Wealth Distribution (As opposed to Redistribution)

Writers Note: This is an essay I originally wrote in January 2014 and posted to my Tumblr. With Hilary Clinton calling for companies to distribute more of their profits to their employees, Jack Dorsey giving a third of his shares to Twitter’s employees and Apple expanding their use of Restricted Stock Options to incentivize their employees it seemed like a good time to put this idea forward again. This is my proposal for addressing the widening income gap in the US.


The GAP

There is growing discontent regarding the widening gap between the wealthiest people and the rest of the citizens of the US. This is not new as complaints about the rich have always existed. But more recently it has been bubbling up into the public sphere both in terms of protests (The Occupy Movement) and in the data (Real Wages Decline, the Gap Between Rich and Poor Increasing). Everybody agrees that something must be done (except maybe the richest one percent though even some of them do too).

This widening GAP is not just about wanting a bigger piece of the pie. This is a real problem as the engine of the economy rests heavily on the purchasing power of the middle class. This is a complicated subject debated in other venues by more informed people than me but for the purposes of this essay it’s enough to acknowledge that the Gap is an issue that must be addressed.

I’d like to present one possible solution that may be achievable in our political climate. Here’s the TL:DR version:

Offer as an option to corporations and businesses that in lieu of corporate taxes, some percentage (determined by legislators) of the income that a company generates (income minus legally obligated debts and operating costs) will be distributed to the employees of that company (the Distribution). The amount each employee is entitled to is determined by their salary. Add up all the salaries paid to employees, from CEO down to janitor, and whatever percentage of that sum an employee’s salary represents, that is the percentage Stake they have of the Distribution.

Think that’s stupid? Think that won’t work? Think no one would agree to that? You may be right, but before you pass judgement allow me to make a more detailed argument for it.

First, I think we should break down just where wealth comes from and why.

Labor, Money and Business

In the beginning we were hunters and gatherers. Why? Because that is how we survived.

The hunters hunted down meat for their survival and the gatherers gathered fruits and vegetables for their survival. But the hunters probably wanted some fruits and vegetables and the gatherers probably wanted some meat. It didn’t make sense for hunters trained in hunting to also waste time gathering and vice versa so a deal was born called Trade. I’ll give you some of the meat I’ve hunted and in exchange you will give me some of your fruits and vegetables. All are happy.

But there are several problem that almost immediately present themselves. First of all, how many apples equals a deer? Or a squirrel? Is a chicken leg worth an apple? Well, it all depends on what the traders felt they were worth and usually this was related to how hard they were to come by. And second, what if I have a lot of meat to trade now but I don’t want the fruits and vegetables until later? If only there was some way to account for what I am giving you now that I can use to offset the trade in time. The answer, of course, is money.

Combine these two concepts and you get to what Adam Smith outlined in The Wealth of Nations; at its simplest, money represents an exchange of labor.

(Important point; value, or the amount of money something costs, is not a measurement of the amount of labor that was required to produce the product. I am only pointing out that money is given to a person in exchange for them doing something. How much one person gives to another is dependent on supply and demand, not how much actual labor was involved.)

So now we have an economy. People are trading. Stuff is getting done. But we’re a clever band of apes and someone realized that if a bunch of us pool our labor resources we can increase the amount of “stuff” our labor produces.

Originally this was the root of the family. One person would go hunt for the family while the other person would raise the children and care for the home. But it quickly extended to farming. Two people can guide a plow with an ox and get far more vegetables out of a harvest than one person pushing a hand plow. Get one person to flush the game out of the brush while a second shoots it and you can bring home more meat per hunt.

This is the root of business. We pool our labor, we produce more, we all benefit more than we would as solitary laborers. But go back to the beginning and you can see that, even though the relationships between people have become much more complicated, trade is differed over time via money and labor is distributed, the root of why we do this has not changed; it is how we survive.

Therefore I postulate the following; all business is just pooled labor, all money is just an abstraction of labor for trading, all labor is for survival. Therefore, the essential purposes of business and money are to enable people to survival. In fact, that is the only axiomatic reason that business and money exist.

