Thursday, March 31, 2011

Tyrannical control freak's guide to starting a commune

A commune is simply an equal partnership in an organization.  My outline of Communal Equity Principles respects the contributions of labour and capital, and provides financial structure for entering and exiting the commune applicable to very large partnerships.

From the perspective of a single owner or existing partnership there are advantages and a disadvantage to forming a commune.


  • Allows owners to monetize their stake in the company, as new partner funds generally go to existing partners.
  • Allows owners to sell shares for higher price than market, because communal transfers are made at the democratically determined median offer price, instead of the lowest offer price set in market transactions.
  • Partnership transactions can be effected electronically and without an external exchange's transaction fees.
  • Through reinvestment formula's adjustments to sales price, new partnership funds can fund the organization as well.
  • Equality of ownership creates perfect alignment of interests.  
  • Intrinsic fairness of equality enhances sustainable motivation of partners.
  • An organization with many financially invested partners is more investable because internal controls and detection capacity designed to protect partner interests also protects external lender interests.
  • The leadership, vision, and opinions of original founders or founding partners is diluted by a wider equality of voices.
  • A false disadvantage is that slower decision making is worse than dictatorial control.
Before I address how to satisfy deeply held tyrannical impulses for control, let me spend a bit of time outlining how control can be counterproductive.

Delusions of control

The best recent example of counterproductive control is Intel's purchase of McAffee (My original analysis) for $7B, and estimated to have been overpaid by $4B.  An obvious equivalent alternative to purchasing the entire company for Intel would have been to contractually incentivize McAffee for $338M per year in perpetuity for whatever benefits McAffee can provide Intel.  While irrational pursuit of control is the most likely explanation for the purchase, presuming rational actors leads to natural speculation that McAffee as an independent brand might not cooperate with Intel.  As recent revelations of Samsung admitting to installing spyware/keyloggers on its laptops (though its most recent position is that the admission was mistaken) show, it is reasonable to speculate that Intel's McAffee plans involve at best an illusion of security features.

The key cost of control is that minions are more expensive than independent free partners.  Entrepreneurs are willing to sacrifice income and security for control and freedom.  Acquiring companies pay premiums to control acquired companies.  Independent brands and partners bring inherent legitimacy to activities due to being free of the naturally corrupting influence of master/minion relationships.

Management and motivation theory has always focused on conjuring an illusion of freedom in minions.  Town hall meetings are more opportunities to explain dictatorial positions rather than seek constructive input.  Employee free-time (made famous at Google) on its own is merely a tool to motivate minions in enhancing their master's property.  Magical tools of charm and propaganda may be effective, but they lack the intrinsic sustainability of real rights and equitable control.  More importantly, when partners are paying for the privileges of joining an association, magical promises are not effective compared to contractual rights and freedoms.

yeah yeah yeah... "but I am a tyrannical control freak"

As the founder of an enterprise or organization it is natural to have feelings of deserving enhanced control and rewards, and natural to feel that original vision has intrinsic importance.  You can simply choose enhanced reward over enhanced control.  There is substantial difference in price between selling a 49%, 50% or 51% stake in an enterprise.  You can retain complete control and stay alone.  Offer a small stake for a small price, or an equal stake for the best price.  (The other option is unthinkable to you).

Another tool at your disposal is to keep temporary control over some operational activities for a fixed term (say 1 to 5 years), as a corporate bylaw prior to accepting new partnership investment.  Natural governance principles are that normally egalitarian partners will vote on functional mandates, budgets, and leadership for as many roles as practical without granting fixed terms.  A fixed term is an exception to envisioned normal natural governance ideals, but strict restrictions on what partners may vote for is not part of natural governance principles.  

Use the self confidence in your vision and operational capacity to believe that you will be the best candidate (as seen by your partners) to continue main oversight of most of your operational duties when your term expires.  Even if you retain complete control over a fixed term, your finite reign of tyranny means higher partnership share value, since there is a fixed date where complete equality of partners is achieved.

The rational explanation for insisting on complete control involve ambition to corrupt organizational goals.  An egalitarian partnership/commune assures society and stakeholders that this is less likely.  So there is magical public relations value from founding/transforming into a commune.

Tuesday, March 22, 2011

An idealist Canadian Political and Economic Platform

This proposed political platform is meant to be embraceable and embraced by all Canadians, though realistically it is addressed to influence the political leadership of the NDP and Green parties who by embracing idealist principles can achieve additional political prominence.

Full Employment and higher incomes
The first principle that societies should embrace is that full employment and wage inflation are not simply the best problem they can have, but rather a goal in itself.  If finding higher wage employment is easy, and finding employment easier, it benefits the vast majority of Canadians.  As obvious a policy as this seems, there are powerful forces against full employment, namely the banking, corporate, and investor classes who see wage inflation as a threat to profits.  Opposing these classes seems close to an NDP platform, but it is not the current one.

