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Social Capitalism with the variable Schmid-Tax
Economic System of the Next Generation
By: Mark Schmid
Version: 2009.12.29
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Let's concentrate on the primary objective of our new economic system, eliminating poverty. This needs to be done, obviously, with a just and well-accepted re-distribution of wealth. What is the most motivating, sensible, responsible and thus accepted re-distribution of wealth? Rewarding diligence, hard work, extra performance and inventions is. This is done through paid-for labor. Full employment of the entire population, without exceptions, ensures re-distribution of wealth among all people, without exception.
To reach full employment, without exceptions, there are two options. One option is to create artificial labor when there is not enough paid-for labor for everyone. For instance, forcing unemployed to pick up litter in a town park. However, such artificial labor is usually not paid well, is often degrading, competes with paid-for labor, costs a lot to administer and generally adds much more problems than it solves. The other option is to divide paid-for labor among all people, without exception, if there is not enough for everyone. The trick as we have seen however, is to not do this with fixed, hard rules such as communism did, but with flexible incentives and motivations which smartly allow for any local or personal needs of an employer or an employee and which still motivate people to work hard and well.
Taking the Good out of existing Economic Systems
Just like in programming, we will not re-invent the wheel from scratch, but take as much as we can from currently existing economic systems. Because capitalism and its so called "free market" with social institutions such as health care, retirement pension, welfare, etc. has outperformed communism, we will start of with capitalism as it exists in Switzerland, the USA or other western countries as the basis for our new, better economic system. However, because capitalism is very dependent on growth, is very hard on people who are not lucky, because it promotes not only healthy competition, but also excessive competition between people and thus is not only competitive, but also antisocial, unjust and inhumane to those who are not on the winning end, we will also integrate the ideal of communism, that everyone deserves to live in wealth and nobody should be poor. We must pursue this goal much harder than in currently existing capitalism because it is the only thing that can stop overpopulation and with the world population reaching our planet's limits, growth will come to an end and then, the number of jobs will decrease sharply and then capitalism as we know it today will stall and generate much more poor then people are willing to accept. We will just go about it differently, smarter and much more careful than communism did. To eliminate poverty and make sure nobody gets poor even when growth comes to an end or when the overall population decreases and the economy shrinks, we will apply the variable Schmid-tax-system on capitalism as we know it today.
Eliminating Poverty with the Schmid-Tax-System
The Schmid-Tax-System is nothing crazy. Basically it's nothing more than a shifting, moving around and adjusting of taxes to steer the economy, our society and thus our future into the direction which we all want it to go.
Removing all per-head Taxes on Labor (Jobs)
In today's capitalism there are often a lot of taxes on and expenditures associated with labor.
Let me explain: If an employer has a certain amount of work that he wants to have done and the product of this work will earn him a certain amount of money on the "free market", he will employ people, employees, to do the work for him. As long as he does not have to pay them more than his total earnings will be, this is worth it for him. The less he has to pay his employees, the more he will earn and the more he will be motivated to continue with his business.
Because our society depends on work or labor to provide us with the goods and services we and our nations need and like, labor is probably the most important good for our society and thus for our economy. Thus it makes very good sense to really thoroughly use labor as the primary and most important means to redistribute wealth, to fight poverty and to counter the gravitational force which money has upon itself. The more people work and the more they earn, the more money is redistributed from the rich to the poor, the more money is spread from large piles to small piles and the more fluently our economy can run, the more goods and services can be exchanged. Everyone will be able to live in wealth, have access to education and information and only this can stop our overpopulation problem without bloodshed or use of unethical force.
Yet, contrary to this, most capitalist countries and their economic systems are actively fighting work. It's as if they don't need either labor to provide the goods and services everyone needs, nor the great possibility for redistribution of wealth which labor offers in order to eliminate poverty. They actively fight labor by putting penalties on labor, by punishing people such as employers who create jobs and labor with a fine for every single job they create. They impose taxes, costs and expenditures on every single job and thus on labor, which an employer creates. In capitalist economic systems of today, an employer who has a certain amount of work to be done has to pay health insurance, unemployment insurance, disability insurance, retirement pension, registration fees, etc. for every single human he employs and thus for every job he creates.