Connecting Labor to Profit

What was the point of this incredibly oversimplified history lesson? Well, a funny thing happened on the way to modern society…

We may be clever apes but we are also aggressive apes. It may even be one of the reasons Homo-sapiens won the evolutionary race to the top of the food chain. But while it drove us to higher and higher levels of achievement though competition, it also led to those with the capacity to excel compared to others to dominate those others. Advantages lead to more advantages and eventually you wind up with stratification of society by classes. At its worst it was feudalism, monarchies or dictatorships. But even in today’s “modern and enlightened” society it can mean oligarchy.

Modern democracy was intended to be a countervailing force against those with outsized power and influence. It provided the mostly powerless masses a tool with the power to reign in the powerful individuals and organizations that could otherwise take advantage of isolated and un-empowered citizens. It did this through representative democracy designed to reflect the wishes of the majority which were inherently primarily made up of those with the least power.

But little by little that delicate balance has been corrupted (or may not have ever been correctly balanced to begin with). With regard to business there is one semantic convention that has worked against the citizens at the bottom: Laborers have always worked “for” a business/individual business owner, not “with”. That simple word change meant that the profits were always “for” the business/individual owner and the laborers were always an outside resource to be bought with wages.

But as I argue above, business is not there for a business/individual owner to profit but for members of a society to provide for their own survival. The reason we in a modern democracy tolerate “big business” in all its greed and massive profits and outsized paychecks for executives is not because we think that might be ours someday, but because we recognize that businesses benefit society. They provide citizens a manner in which to provide for their own survival in a far more efficient manner than if each individual had to go it alone.

The foundation of my argument then is that we should consider laborers as working “with” each other in a group form defined as a business. That business entity exists and profits on the backs of its laborers. No laborers, no business, literally.

Massive side note: This is not an argument for Communism or Marxism even though “backs of its laborers” certainly sounds like it. The problem with those philosophies was that they believed in dividing up everything to every citizen equally no matter their job or even their performance in said job. They assume generic “citizens” that behave in a rational, consistent manner rather than in the messy way actual humans behave. Not to mention the fact that they are inherently unfair and massive disincentives to progress. That is not where I am going with this.

It is an argument for the laborers of a company having a claim on the profits of said company. They worked and their work helped generated that profit in some part. If it didn’t they wouldn’t be employed there. Yes, it’s as simple as that. (Well, ignoring useless nepotism hires and corruption, etc. But too much of that and there won’t actually be profits so the statement still stands.)

Wealth Distribution (Not Re-distribution)

And so we come to the essence of my proposal; the profits of the company should be shared with those that generated it. In broad strokes (again):

Offer as an option to corporations and businesses that in lieu of corporate taxes, some percentage (determined by legislators) of income that a company generates (income minus legally obligated debts and operating costs) will be distributed to the employees of that company (the Distribution). The amount each employee is entitled to is determined by their salary. Add up all the salaries paid to employees, from CEO down to janitor, and whatever percentage of that sum an employee’s salary represents, that is the percentage Stake they have of the Distribution.

Example (with numbers made up for demonstration only!): Say the Distribution percentage is set at 20%. If the company makes $10,000,000 of income in a year (after paying legal obligations including salaries, rent, interest on loans, etc. This is probably not quite the same as profit as is currently understood but it is similar.) then the Distribution total will be $2,000,000. Say CEO’s salary for the year is $100,000 and the janitor’s is $10,000 and the total of their and all the other employees salaries adds up to $200,000. That means that the CEO is entitled to 50% of the Distribution ($1,000,000) and the janitor is entitled to 5% of the distribution ($100,000). (Obviously these numbers are absurd but they show the intended math.)

“20%!!!!” You scream. “That will bankrupt the company!” Ah, actually it won’t. First of all, that number was made up to make a point but will actually have to be worked out during the crafting of the legislation. But I wouldn’t be surprised if it actually wound up higher! Why? Because along with asking a company to give up profits to its workers will be a complete exemption from corporate taxes which are likely to be an even higher percentage. We are in essence replacing taxes with the Distribution (with some adjustment to the allowed deductions). Companies could actually end up giving away less than they are now.

Okay, (some of) The Details

What’s going on here. Well, lets start with that last point.

We are swapping corporate taxes for Distribution. Almost all economists agree that we should get rid of corporate taxes and shift the burden to a VAT so dropping the corporate tax receipts isn’t a really controversial issue.