Pro union and minimum wage polices are against full employment policies.  They lead to fewer (though better) jobs to the detriment of those left unemployed.  Collective bargaining has typically lead to lower competitiveness and sustainability to industries such as auto manufacturing and airlines.  I'm not suggesting any curtailment to collective bargaining rights, but rather that the aims of collective bargaining be directed to profit sharing and ownership stakes such that labour can share in the risks and rewards in their organizations.

basic income - making life easier for Canadians.
The philosophy of giving every Canadian an equal share of tax revenue targeting basic survival income for all is fundamentally fairer than catering to political lobby groups for targeted handouts.  It guarantees fiscal discipline at all government levels by making every expenditure come equally from every Canadian's pocket.

Survival level basic income can easily be financed by replacing existing social services.  The most important benefit of all is the elimination of desperation and oppression.  Instead of the Harper Government's plan to increase income inequality belied by its military and prisons based economic vision, basic income addresses the root causes of crime (oppression and desperation), lessening the need for government protection services.

Basic income further promotes full employment.  There is no disincentive for EI or welfare recipients to continue qualifying for benefits by not working.  If people choose not to work as a result of basic income, then the remaining labour pool gains better a competitive position for wages.  The income support further allows for training or venture startups thereby creating more and better jobs, and safety nets that extend to investment class means lower risk in investing, and therefore, greater likelihood of funding those startups.

Equalizing taxation on work and investment income
Advocating for taxation policy always involves taxing someone else more.  The corporate and investment classes have and will continue to dominate discussion on tax policy, and use a genuine argument of double taxation of corporate and investment income, but also disingenuously use the argument that taxes on investment discourage investment.  The latter is disingenuous because if there are appropriate tax credits for investment losses, then as a simplified example of an investment that either doubles or loses all of its value based on a coin flip, investing $1M under a 90% tax rate, brings after tax returns or loses of 100k.  The exact same risk/return profile as investing 100k under a 0% investment tax rate.  High corporate tax rates thus encourage greater investment, though this ignores another genuine corporate argument of international tax arbitrage.

One of the 2 central components of natural tax policy is the tax equalization of work and investment income.  This is accomplished quite simply by allowing businesses to deduct dividend payments from their taxable income, and making investors pay income taxes at their marginal rate (same as work income) on dividend income and capital gains.  The effect would be to eliminate any double taxation and investment disincentive arguments,  because virtually all businesses would pay 0 tax with this new deduction alternative.  Money would be distributed back into the economy instead of hoarded, thereby substantially improving the economy.

If this is combined with basic income security for Canadians, then since investors also benefit from the basic income social safety net, they can pay the same increase on tax rates that are designed to replace social security premiums.  A fairer share of taxes paid by the investment class means lower overall tax rates will be possible.  Corporations receiving an effective 0 tax rate, will make Canada a leading foreign investment destination, and win (or at least lead)  the tax arbitrage war that has raged for at least 40 years.  Since money flows determine economic growth, the combination of foreign investment and substantial redistribution of profits back into the economy means superlative economic growth prospects for Canadian society.

These principles transcend liberal and conservative values.  Providing for economic growth, and freedom,  and socialized safety nets, with less government control.  While I am willing to work with every political party to implement these practical and idealist policies, I encourage the Green Party and NDP to disassociate from the usual games of political constituencies (wouldn't same platform lead to same results as last time?), and embrace this progressive idealist platform.

Thursday, March 17, 2011

Strong Yen is best for Japan in recovering from disaster

There seems to be alarm that the Japanese Yen has strengthened below 80 Y/USD.  There are signals that a coordinated G7 monetary action will push the Yen back down.  These are corporatist policies that actually won't benefit large Japanese corporations hurt by the disaster.  Toyota will not export many cars in the comming months even if they Yen goes down to 150 Y/USD.  Certainly, a weak Yen will help those exporters unaffected by the crisis, but this is literally the only group advantaged by weaker rather than stronger Yen.

Japan is soon faced with rebuilding.  This means imports of lumber, steel, copper.  This will create strong entrepreneurial sector within Japan.  The Japanese people may need more food imports.  A stronger Yen makes the Japanese people richer and makes their lives and rebuilding easier.  It is not the time to pay attention to financial institution concerns, or this week's stock prices, on Yen volatility.

There is likely to be pressure against the Yen in the future anyway.  But trade balance management is only a future concern for Bank of Japan.  My message to Bank of Japan, and the Japanese who can influence them:  Enjoy the strong Yen while you can.

