222 378
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Life long E-mail: sturnbull@mba1963.hbs.edu
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