Conservatives hate taxes because they are in essence “wealth redistribution” from those that earned it to those that did not. But I’m arguing for “wealth distribution”. Unlike entitlement payouts, these people actually, demonstrably earned that money. Anti-tax people and libertarians should like this plan. (Companies will still need to file a Distribution declaration with the government for transparency but my guess is it will be much simpler and straight forward. In line with the type of information provided to stockholders with regards to operating costs.)

And putting it into the hands of the middle and lower class citizens means that it is much more likely to be spent, injecting it back into the economy and returned to the government in the form of VAT/sales tax (income tax and capital gains tax are a discussion for another day but would also probably be part of this in some form). And it’s been found that giving money directly to the people is the best way to help those that are in need.

In addition to paying a Distribution that is (theoretically) at a lower rate than their previous corporate tax rate, corporations are rewarding their own workers, thereby directly incentivizing them to help the company profit and thereby profit themselves (same idea as Restricted Stock Options). That means more productive and dedicated workers, a bonus for a successful company. But it also means that companies have to be successful to attract the best workers. That means better run companies as well. Incentives mean everything in capitalism.

How is this not Communism? Because it isn’t “everyone gets the same”. You get a Stake based on your salary. Small salary? Small Stake. Big Salary? Big Stake. The fairness of your Stake is already baked into our system of salaries. This of course means that we still need a minimum wage which guarantees a minimum Stake, but beyond that your salary dictates your Stake.

Related to this would be the requirement that any additional bonus given to one is (proportionally) given to all. The legislated Distribution percentage is a minimum but not a maximum. If in our example above the company chose to give the CEO not $1,000,000 but $2,000,000, then everyone else in the company would get double their Stake as well raising our janitor’s Stake to a princely $200,000. If a company wants to award one employee more than the others then just raise their salary. Pay the CEO $200,000 instead of $100,000 while leaving all other salaries the same and he’ll get $2,000,000 of the Distribution while the janitor still only gets a “paltry” $100,000. Of course in either of these versions the company would quickly go bankrupt so therein lies the built in incentive to not give CEO’s outsized bonuses.

I would also require that any stock compensation given to one must be given to all though in the same ratio as the Stake percentage. Give the CEO $1,000,000 in stock and you have to give the janitor $100,000 in stock. This means that if a board of directors wants to pay a CEO a ridiculous amount of money it has to be proportional to an actual ridiculously outsized up front salary. It’s possible and certainly their prerogative, but will likely be much harder to get past investors, employees and the public without really good justification. In that sense it is self regulating.

You may have noticed that I’ve also repeatedly said income minus legal obligations. What do I mean by that? This is going to be calculated differently than taxes were. Workers should get a cut of first dollar income to the company, but it’s not as simple as that since every company has legal finical obligations, primary of which is actually the workers up front salaries. This could also be licenses and permits, legal fees, rent, etc. There are certain hard costs to running a business and they need to be covered. On the other hand unlike with taxes there won’t be a ton of allowed deductions. New purchases, repairs, growth related investment, R&D, etc., all will have to come after paying people their Distribution. The Distribution is in essence a part of their direct salary. It is not a bonus, it is part of the cost of running the business and must be paid up front like other business running costs.

Loopholes and Special Cases

As much as this needs to be kept as simple as possible, one size will not fit all. Here are how some of the loopholes and special cases could be addressed.

Take that last detail about investment in the company coming after the Distribution. New businesses will need time to grow and find their market and become profitable. Typically this is about five years. Cutting into the profit for the Distribution before there are really any significant returns would severely limit a company’s ability to get off the ground. So for the first five years investments in the company can come before the Distribution instead of after. But note, there’s still a Distribution if there is profit left over.

What about projects that don’t realize income or profits in the same year the salaries are paid? What about free-lancers who don’t work the full year or long term? In the movie industry, ticket receipts and especially home video sales are realized often years after production. Most of the people involved in the actual shooting of a movie are free-lance and have moved on. In addition, the studios are notorious for claiming that a movie never made a profit because they counter the profits of one movie with the losses of another in their slate of films. How does that work?