Monday, March 7, 2011

Dan Pink's talk on motivation - natural governance justification

Dan Pink's excellent TED talk on motivation is one of my favorites but also terribly wrong.  His thesis is that performance incentives harms productivity in many creative fields, and he thinks he proves it with experimental evidence.  What his example experiments actually demonstrate is that faster deadlines (imposed through incentives) harm the quality of solutions to creative/analytic problems.

If I am offered payment for solving a Sudoku puzzle in 10 seconds or 30 seconds, I will simply make wild guesses at the solution desperately hoping it is correct.  It is not financial incentives that cause me to fail or take longer to come up with the solution, it is impossible/impractical deadlines.

The second part of Dan Pink's presentation focuses on worker autonomy.  This part is largely correct.  Employers can leverage employee creative drive to have some employees innovations enrich the enterprise.  It is in fact a successful motivator for many, as the recognition for accomplishment in doing something intrinsically enjoyable is more satisfying than slaving away faster on typically boring employer-mandated activities.  What most of these autonomy promoting management practices have in common is that they are simply the latest step in the centuries-old manipulation techniques of telling people they are freer so that they may more enthusiastically participate in slave structures.

For systemic solutions to be accepted/funded by the market, they just need to be slightly less corrupt than previous models.  Dan Pink's inadvertent discovery of deadline restrictions inhibiting correct problem solutions, is just discovery of the most obvious restriction.  A self-justifying tautology:  All restrictions inhibiting correct problem solutions, inhibit correct problem solutions.  One other restriction important enough to address can be generally described as the aristocratic world view of the would-be patrons of the solution:  Profit maximization (with large aristocratic share) over value maximization, and protection of aristocratic systemic hierarchical attitudes.

Natural solutions attempt to create balanced equilibriums among system participants striving through egalitarian fairness to participants, enhancing trust, and sharing risk and responsibility.  For a solution to be sustainable it must be free of anti-idealist corruptions, not simply improve some stakeholder interests.  Communal partnerships and natural governance are such ideas addressing worker autonomy by encouraging them to join as equal owner-partners of the enterprise, and create processes for gigantic partnerships to manage themselves efficiently.  The concept of basic income is a greater social tool for eliminating the deadline-like restrictions on individual's pursuit of happiness.  Wikipedia and Open Source Software are also natural solutions, but lower financial incentives for participation are not the relevant driver.  Genuine autonomy to provide value intrinsically are (in case of open source software, or free concerts, ancillary paid services and career growth are also motivators).

Saturday, March 5, 2011

(Natural) Tax Policy

What if the same tax avoidance strategies (income deferral, loans as income replacement, and income splitting) were made easier for everyone rather than complex tools accessible only by elites?  Since preventing tax avoidance is impossible, then the only fair solution is to make it available/accessible to everyone.  Similarly, since large corporations are able to escape all taxes, all companies should have a socially productive way of eliminating their tax bill.

Other issues with the tax code, are eliminating/addressing arguments that high taxes discourage work, and eliminating double taxation as an excuse to favour investment income over work.  Taxing cash flows rather than paper profits would simplify taxes and eliminate avoidance opportunities available through interpretive accounting or audit difficulty.  To offset increased tax minimization ease, simply raise the tax rates sufficiently to achieve target social tax revenue.

Short version of proposed tax policy
Corporations would have all cash inflow taxable and outflow tax deductible including a tax deduction for dividends.  International transfers, dividends received, or international service payments would have a 10% tax payable by the recipient in the originating jurisdiction.

Individuals will be entitled to treat all investment accounts as the equivalent of unlimited RRSP/401ks in that contributions to investment accounts become tax deductible, and withdrawals count as taxable income.  All dividends, capital gains, interest, and work income is taxed at 10%.  Remaining income (including after-10%-tax portion of preceding work and investment income)  is taxed according to tradional marginal tax brackets, but the lower tax brackets can be significantly lowered, while higher brackets

Consumer borrowing would increase taxable income by the amount borrowed, and at least some opportunities for income splitting should be permitted.

Corporate Analysis
The major differences in taxing cashflow compared to profit is that traditional tax policies allow slower deductions for investment in assets such as equipment, and some transactions such as stock options and loan guarantees are impossible to value objectively.  Traditionally, investment inflows (loans or share purchases) into the corporation are not taxable, and dividends paid/loan repayments are not tax deductible.

Incoming investment inflows should have 2 years to be spent before they are taxed.  This is to allow sufficient time for the corporation to spend its capital infusion on assets and expenses.

Dividend/capital gain recipients (whether individual or corporate) pay 10% non-avoidable tax on such payments (10% deduction on capital losses) in addition to counting the untaxed portion as income or cash inflow.  Corporate interest (and financial service fees) revenue (net of interest expense) would also pay a 10% non-avoidable tax on that net revenue.

