May budget could reduce inequality, the size of government and its taxes?

The May budget could reduce inequality, shrink the size of government and its taxes, and allow most voters to become richer. The process would help build a larger, more self-reliant circular economy and foster a richer form of democracy.

What is required is a tax incentive for shareholders that allows corporations to issue free shares to all citizens. This would create a pathway for corporate dividends to gradually replace welfare payments and pensions.

Employee incomes would increase by about 12 per cent as the need for compulsory superannuation contributions is removed. Ownership of firms would be shared more broadly with citizen stakeholders in the constituencies represented by politicians who support the process.

Multinational corporations would gain an incentive to transition gradually while earning larger profits. Dividend reinvestment plans would encourage the creation of newly incorporated offspring businesses, expanding the corporate ecosystem. This would create succession pathways for both shareholders and employees. New foreign investment would still be attracted, but with citizens progressively acquiring equity and, in effect, “buying back the farm”.

The export of Australian income to foreign investors would be reduced. Australia could become a much richer and more self-reliant circular economy. Professor Edith Penrose once observed that foreign investment introduces “the acceptance of an unknown, unlimited, and uncontrolled foreign liability”.

Government taxes used to fund welfare could be progressively reduced. As a result, the scope and size of government would shrink while self-governance could increase efficiency.

Self-governance

By definition, self-governance means removing the need for"Markets and States". This point was raised by Elinor Ostrom in her Nobel Prize acceptance lecture. The Nobel Committee noted that Ostrom had overturned what had previously been the "unanimous" view of economists, who believed that self-governance of shared resources was impossible. 

Ostrom spent forty years documenting examples of self-governance in communities competing for life-sustaining resources. The key is distributed decision-making among politically competing interests. She described this as “polycentric” governance. It creates checks and balances that help discover or negotiate win-win outcomes.

Contested decision-making also appears in biological systems. The human brain, for example, contains no chief executive neuron. All living systems demonstrate forms of self-regulation and self-governance.

On two occasions I have designed corporate charters incorporating polycentric self-governance for Australian national non-profit organisations. In 1974 I became the honorary CEO of the unincorporated Australian National Ski Federation. Each self-governing skiing state had its own self-governing organisation managing competitions among local clubs. I incorporated the national body as a polycentric federation to govern interstate competitions and represent Australia internationally within the global skiing federation, which in turn became part of the self-governing Olympic movement.

No new laws are required to introduce self-governing businesses. Evidence already exists in polycentric firms that have proved competitive and resilient over the past half century. Examples include the Mondragon Cooperatives in Spain, the John Lewis Partnership in the United Kingdom, and the VISA card organisation in the United States.

The self-funding tax incentive proposed to reduce inequality could also introduce self-governance. The cost of the incentive would be repaid to government by reducing shareholder overpayment that current accounting practices cannot report. Accounting doctrines do not require the disclosure of shareholder time horizons. Yet surplus profits arising after investor time horizons are often substantial. What is not reported cannot be taxed. These surplus payments help explain how corporate ownership becomes soradically concentrated.

Enriching democracy by removing corporate dictatorships

According to Oxfam, eight men own more assets than half the poorest individuals on the planet. Fixing this problem requires processes for sharing ownership. Stakeholders need to be included as owners as no firm can exist without them. In 2018 the largest fund manager in the world, Larry Fink recognised the need for "A new model for corporate governance" that would bring "critical stakeholders to the table". As Mark Carney stated at Davos earlier this year, "If you are not at the table you are on the menu." Polycentric governance creates a way for stakeholders to protect themselves as co-regulators.

Economists such as Thomas Piketty have documented the concentration of wealth but struggle to explain its mechanisms. One reason is the absence of a concept such as “surplus” profits to describe excessive payments to investors. Piketty observed in his 2017 work that “through most of human history, the inescapable fact is that the rate of return on capital was always at least ten to twenty times greater than the rate of growth of output and income.” This dynamic helps explain the Oxfam findings.

The solution is to introduce time limited corporate property rights as adopted for all intellectual property. Countless billions of dollars have been invested in patents that only last 20 years. On two occasions, I have proved that hundreds of investors will contribute millions of dollars to fund higher-risk new ventures with 15-year leases. The first was Saxonvale Vineyards Limited founded in 1969 and publicly traded in 1975. The second was Barwon Farmlands Limited, founded in 1980 and publicly traded in 1985.

Under the proposed system, investors would receive a tax incentive providing larger, quicker and less risky dividends on the condition that two changes are introduced to corporate charters.

The first would be adoption of the polycentric self-governing "Design Principles" described by Elinor Ostrom in her Nobel Prize lecture. The second would require five per cent of shareholder equity to be transferred annually, through book entries, to a stakeholder equity account. Stakeholder shares, with taxable dividends, would be gifted to citizens in the host bioregion of the firm. These dividends would be untaxed if reinvested in other participating firms.

Over time, corporate scale would remain closer to human dimensions as ownership cycles gradually shift toward local stakeholders over roughly twenty-year periods. Operational stakeholders would become shareholders, reinforcing responsible governance but still maintaining shareholder primacy.

These processes would reinforce self-governance, environmental stewardship, and the re-election of supportive politicians across the political spectrum. Evidence already exists in the United States, where both Republicans and Democrats support tax incentives for Employee Share Ownership Plans. However, only about eight per cent of US citizens participate.

Ecological corporations could involve all voters. Capitalism would become more sustainable, governed by the renewable natural endowments of nature.