As an alternative to the salary/company structure, workers can be project based with their Distribution tied to profits over the life of that project only. For this to work a project would need to be organized like a wholly owned subsidiary that lives only for that project. Movies already do this to limit liability to a particular film and protect the studio mothership.

How about big multi-nationals that hide their profits over seas to avoid taxes? They are no longer paying US corporate taxes but they may still want to limit claimed profits to limit the Distribution. Sometimes workers in the US are entitled to overseas profits as their work contributed to them. The guy who designed the vibration motor for the iPhone for Apple in California should benefit from the profits of the sales of iPhones around the world. The reality is he is not likely to due to the same off shore tax havens.

But I’m betting that Jony Ive, the star designer of Apple’s industrial design department is going to want a bite out of those profits. He just became chief negotiator for the rest of Apple’s corporate employees. If he can get a cut of those profits, so can they. Whatever math is used to benefit him benefits them proportionally. If he and the others at the top are willing to leave that money overseas, held for use overseas in the future, then fine, same for everyone down the line.

Do all of Apple’s employees get a cut? What about the guys working the Apple Store down at the mall? Should they get a cut of the iPhone sales in India? Probably not. In these cases it makes sense to make divisions in the company again, like the wholly owned subsidiaries, where in Store employees only share in US sales or regional sales, some smaller slice of the profits to which they are more closely aligned.

But some of that profit is shared with corporate too, right? Sales guy in New York gets a chunk of the Northeast Region and sales girl in LA gets some of the Southwest Region but Corporate accountant girl gets some of both. Say 60% of the profit came from the NE and 40% came from the SW. If they all have 1% Stakes, NE guy gets 1% of that 60% and SW girl gets 1% of the 40% while for accountant girl .6% comes out of the NE and .4% comes out of the SW. (Are you lost? I am.) What if it’s even more complicated? It’s all just math. We can figure it out. That’s what Apple makes computers for.

Some companies don’t have profits or are not profit oriented. Non-profits and government jobs don’t work under this structure. I also propose that this new business model isn’t mandatory. If a business doesn’t want to give the money to its workers it’s perfectly acceptable for it to continue paying corporate taxes. What about their workers? In addition, this scheme is likely to have a downward effect on up front salaries especially for the more successful and highly profitable companies. What about that?

My answer; let the market decide. If you are Apple and have massive profits you can probably offer lower salaries (limited by minimum wage and skills supply and demand) with the promise of outsized Distributions. On the other hand if you have a little mom and pop that doesn’t realize a lot of profit you will likely have to offer a higher wages to offset the lack of Distribution. The same goes for non-profits and government jobs. Lack of Distribution will drive up salaries or there will be no one willing to take the jobs. The same goes for large companies that play games to minimize distribution. It won’t take long for prospective employees to figure out who doesn’t pay a worthwhile distribution (especially since past Distribution must be recorded publicly and estimated future Distribution disclosed at hire). Supply and Demand will adjust salaries accordingly for each companies case.

What’s to stop a company from switching to Distributions to drive down salaries and then switching back to not pay them out? Build in a rule that a company can’t switch back for a set period of time (5 years) and if they do they have to return salaries to pre-Distribution levels with increases to account for inflation/cost of living changes plus a percentage penalty (3–5% say) for the trouble. We want to disincentivize switching back but not outlaw it. On the other hand, startups that are Distribution based from day one don’t have the option to switch out. If it’s not working for them they need to dissolve and reform. Hopefully that is disincentive enough to limit that as well. (Note: I’m just speculating solutions to possible problems. This is another place where the gritty details should be left to legislators.)

Precedent

Does all this sound alien and extreme? It shouldn’t. There are a number of industries that already do this, to a degree. For example…

Residuals: Some actors make money off of TV shows or commercials over the life of the show or ad. Every time it airs for some set number of years they get a check. Big stars and directors even get percentage stakes in movies taking home a chunk of the gross profits.

Deferments: Another film industry practice, though rarely used, is deferred pay. It’s usually associated with low budget films trying to get made on a shoe string but famously Titanic did some deferred pay. Here a worker agrees to a lower than normal pay scale in return for making up the difference plus extra if the movie is profitable. Since most low budget movies are not profitable this isn’t used all that much but it does happen.