Because dividends and share buybacks become a corporate tax deduction,   whether the nominal corporate tax rate is 90% or 15%, virtually every corporation would pay 0 taxes, by paying out all profit as a dividend.   The choice to lower total after tax profit by withholding dividends and paying taxes on profit would only be viable for corporations that are not worth reinvesting in.

The reason for the 10% tax on international transfers and services is to prevent corporations from bypassing dividends as a way to repatriate funds from one nation to another.  The 10% taxation on international dividends by recipients serves local jurisdictions ability to tax the profits of imports, and can encourage reinvestment instead.  The intractable problems caused by accounting profit based taxation are that the avoidance loopholes cannot be closed.  Only transfered into move complex avoidance schemes.  A superficially justifiable excuse for the 100s of shell corporations Enron controlled was that it was a normal tax planning structure rather than a risk and balance sheet manipulation structure.  Cash-based taxation policies is the only way to close those loopholes, and simplify objective audits if loopholes are invented.  The 10% tax on international service payments is meant to tax transfers between international shell corporations that take the form of consulting fees.

An illustrated example of offshore tax-haven transfers  has the additional negative consequence of apparently trapping the capital offshore unproductively.  This activity results in the current lobbying effort to grant new tax loopholes to permit corporations to repatriate those funds tax free.  This lobbying could be interpreted as a brazen attempt to excuse tax evasion with sweet, sincere(?), promises of job creation.  By making dividends tax deductible, it would directly increase corporate after tax profits if they paid the full profit as dividend, and therefore an obvious reason to always do so.  The funds aren't trapped anywhere and 90% of them can be directly reinvested in the corporation if it asks nicely.

The (S&P) 500 largest US companies are worth $12T.  If they distribute 10% of that as dividends, and 10% of it is collected as unavoidable tax revenue, then it would amount to $120B in tax revenue.  More than half of the $225B total 2009 corporate tax revenue from 2.5m US corporations and is the same amount as actual S&P US corporate taxes paid in 2007.  Therefore, even if investors are able to shelter dividend income in perpetuity, the 10% unavoidable tax on dividends is not a tax decrease compared to existing corporate tax structure.  It excludes the 10% tax that would be paid by financial services firms on interest (net) revenue. Furthermore, by increasing the flow of funds to and from corporations and investors through incentives for both investment and repayment on those investments, considerable more taxable financial activity occurs, and it is constantly rechanneled towards the most promising investments rather than merely hoarded by incumbents.

Every political group concerned with the undue influence that corporations have over social governance should support this corporate tax plan.   Corporate empire building is made possible by its evasion to repaying its investors.  Compelling corporations to pay dividends is an important restriction on their power to corrupt society, or more accurately, their power to influence society without investor justification on the use of those funds.

Individual tax analysis
By allowing all investment account contributions to be tax deductible, it allows individuals to defer taxes easily and as long as they feel like it.  But someone with a $1M investment account, might be earning 40k to 100k in investment returns per year on it, and paying 10% tax on those earnings even if not withdrawn. At one point he will want to withdraw all of those earnings (and more) each year, adding to his taxable income.  The primary purpose of any investment is future consumption.

Another feature of the tax proposal is that loans taken out by individuals would be added to their taxable income, but they may amortize the income-value of the loan over 5 years (7 to 10 years for homes).  So a consumer borrowing $50k for say a car purchase would count an additional $10k for each of the next 5 years as taxable income.  Interest repayments would be tax deductible.  Because home and car purchases are paid for with taxed funds, there is no need to tax any of the proceeds on the resale of those assets.  Homes for principal residence, and even cottages for personal use, would count as consumption.  For large purchases, individuals could lend themselves from their investment accounts in order to take advantage of the 5 year amortization of that income (loans not for major purchases should still be allowed, but are not amortized, and have no obvious advantage over withdrawals).

Investment homes (those rented in full) would qualify as businesses.  Purchase costs counting as an investment deduction from income.  Collectibles (stamps, art, gold) including collectible cars would count as consumption and have no taxes due on resale even if they appreciate in value.  Savings accounts would behave as a deductible investment amount, the increase in the lowest balance of the year over the previous year.  If your lowest savings account balance during all of last year was $1000, and this year it was $3000, then you may deduct $2000 from taxable income.  If it was $0 this year, you would add $1000 to taxable income.

For Estates/inheritance transfer to heirs all in-kind goods are tax free, but their investment account is fully taxed in heir's hands, though they can reinvest it as a deduction to taxable income.