So it's not enough that an employer who has a certain amount of work that he wants done has the pain and aggravation of having to organize shifts, presence and on-the-job times of all employees, which becomes not just an aggravation, but a matter of cost when there are more than at a certain number of employees, additionally, he will have to pay countless insurances, fees and costs for every single employee, let alone having to manage all the paperwork associated with that. All these things are a very strong incentive for employers to employ as few employees as possible. The fewer people they employ, and the fewer people they can get a certain amount of work done with, the less taxes, insurances and fees will have to be paid by the employer, the less organization and paperwork is necessary and the cheaper and easier to handle will all this be for the employer.
If it weren't for the work or labor which can be done by a human being only, employers would be most happy to employ nobody at all! And who can blame them? Because of the additional organizing troubles and especially the additional fixed costs for insurances, taxes and other fees on every additional job, on every additional person employed, all employers have many very strong incentives, to get the amount of work they have done with as few people as possible. If employers can get a certain amount of work done with half the people, that means not only half the organizing troubles, but also half the fixed costs for insurances, etc., even if this half amount of employees works twice as long.
What this all spells out to is that with our current capitalist economic systems, it's not worth your while to be social by employing as many people as possible, as unions naively and stupidly all whish employers to be, but it's actually extremely beneficial for employers to employ as few people as possible and to then have them work as long and as hard as possible. This saves not only countless time and effort needed in organizing the work of more people, but it also saves the employer millions of dollars in per-head fixed costs such as for insurances, taxes and other fees.
The organization of insurance fees, taxes and other costs which are really needed to pay for health insurance, retirement pension, etc., in such a way that it becomes financially profitable for employers to employ as few people as possible to do a certain amount of paid-for work really is a strong incentive to employ as few people and to create as few jobs as possible. And that in addition to the additional organizing troubles arising from doing a certain amount of work with more people instead of with less. Thus employers are motivated to create as few jobs as possible and to employ as few people as in any way possible to get a certain amount of work done.
Clearly this does not give labor the value which we saw that it has for our society and economy. Although politicians know or seem to feel instinctively that jobs and thus labor are extremely important to people and thus for their re-election, they don't understand that it's not good enough to have a majority of people employed and thus vote for them, or to just create some jobs, but that we actually need a system which eliminates poverty and assures wealth and thus jobs for everyone, without exception, even when growth in population and economy come to a total stop or are even reversed.
What we need to eliminate poverty by redistributing wealth from the rich to the poor in a responsible manner which provides society with the needed goods and services is the use of labor as the means to assure this. We need good jobs for everyone, not bad jobs requiring overtime for as few people as possible while rendering all others unemployed! It's time politics do something to reach this goal. And I say this is not a problem of rulership, but a structural problem. If we want jobs for everyone, we need an economic system which rewards employers and gives them a positive incentive to create not as few jobs as possible to get a certain amount of work done, but as many jobs as possible. We need a system which makes employers think that if they have paid-for full-time work for 50 people, they would much rather do it with 100 people instead. This is the only way to get through a shrinking population and economy, the only way to assure wealth for everyone, even during economic depression and thus the only way to fight our planet's overpopulation.
We need employers to start thinking socially responsible, not because it is "nicer" if they do, but because if they don't there will be poverty and if there is poverty, there will be overpopulation and finally bloodshed, war and misery.
But how do we get employers to think social, to want to employ rather more people than less?
We tried asking them nicely and obviously it didn't work. Communism tried forcing them and that didn't work either. The only other option left in my eyes is to make it worth their while. We must give employers a positive incentive to do so. And the only thing which is really relevant to an employer is money, because money means future for his business. So the incentive given to "social" employers which we need must not be a chocolate cake or a diploma, but a financial incentive. In other words, we must make it financially profitable for employers to be "social", to spread the amount of paid-for work they have not on as few shoulders as possible as is the case today, but on as many shoulders as possible!
