Just Capitalism

Michael Zilbering
March 30, 2009 — 2,095 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

The financial and economic situation in our country, like all over the world lately, sharply deteriorated. There are many obvious causes, but in summary this is a result of the exhaustive levers of managing the contemporary capitalistic system.

The foundation of progress in the capitalistic system consisted of increased production of goods and services that was an alternative to redistribution and economic insecurity. Undoubtedly the limit of continuous economic growth was reached and, in the near future, we shall satisfy our requirements with the reached peak and slower growth.

Regardless of the natural reasons of the decline, the sphere of production and services has substantial problems. The core issue lays in the fact that leadership of public corporations was able to gain full freedom of activities that frequently went fraudulent. They juggled the facts and adjusted the financial results so they could misappropriate many millions of dollars under pretence of premiums and bonuses, bringing some companies to a full ruin. The public corporations belong rightfully to the stockholders and should be completely accountable to them.

This means, that it is necessary to make tougher the approach of selecting the corporations leading personnel. It should consist of highly skilled specialists of corresponding branches of industry. The Board of directors should be elected from the best specialists of the companies, but not from 'honorable newcomers' from elsewhere. The salary of CEOs, CFOs and other leading personnel shouldn't exceed 3-5 times the rate of pay of a medium level specialist. The premiums and bonuses can be of any reasonable dimension, but should be obligatory coordinated with the financial results of the company not for a year, but for a five year period. Then the leaders will understand that they must work harder, persistently, and creatively in order to obtain premiums and bonuses. The corporate leadership is responsible for all aspects of daily activities of corporations. They are accountable for trustworthiness of book-keeping and in charge of signing the information given to the public.

* * *

Financial institutions are in a significantly worse shape. Exploiting billions of means of investor's money, they were engaged in risky business, consisting of giving out precarious loans for purchasing houses, and as well as other speculative business, incurring billions of losses. The instability introduced by volatile markets threatens the normative foundation of the open society. Giving the free rein of full freedom of action to the players of the financial markets, we should remember that the human nature is a long way from perfection and it takes a long time for the effective control levers to be built, without which the system is a complete failure.

The point is that the speculators seized the leadership of the markets, which draws in purchases and short sells of stocks, bonds, commodities, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in the price, as opposed to buying for use or long-term investment. They don't bring any benefits to society in creating any valuable goods or services for consumers, who are at the end of the supply demand chain. They artificially violate the balance of supply and demand, so they can make every day millions of dollars, enriching themselves on the back of the ordinary investors and consumers. So should the speculation be allowed?

The root of all evil in the developed situation lies in the basis of price definition. Price should reflect the use value of goods and services, be well-founded and established, taking into account the demand and supply on the market. The market undoubtedly affects the level of prices by means of adjusting the total volume of output. However it shouldn't independently establish prices. For some reason in practice a fallacious procedure was established, under which the market determined the price (for stocks, bonds, commodities etc.)

Under the pretence of changes in demand and supply an instrument is handed over to the speculators with the help of which they constantly manipulate the markets, misappropriating billions of dollars, that are taken away from honest consumers and long-term investors. It is unreasonable to expect a fair distribution of income among the population until the deceptive practice of market price determination is in hands of opportunists. The better approach is to relinquish this responsibility to the producers of the material values. The stabilization of prices referring to our affirmation is equivalent of establishing justice in income distribution, which equivalents to establishing-A NEW PHASE OF CAPITALISM- where all levels of the population makes use of the advantage of the capitalistic system, smoothing over contradiction in the distributions of income.

* * *

The tax system is connected simultaneously with the distribution of income and economy. Taking into consideration the significance of taxing as an instrument of fiscal policy of the government, there are many theories about the role of taxing in the economy. Theoretically, the tax should be as low as possible to create incentives for people to work harder. Low tax should also encourage entrepreneurs as they will not lose much of the profit in taxation. Using tax in this way to encourage enterprise and hard work is a supply side of the policy. The taxes also should provide the budget with rational needs. At present time the tax code is so complicated that ordinary taxpayers can't fill in the forms on their own. They are forced to spend 300 billion of dollars every year to accomplish this complex job. In addition to the tax system being complicated, it allows government to expropriate the excess means from the population and corporations. It gives the politicians an instrument and ability to cut or raise taxes. No more tax rise or tax cuts. Taxes should be permanent. The current tax system is a convoluted failure.

It seems to us, that the time is ripe for a full reform of the tax system. It is time for transition to a new tax system - Flat tax. This is a system with a constant tax rate, where the working people pay taxes by fixed rates (percentage) from their income and corporations - a percentage from their profits. If a consistent and reliable approach is applied to determine the tax rates, than a new tax system can be created with minimal collection of taxes that satisfy the needs of the budget. Flat tax is simple, fair, and good for growth, labor income, for business and capital income. A flat tax by dramatically lowering rates and ending the tax code's bias against saving and investment would boost the economy's performance. The transition to a Flat tax demands boldness, inventiveness and responsibility.

In the future our country will be obliged to make a decision to go over to universal health care. It means that instead of paying premiums to the Insurance companies, we should work out a payroll tax rate for workers and corporations for health care. This payroll tax will pull resources with Medicare and Medicaid in the budget, forming an aggregate fund for universal health care. The payroll tax for universal health care will constitute a separate fund, which the budget should transfer to a special organization, responsible for managing the universal health care and use of the allotted means.

And so, to summarize it, putting in order the corporations' management, introduction of a new system to define prices in the market and the transition to a Flat tax system, undoubtedly will affect economical growth and adjust distribution of income in society.

About the Author

Michael Zilbering 12003 Bustleton ave unit 423 Philadelphia, PA 19116

Michael Zilbering