Income splitting is a difficult issue for social tax revenue policy makers because it allows income to be split into multiple people at lower effective tax brackets, thereby lowering total tax revenue.  However, income splitting has social cohesion benefits by promoting marriages, communes, or even tight-knit communities.  Income splitting would remain an avoidance option for the wealthiest through businesses or trust, and if Individual investment accounts are able to lend to themselves, why couldn't they be allowed to lend to spouses, family and friends?  The only disadvantage to allowing income splitting is that single people who wish to remain single do not have the same opportunities.  Though single people have the advantage of not having to compromise their taxable income any higher than they desire it.  So, income splitting is allowed  through loans from an individual's investment account with the small regulatory caveat that an individual may not loan to someone who is not current (at least interest repaid) on existing loans outstanding to that individual, and who has not repaid past loans given more than 10 years ago in full.  One of the features for income splitting loans intended to be gifts with this rule is that it would prevent excessive gifts as an estate tax planning strategy.  Another possible restriction on income splitting might be either lifetime or annual maximums of loans to one individual.

As a result of all of these easy tax deferral and tax planning opportunities for individuals, maintaining traditional revenue levels is simply accomplished by raising the tax rate at each marginal bracket, but as shown below no large tax rate increases are necessary.  We can eliminate regressive social security taxes on work income, and equalize work and investment income tax treatment (substantially boosting investment income tax revenue)

Even if some restrictions on income splitting are favoured, imagining a world where all income is split evenly as a tax avoidance strategy allows us to determine precisely the minimum tax revenue generated at a tax rate on average income, and to do so within this paragraph.   First, under this proposed tax plan, using the income approach to GDP, at least 10% of GDP is inescapably taxed each year (excludes the 10% corporate tax on interest, dividend and capital income) because the 10% flat on work and investment income directly taxes all GDP components.  Another direct effect of this tax policy (by compelling profits to be paid as dividends) is that Average GDP income becomes average personal income.  GDP per capita $47,132 is nearly 60% higher than average personal income, and so this tax policy would directly result in a near 60% increase in average personal income.  At a $15T US GDP, at least $1.5T is guaranteed to be raised every year from the 10% rate, and if the average tax rate on remaining income is 10%, another 1.5T is raised.  $3T in tax revenue would severely reduce current deficit ($619B higher revenue than 2010 revenue excluding duties,excise and other).  To have same revenue as 2010, then only a 6% tax on average income is needed (effectively 16% total tax).  Some arrangement for state/provincial taxes are not included in the analysis.

The benefits of the proposed tax policies are substantial 
First, and foremost, it irrevocably eliminates any argument that taxes can discourage work.  If you have the ambition and ability to earn $1M in a year, under current high progressive (50%-70%) tax rates, you might choose to work less than you are capable of, targeting earnings that would place you in a lower tax bracket, and depriving society of any of your value contributions.  Under a 10% flat tax on those earnings, then there is no arguable disincentive to work.  Earning 1M results in 100K in taxes, but $850k of the remaining 900k can be invested, resulting in taxable income of 50k for the year, and what is likely at least 50k per year every year in the future as a result of investment growth and withdrawals.

It creates absolute fairness in the tax system by making all fund flows taxable revenue to one party and tax-deductible expense to the other, except for consumption. It essentially taxes only consumption, and taxes it progressively.  It simplifies the main tax minimization strategies of income deferral and income splitting, making them available to all tax payers instead of just the wealthy.  Income deferral provides needed financial security to people, and income splitting can both promote long term relationships, and through loans or gifts in the form of loans with minimal repayment expectations, substantially enhance demand for maid/childcare/gardening/accounting/legal personal services.  This job creation, in turn substantially enhances the full labour market's competitive position (higher wages if fewer unemployed), and allows society to self organize itself into more egalitarian wealth and income distribution, since those with accumulated wealth are incentivized to transfer it to many people, rather than consume it all.  Fairness is also increased by having only one level of taxation, and at the consumer level.  Costly-administered regressive sales taxes can be eliminated.  But specific excise taxes on discourageable (sin or pollution) consumption can be permitted. The term Natural taxation of consumption can be applicable to this fair single taxation system

Consumption is not unduly discouraged due to the allowance for amortizing loans over several years.  Service based consumption can be enhanced by using "gift" transfers from investment accounts.  Multi-million dollar home purchases are still possible through rent from corporate-owned home, though regulation for fair market rent in related party situations is likely deserved.  Since the main ultimate purpose of any wealth is eventual consumption, then that wealth is eventually taxed, and consumption eventually takes place.

Under this plan, even a top marginal tax bracket of 100% would not discourage work, because the tax payer has complete control over when his income is taxable, and even who to give it to instead of the social coffers. Modest progressive marginal tax rates for taxable income in the 30k to 100k range would reinforce consumption in those ranges.  Higher marginal rates above 100k can be used to either collect substantial tax revenues or encourage individuals to behave in socially beneficial income splitting or investment instead.