And obviously raising insurance fees, taxes and other expenditures on a per-head basis for every employee as our economic systems do today is the exact opposite! It rewards employers financially to employ as few people as possible. So naturally, this must go in a first step. In a first step we must remove all insurance fees, taxes and other costs which employers must pay for employees on a per-head basis. Then, in a second step, we can think about rewarding employers financially for dealing with the additional trouble of doing a given amount of work with as many people as possible instead of with as few people as possible.
Removing all insurance fees, taxes and other per-head costs which employers must pay for every employee is not hard. The problem is how the good and required services which were paid for with these fees and taxes should be paid for instead. Here we have two possibilities: We can either pay for them with totally unrelated taxes such as on the consumption of non-renewable resources like oil, gas and land, etc., or we can pay for them with related taxes which are raised where the beneficiary of such taxes or the one creating the problem is or at least as close to the source as possible. I strongly favor the second option, raising the taxes as close as possible to the source, to those creating a problem or benefiting of the raised taxes. In programming we call this good practice because it makes a final program much clearer, easier to understand and thus also easier to fix and fine-tune when something needs to be changed or doesn't work as it should.
Raising Taxes for required Services responsibly at the Source
Raising the required fees and taxes for services in connection with people and labor, such as health insurance, disability insurance, retirement pension, unemployment insurance, welfare, etc., as close to the source as possible, but without giving employers an incentive to employ as few people as possible can be done by paying all such fees and taxes with a simple percentage on the wage of every employee. Now before unions start screaming bloody murder, this does not mean that employees will get or earn less. It's just a shift from a per-head payment made by the employer for every employee to a percentage payment based on the wage made by every employee. As much more taxes and fees which the employee must pay is as much more wage as the employee will get. So the employee pays more taxes and fees with his wage, in fact all of them, but in the end, all things counted, the employee has the same amount of money in his pocket, because his wage is exactly that much bigger as the additional amount of taxes and fees he has to pay.
Additionally, to facilitate the payment of taxes and to not give the employee the idea that something is taken from him which is rightfully his, which it is not, all fees and taxes which he must pay from his wage are to be subtracted and paid for before his wage is paid out to him. This way the employee never sees has his full wage, before all taxes and fees are paid, but only receives what is left after all taxes and fees are paid. And this is exactly the same amount as before, with the current system in capitalism of per-head fees and taxes paid by employers for every employee or job created. The difference is, with this shift in payment method, we eliminated a huge part of the incentive for employers to not create jobs and to do work with as few employees as possible.
Add Taxes on non-renewable Resources
An alternative to pay for required services in connection with people and labor is to raise required fees and taxes in totally unrelated areas, such as by raising taxes on non-renewable resources such as gas, oil, water, land, etc. In fact this is not even that far away from the source because burning non-renewable resources such as gasoline, diesel or kerosene in transportation vehicles or using oil for heating actually pollutes the air, thereby causes cancer and other sicknesses which in turn raises the expenses of health insurances. So raising the money to pay for health insurances with taxes on non-renewable resources such as oil is actually not raising the fees too far away from the source of responsibility.
However using taxes raised from non-renewable resources to pay for retirement pensions or unemployment insurance might not seem logic to many people and might in fact not be ideal because of the intransparency and thus increased difficulty of maintenance which it adds to an economic system.
Besides using taxes on non-renewable resources to raise money needed for required services, institutions or the government, such a tax certainly is a very strong incentive to use non-renewable resources sparingly and to protect them wherever possible. For this reason alone, even if we would not need the money raised by them, an economic system of our time which faces the environmental destruction created lastly also by overpopulation must make heavy and strong use of taxes on non-renewable resources as incentive to use as little of them as possible. Especially if using such resources also pollutes the air or makes people especially sick such as burning diesel or heating with oil for instance.
In the end, how a government raises taxes to pay for its needed services such as health care, welfare, disability rents, retirement pensions, prisons, etc. is up to the government. The only thing that really counts is that non of that money is raised from employers on a per-head basis for employees as is the case today.
Add a Tax Incentive for Employers to be Social Capitalists: The Schmid-Tax
To eliminate poverty by creating good jobs for everyone, without exception and at all times, no matter if population and economy are growing or decreasing, we have already eliminated all negative financial incentives for employers, such as insurance fees and taxes on a per-head basis for each employee which motivate employers to not create many jobs and spread a given amount of paid-for work on as many shoulders as possible, but on as few as possible. Still, even if employers don't have to pay a single penny more in terms of insurance fees, taxes and other fixed costs if they employ two people to do a certain amount of work instead of one, dealing with two people instead of one still is more of a hassle, more tedious, etc. Two wages must be paid and even if each wage is only half, that still means double the paperwork. Two people must be instructed, their hours and presence times must be checked individually, synchronized, etc.
What all this translates to is that even if we managed to create an economic system which makes it exactly as expensive or as cheap in terms of wage and paid fees and taxes for an employer to spread his work on as many shoulders as possible instead of on as few as possible, doing so, spreading his work on more shoulders still means extra trouble and thus extra work for the employer. And extra work translates into, you guessed it: Extra cost.
So just removing all costs which employers have to pay for employees on a per-head basis as we have done is good, but still not quite enough. Employers who need to household strictly with their money, and these are all good employers in capitalism, will not create as many jobs as possible and spread their work on as many shoulders as possible, even if they do not have to pay a single cent more for wages or per-head taxes and fees, simply because of the extra trouble, time, work and thus cost associated with employing many instead of few people. This extra cost can not be removed by smartly shifting taxes and fees as we did with per-head fees such as health-care, retirement pension etc. To also eliminate or overcome this additional trouble and negative incentive for employers which motivates them to employ as few people as possible and to create as few jobs as possible, we must actively give the employers something out of our own pocket to make it financially worthwhile for them to do what we want, the opposite.
By saying we need to give the employer something out of our own pocket to motivate him to do a given amount of work with as many people as possible instead of with as few as possible, I didn't mean our personal pockets. I meant the pockets of the government.
Once again socialists might rebel at this thought. Giving capitalist employers money out of the state's pockets, just to get them to behave socially is probably not their idea of charity or socialism. Yet it is necessary due to the reasons mentioned. Still socialists might get increasingly frustrated with me because first I privilege employers with not having to pay any kind of fees or taxes on employees anymore and now I actually want to even give them money out of the state's pockets just to get them to behave socially as required!
Luckily for me and for socialists there is a nice solution to this seemingly one-sidedness: Instead of giving employers something out of the state's pockets, we can also give those which do not behave as required, which are not as social and which do not employ as many people as possible a little less of something which they already get from the state today. To make things clear, let me explain this with simplified example:
When an employer makes 1000 dollars by selling a product on the market, from this money he also has to pay the wages of his employees. Just to keep things really simple for the sake of this example, let's say he has 10 employees and each one of those employees gets a wage of 50 dollars. That means the employer pays a total of 500 dollars worth of wages to his employees and his final earnings are only 500 dollars. Now the tax system in most capitalist countries raise taxes only on the employer's final earnings, the 500 dollars left after having to pay the wages of his employees. Perhaps the tax on these earnings is 10%, so the state asks for 50 dollars of the 500 dollars made, which leaves the employer with 450 dollars after all wages and taxes paid. So far, so good.
What this current system implies, is that employers can deduct the wages they pay to their employees from their initial earnings, the 1000 dollars made initially in our example, before having to pay tax on their earnings. This allows employers to pay 10% only on the 500 dollars left after paying wages, instead of 10% on the full initial 1000 dollars. We think this is fair, because the employer actually earns only 500 dollars, even if he initially got 1000. If he had to pay 10% taxes on the initial 1000 dollars made, that would be 100 dollars worth of taxes instead of 50. So what the current system actually does is giving back the employer 50 dollars worth of taxes for the 500 dollars worth of wages he had to pay to his employees. It's like the government is saying, O.K., we want 10% of everything you earn, which is 100 dollars, but then, after having received that money, the employer says "but I had to pay 500 dollars to my employees, so I only made 500 dollars, not 1000!". Upon hearing this, the government says, O.K., if you only made 500 dollars, I guess 10% of that is only 50 dollars, so here, I give you back 50 dollars. And this is the point! The government gives the employer back money because he employs people!