Transfering tax burden to the wealthiest by equalizing avoidance strategies
Even if the rich can turn millions of dollars in income into taxable income well below 100k, this is a significant tax increase on the rich proportionally to the rest of the population (no matter what actual tax brackets turn out to be).  First, the rich currently already have the opportunity to defer income indefinitely by choosing investment sales, and US dividends and capital gains have about a 15% total taxation, instead of the the proposed 10% flat tax + the taxes on whatever eventual consumption will be used with those funds. So someone who earns and withdraws $1m in dividends at a 66% marginal rate would pay a total $700k in taxes instead of $150k under current US regulations.  Second by eliminating social security/payroll taxes and raising  in offset marginal rates on taxable income, you are both eliminating the disadvantages of work income vs investment income, and making it cheaper for employers to hire people (pay you more).  You're also increasing taxes on investment income which previously was not subject to payroll taxes.  The substantial tax revenue increase potential from the rich means that if the top 1% pay 40% of all taxes, then doubling or tripling them means that the rest of the population would pay less than 1/3rd of what they do currently and means that marginal tax brackets do not have to be set so high after all to meet revenue targets.  All, without the possibility of arguing that higher tax payments will discourage work, because all income is easily shelterable,  corporations effectively pay zero, only consumption is taxed, and there can never be a tax disincentive on investment returns because they increase net wealth regardless of the tax rate.

The real source of tax increase in this plan is taxation on investment income, and cash based taxation.  The purpose for allowing income deferral and income splitting is to eliminate arguments against tax-caused work discouragement, and to focus on consumption, and fairness between classes.

Transitioning to new tax model
The transition from traditional tax policies to natural taxation can involve choices that either punish some, or allow individuals to manipulate the system during transition.  The most important transition policy is that all investment accounts at time of transition can be withdrawn (that amount) from tax free.  This is to avoid people liquidating all investments to cash prior to transition so as to create future deduction opportunities.  Some choice may have to be made regarding controlling people from withdrawing these funds and reinvesting them as a tax deduction.  At transition time, there is also a significant incentive to mass borrow and consume large ticket items such as homes to avoid the imputed income effects of loans after transition.  The solution here is to treat the net proceeds (after loan repayments) of homes, cars, and collectibles owned prior to transition as taxable.  (Such items bought after transition are sold tax free).  On the whole, fair and generally ambivalent between the two options.  Except, choice for controls preventing people from borrowing prior to transition and keeping cash, and then using that cash for purchases (or investment) after transition are likely needed.  Choices need to be made on how to control or accept people with a history of likely illicit undisclosed cash income and wealth.

One general solution for the transition is to temporarily use a 15-20% undeductible tax on work and investment income with much lower marginal tax rates on consumption benefits, and then gradually reduce the undeductible tax down to the target 10% while making an offset increase in the rates on remaining taxable income.  The purpose of these temporary tax rates, is to mitigate any manipulations individuals will be able to come up with during transition, by reducing the tax cost of loans or tax benefits from additional savings immediately after transition.  Deductions for low income earners would likely be appropriate under this temporary plan.

I've avoided any comment on whether taxes are theft or what level of taxation society needs.  While I strongly believe that taxes are not theft, that wealth redistribution is a justifiable aim, and usually directly results in those paying the most taxes receiving the most benefits from respent distributed wealth (likely on their goods and services) and a peaceful and docile society (as result of less desperation, inequality, and oppression), I do believe that governments should be forced to justify all spending not redistributed equally to citizens as basic income, the same way that corporations should be forced to justify to shareholders all profits they wish to keep instead of distributing dividends.

Thursday, March 3, 2011

Open Partnerships - Modest profit alternative to non-profits

An Open Partnership is a special form of communal enterprise where a maximum communal equity value is perpetually enforced.  All other aspects of communal equity accounting apply (buy in price can still be set democratically below the maximum).  This means that unlimited partners can (have the right to) join the commune, buy buying the appropriate fraction of communal equity (nth partner buys in at 1/nth communal equity).  Open partnerships  therefore have a limit on expected and actual profitability because if they are more profitable than normal (natural?), then an infinite number of new partners are motivated to acquire a partnership share.

The appeal of forming open partnerships is to make a purpose driven enterprise, and achieve social responsibility recognition.  A promise is made to society that gifts it an option to buy into the enterprise at a specific price.  The 2 main classes are alternative business models for charities and customer-purposed organizations.  Customer purposed organizations may be thought of as semi-charities even if their beneficiary clients are all humans rather than specific disadvantaged classes of people.  So, charities and customer purposed organizations are in fact a continuum on the same class of applicable Open partnerships.  The other class is legal monopolies such as patents or massively social (government) funded monopolies such as utilities, where the open partnership restriction on the company is an appropriate social compensation for the legal or capital benefits given to it by society.