Returning to our initial problem that we have to give the employer an additional financial incentive to deal with many employees instead of just a few when he spreads his given amount of paid-for work on as many shoulders as possible instead of on as few as possible, this means instead of giving the employer money out of the government's pockets, we can also give him back a little less of what he already gets under the current system if he does not behave as required, as a social employer! In our example this is the 50 dollars the government gives the employer back for the 500 dollars worth of wages he had to pay to earn the initial 1000 dollars.
To make things short we can say to the employer: If you paid 500 dollars worth of wages to make 1000 dollars by employing only 10 employees, that's not very social and we will give you back not the full 50 dollars for their wages, but only half of that, 25 dollars! On the other hand, if you paid 500 dollars worth of wages by employing 20 people, that's very social and we will pay you back the full 50 dollars.
O.K., that was a lot of math. Let's see what all this boils down to for employers so far:
First we removed all per-head fees and taxes from the employer and shifted them to the employee side. This means the employer does not have to pay any additional fees, taxes or other fixed costs when employing 20 people instead of 10. Next, we told the employer, that if he employed only 10 people to make 1000 dollars and paid 500 dollars worth of wages, we will raise 10% taxes on the 1000 dollars he made, 100 dollars, and pay him back only 25 dollars (5%) for the 500 dollars worth of wages he paid to his employees, because employing as few people as possible is not very social. The end result for the employer is, he made an initial 1000 dollars, with this he paid 500 dollars worth of wages and 100 dollars worth of tax. From the tax he got back 25 dollars for paying wages, but only 25 dollars and not 50 for not employing as many people as possible. To organize only 10 people, the employer had to spend only 10 dollars. This leaves the employer with a final earning of: 1000 - 500 - 100 + 25 - 10 = 415 dollars.
Now let's say the employer employed 20 people instead of 10 to do the same job. Because the per-hour wages are the same and 20 people are done faster than 10 and because we eliminated all per-head fees and taxes on employees, using 20 people instead of 10 costs the exact same amount of 500 dollars worth of wages. However, organizing 20 people instead of 10 is more tedious which in the end translates in more cost. Instead of just spending 10 dollars to organize 10 people, the employer had to spend 20 dollars to organize 20 people. On the other hand, the government thinks this is very social of him, so instead of paying him back only 25 dollars (5%) for the 500 dollars worth of total wages he paid his 20 people, the government pays the employer back the full 50. This leaves the employer with a final earning of: 1000 - 500 - 100 + 50 - 20 = 430 dollars.
What does all this mean?
Take a good look at the numbers and ask yourself what a good capitalist employer would do. Naturally he will go for the solution which leaves him 430 dollars instead of just 415 dollars. And that's the whole point of the Schmid-tax, to make social behavior which we want from employers but cannot simply demand from them without compensation, financially profitable for them.
Of course this example is extremely simplified for the sake of understanding, but you get the point. The percentage of the money paid pack to the employer for the wages paid to his employees or the amount of tax raised on the initial earnings of his business is what the Schmid-tax is all about. The more employees an employer has or had while making an income, the less tax he has to pay. And the less employees he has or had while making a certain initial income, the more tax he will have to pay. And this to such an extent, that it will and must be financially worthwhile, to employ as many people as possible or more instead of as few people as possible.
You can think of the Schmid-tax two ways: If you think the employer pays 10% tax on his initial earnings, the 1000 dollars and the government returns the amount of tax he paid on the wages for his employees, 50 dollars for 500 dollars worth of wages, then the Schmid-Tax is the amount the government deducts of those returned 50 dollars for being so unsocial has having employed few instead of many people.
A more direct way might be to think that the employer pays 10% tax only on his final profit of 500 dollars, after having deducted the wage for his employees, meaning 50 dollars which is the income tax most capitalist systems have today, as well as another tax, the Schmid-tax which is raised on the total wages paid to his employees, and which is higher the fewer employees he has. Either way, it's the same thing, it's a direct financial incentive to employ many people to do a certain fixed amount of work and it's supposed compensate and even overcome the negative incentive created by the additional trouble, work and costs of employing many people to do a certain fixed amount of work instead of as few as possible. Please make sure you understand this example and what the Schmid-tax is well before you read on as this is the essential part of our new and better economic system.
Of course this was just an example for illustration. In real life, taxes will not be 10%, people will not earn 50 dollars and the cost of employing 20 people to work half-time and to do the work which 10 people could do in full-time (including overtime work), is not just 10 dollars more. In fact, not just the sums will be different in real life, but also the proportions and relations. Nonetheless the mechanics of the system remain the same and when all taxes on labor are removed and the Schmid-tax is set to the proper value, it will be a strong enough incentive for employers to employ as many people as possible to do a certain amount of work instead of as few people as possible. Of course the Schmid-tax also can be set to different percentages. In our example we used a Schmid-tax of 10% on total employee wages when employing people full-time and thus as few people as possible, and a Schmid-tax of 0% when employing people part-time 50% and thus double as many people as would be needed as with full-time. Obviously the height of the Schmid-tax can be anything a government wants and sees fit in order to maintain employment for everyone. It could be 20% for full-time jobs, 10% for part-time jobs of 80%, 5% for part-time jobs of 60% and 0% for half-time jobs. Whatever does the job of eliminating poverty by assuring employment for everyone, without exception.
Making the System stable and independent of Growth with the variable Schmid-Tax
Let's summarize our work once more: We eliminated the per-head cost employers have to pay for every employee and we added a Schmid-tax to compensate for the additional trouble and costs of employing several people to do the job of few. If this is done right, it will lead to employers competing for employees much more than today. Suddenly it will become interesting to employ even people with disabilities, elderly people or people who need to be educated first. If the Schmid-Tax-System is fine tuned just right, there will be so much competition between employers for employees, that all jobs become good and guarantee the elimination of poverty.
However, if the Schmid-Tax-System is not tuned right, if it gives too little or too much financial incentive to employers to create many instead of few jobs, two things can happen: If it give too little incentive, there will be unemployed again who become poor. If it gives too much incentive, the competition between employers for employees will be so hard, that they are forced to create an abundance of good jobs. This could cost too much and reduce overall productivity because employees could get tempted to just occupy jobs instead of actually working. If there are countless good jobs available, you don't really need to work. If you get fired, you can just get a new job.
Obviously both of these scenarios are not preferable and one might remind one of the faults of extreme capitalism, the other of the faults of extreme communism. Luckily for us, we are not fixed with a certain Schmid-tax. Depending on the reaction of the employers, the employees and the overall cost and productivity, we can set the Schmid-tax just right, simply by trial and error. All that's needed is a government or a parliament which has the power to adjust the Schmid-tax on short notice to the overall benefit.
Being able to adjust the Schmid-tax dynamically allows not only setting it right and fine-tuning it to a given existing economic system, but even more importantly, it allows adjusting it to compensate for severe changes in the market and economy. The Schmid-tax doesn't fix the psychological ups and downs of the stock market, at least not initially, it's only a very efficient shock-absorber. So even after introducing the Schmid-Tax-System, the stock markets will continue to go up and down and as a consequence, the amount of paid-for work in man-hours will go up and down just as drastically as the stock market. The Schmid-tax doesn't fix this, but makes it much more irrelevant by maintaining jobs for everyone at all times (which in turn actually does have a very strong stabilizing effect on the stock market due to the stabilized consumption caused by a stable employment of everyone!). However, to be able to maintain jobs for everyone at all times, the Schmid-tax might have to be adjusted dynamically to counter the effects of the ups and downs of the stock market. Fortunately, the Schmid-tax was designed from the very start to be a tax which can be adjusted dynamically, overnight and just as easily as the central bank's base discount rate.
In addition to all these advantages, a freely adjustable Schmid-tax has one more great advantage: By being freely adjustable, any government and ruler who does not trust if it will work as intended can implement the Schmid-tax from nothing to 100% of what he wants at any speed he wants. And it can be reversed and abandoned without any trouble at all if it doesn't have the desired effect. The only precondition is that to really work properly and to be able to see its effects clearly, as a precondition to implementing a Schmid-tax, all per-head costs and fees raised from employers for every employee should first be transferred elsewhere, such as to fees and taxes raised as fixed percentages, never as fixed sums or minimums, from wage.
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