Economic analysis
Lets say an Open partnership caps its maximal communal value at $1M.  For a normal disinterested investor happy with normal returns, he would be willing to invest in the open partnership if it has a decent expectation of earning 100k/year (10%) in annual profits in perpetuity.  For a customer of the enterprise, he might be motivated to influence the company into targeting 5%-8% return on equity (ROE) rates (50k-80k/year) by improving products or lowering prices, especially if his partnership purchase involves partial reinvestment by existing partners.  A philanthropic/charity minded investor might be motivated to invest at 0%-1% ROE if the company strives for and accomplishes social goals, and especially if full reinvestment by existing partners is involved.  Intentions and motivation are not static over time, and the organizations direction should always be based on its present partner wishes for direction.  The 10% normal ROE rate effectively acts as a cap, attracting all customers and social members with special additional motivation to the partnership if it is exceeded.

The following example illustrates the dynamics of open partnerships.  Consider a communal value open partnership with 10 initial partners, that is both capped at and worth $1M.  Each share is worth $100k.  If profits one year are well beyond a $100k normal ROE (say $1M) then the number of partners could grow from 10 to 1M.  The initial 10 partners would receive $99999 as a result of their dilution (new partners buy from old partners collectively).  Each share would be worth $1 (with 1M partners), and each partner would be entitled to $1 as their share of the year's profits.  From the perspective of the original 10 partners, being too successful results in their dilution from 10% share to 0.0001% share.  Rather than profit maximization, the focus in open partnerships is on profit sustainability.  Sustainability reinvestments in growth and customer acquisition/satisfaction become relevant equal priorities leading to greater socio-economic benefits of jobs and consumer value.

Cancer and AIDS research are often funded through grants, and often provided through personal charitable donations.  From an investment perspective, funds are channeled more towards opportunities that could yield 100B+ in potential profits through treatments grotesquely propositioned as "pay us everything or die."  Furthermore, those involved in the war on cancer have misaligned incentives in that victory in the war on cancer means the end of the war on cancer, and an end to their usefulness.

Cancer research enterprises structured as an open partnership capped at say 40M-100M equity value provides sufficient incentive to both successfully develop cures, and to price the cure in a socially responsible/benefiting manner.  Those members of society disposed to philanthropy or desperation are willing to pay higher than market value for a partnership share at its early research stage, and financially motivated investors willing to buy in at a higher price once research has demonstrated results.  Partners have the rights to information necessary to decide whether the enterprise deserves their additional capital (in form of loans).  This modest profit model is far more suited to achieving philanthropic goals than is either a charitable or non-profit model.

Another issue with charities, are the substantial legal hurdles (in Canada) that prevent charities from directly helping people beyond education and councilling.  Any value transfer to individuals is forbidden by legislation focused on preventing tax evasion.  For instance, charities (tax deductible) are not allowed to be legal defense funds or affordable housing builders in Canada.  Depending on the scope of the enterprise, an organization wanting to provide affordable housing could setup as an open partnership with capped equity between 10k and $1M.  Some concept of a sliding cap based on housing units provided is conceivable.  Even without a charitable organization status, such an organization can attract investment from social groups that genuinely care about the issue, but also its potential customers.  Instead of a tax deduction partially motivating strictly controlled charitable operations, slight opportunity costs to return on capital would be the charitable sacrifice but applicable to unrestricted benefits for community or humanity.

Society currently generously incentives innovation by granting innovators a 17 year monopoly (patents) during which they may extract unlimited profits from their innovation.  Society asks for nothing in return.  If society demanded instead that patent monopolies structured themselves as open partnerships there would be a fair bargain between the monopolist and its potential customers.  The customers that benefit most from the patent would have the highest incentives to buy into the partnership.  My rule of thumb, as a general guideline, is that $4M communal equity cap on a patent holding corporation would constitute sufficient incentive to develop any innovation.  A $4M equity value would represent the Net Present Value of future profits at the time it is worth $4M.  A $4M asset + employment in sales/management/engineering applications of the company, with input in hiring assistance on the project, and reimbursement with interest on development expenses are sufficient incentives to develop anything.  Higher maximum equity awards are appropriate when society wants to encourage solutions to specific problems it faces.

A related factor that can block innovation is the innovator's greed in seeking monopolist profits from his invention.  Capped equity makes selling to both customers and investors easier, the same way that selling a ferrari for $30k is easier than selling it for $200k.  The inventor can sell a 50% stake to one customer for up to $2M, or to 75% stake to 3 customers for $1m each.  From the customers' perspective who buy into the patent holding corporation, they first have sufficient control over the corporation to enforce fair prices, but they benefit from any monopolist premium on prices.

Monopolies (Utilities)
On paper, there is decent regulation of monopoly utilities in Ontario.  Electricity is government owned, so profits at least go back to society.  Heating gas monopoly is price regulated based on gas cost.  Communications have more complicated and weak regulation on its monopolist/cartel providers, but theoretically impose a mechanism to complain about their abuse.  Liquor sales are monopolized under the pretext of social responsibility in limiting general alcoholism and underaged drinking.  These regulations are cost/time expensive, corruptable, and unnecessary if the monopolies adopt an open partnership structure.  Open partnerships naturally focus on sustainable operations rather than profit maximization since stakeholders of the monopoly have additional incentive to obtain ownership influence.

So anti-alcohol groups or alcoholics can take ownership of the liquor board.  A democratic process can directly affect liquor sales operations much quicker than slow regulatory government feedback, and without largely irrelevant liquor control policies influencing general leadership or governance decisions.  An other defect of regulation is that laws can become outdated, or a monopoly no longer a monopolist.  For example, land lines are apparently a declining business which has competition from wireless and cable.  It would be normal for a land line open partnership's communal equity to decline below its cap as a result of competition, and the company should enjoy the flexibility of leveraging its land lines for other business opportunities.

Monsanto is recognized as the most evil corporation in the world.  The reason is principally its GMO food operations, which are resistant to its Roundup herbicide, and whose seeds infect neighbouring farmer fields.  It spends more on its legal enforcement of its patents than any other organization in the world including persecuting infected non-customer farmers.  Monsanto uses its government given right to maximize profits and trap its customers and non-customers into dependence on it, holding world food supply hostage in the process.

Presuming that GMO food has no negative health effects, or can be engineered further to even have health benefits, then GMO food has a cure-for-cancer level humanity benefit potential for global economic/population sustainability through higher yields and lower costs.  Disgust with monopolist intellectual property enforcement that seeks to capture 90% of the economic gain from the innovation is understandable.  War against GMO food is economically unfortunate.  GMO innovators could be revered as humanist heroes under a different business model.  An open partnership structure would allow its farmer customers to buy-in influence its pricing and legal policies, and allow farmers and eaters to buy in to influence its R&D efforts towards more globally economic sustainability projects.  Open partnership investment in Monsanto GMO food operations would transform Monsanto investors from evil enablers of oppression to heroic providers of economic food sustainability.

Social Networks, bands, sports teams
The user is the product for social networks.  At least one of the more successful social networks has a sordid history of membership privacy abuse and funding backed by investors with CIA ties.  There is a competitive opportunity for community owned open partnership structures for social networks.  There is an emotional satisfaction in fans supporting a band, and a utilitarian benefit beyond economics in encouraging it to make more music.  Sports teams instill a vanity components in their fans' support, and have vanity celebrity status as the primary motivator in team ownership.  Vanity and other emotional aspects can enhance value/worth of an enterprise far beyond its pure economic value through open partnerships, or at least communal equity structure.  Communal equity ensure's that there are no minority owners (all owners equal). is a social network which does an admirable job of providing democratic, user-focused and user-friendly organization and presentation, despite being owned by a traditional corporate media overlord: Conde Nast.  Conde Nast has owned it for several years now, and presumably purchased it under the same monetization ambitions that, when implemented,  so often destroy internet communities.  Conde Nast appears instead to have been convinced that the better option is the only other business model for internet communities:  to grow them with the ultimate purpose of selling them to someone else with delusions of mass monetization.

Conde Nast can, if it is eager to monetize additionally or sell, instead sell as an open partnership, marketing the offer to its own community. has an enthusiastic, supportive community with collective support and admiration for its current administrators.  An open partnership evokes community building and social good motivations among its investors in a way that pure economic investment cannot.

The Power of dividends
An Open partnership valued at its maximum communal equity stays at that value by paying all of its profits as dividends.  Dividend payments are widely misunderstood as harming company/investor health.  This is wrong because first, a company healthy enough to pay dividends is attractive to have whatever financing needs it has met by the same investors it paid dividends to.  It is also wrong from an economic sustainability perspective since investors can best decide for themselves what opportunities are in greatest need of investment or they can increase their consumption.  Apple (stated to have $65B in cash equivalents) has precisely the same operational profit outlook if it gave back $64B to investors than it does if it didn't.  Open partnerships naturally enforces the corporate duty to pay back investors.  Escaping that duty through corruptly management-loyal board-of-directors is a direct cause of current economic stagnation.