Commissions: Not everyone gets to work on a big movie or TV show. At the other end of the scale are sales guys making a commission. Commissions have a bad reputation as they are tied directly to that individual’s sales. By moving the profit participation up the chain to a larger umbrella Distribution workers have more of a stake in the overall health of the company rather than their own personal sales.

Gratuity: Even lower on the scale are tips. Here a lot of restaurants actually follow what I am describing where at the end of the night all the tips are pooled and distributed to the employees evenly. That way the cooks get a little too and you’re not motivated to screw over your fellow servers angling for tips and not worried about sharing a table. It’s important to note that it would become illegal to do what many restaurants do which is actually pay their people less than minimum wage and claim they will make up the difference in tips.

Nay-sayers

So in pitching this idea to friends a number of common arguments against it repeatedly popped up. I’ll try and address them here.

It’ll never get through congress — This is a fatalist attitude, not an argument. It may very well be the case but this isn’t a legitimate argument against proposing a solution to societal ills. If it was and we never proposed any idea we didn’t thing could get voted in then the US would never have advanced in any meaningful way since the revolution. No Healthcare Reform, no Civil Rights, no Social Security and Medicare, no Women’s Suffrage, no Abolishment of Slavery, and many many less known but no less important changes to our laws and government.

Companies will just find loopholes to get around it — Yes, of course they will but this is almost as bad as the first argument. They will try and game the system, but they already do with taxes. Keep this simpler than tax law and there will likely be less ways to game the system. Not none, but (hopefully) no more problematic than the current system though with the benefits outlined above. For example, GE famously paid no taxes a couple years ago. They did this though legal deductions. That would not work under this proposal as the only deductions are ongoing legal obligations and none of the development or business expanding type of deductions. In addition, by tying executive compensation above salary to everyone else in the company, if they want to give the higher-ups extra money they will either have to increase their actual dollar salary to absurd levels with all the social and business costs related to doing that, or give appropriately scaled equivalent profits to everyone else.

Companies will just move all their profits overseas — While this is just another possibility that could fall under the loophole argument it bears special consideration. They can do this and they will. But they already do this to avoid taxes and there are certain profits that just can’t be moved. In addition, like mentioned in the loopholes argument above, if they want to bring some of those profits back and give it to CEOs and other higher-ups they’re going to have to give it to everyone. The CEOs can just move overseas? Fine. Then they can’t live here. You can’t patch every hole and again, this is already an issue that we are dealing with in regard to taxes. We’ll make it work.

It will be too complicated to regulate — I can’t guarantee it won’t. Private companies that are under less scrutiny than public ones may very well be under a greater burden in terms of record keeping. I doubt this is worse then their current tax accounting burden but if it is I never promised that fixing society’s ills would be completely painless. Hopefully, it will be simple enough in design to make compliance easier than taxes. And the fact that it is money going to your own workers rather than the government makes it an easier pill to swallow (and a socially harder one to avoid).

Wealth inequity issues can be better solved through changes to existing tax law (i.e.. Tax the rich more) — Yeah, maybe. The argument here is that before the Bush tax cuts it was better but that’s only partly true. The Bush tax cuts exacerbated a problem that was already decades in the making. Income inequality has been growing for half a century if not more. In a capitalist society your place in it is entirely based on your bargaining position. This is actually the reason we formed a representative government and Unions in the first place; to give those without power a voice and a position of strength at the bargaining table. But the system itself is set up to allow for the marginalization of those at the bottom with the least bargaining power and those at the top have taken advantage of it. First, by spending money to reduce the government’s fair representation of its citizens (see Gerrymandering and Super PACs) and second, by actively working to castrate Unions (see reducing the government’s fair representation of its citizens). The result, income inequality that grows and grows and grows. Attacking the rich with higher taxes only foments anger at what is perceived as inherently unfair wealth redistribution. In addition, it isn’t a scalable solution. If the income gap continues to grow do we just keep taxing even more? What is the limit on taxing the rich? 100%? And how do you get the money into the hands of those who need it? My proposal gives the money directly to those that deserve it. You can’t argue they didn’t work to earn it. Besides, talk about something difficult to get through congress.

Owners of companies deserve outrageous profits because they’re the ones that take the risk — This argument came up from two of my friends, one of which is a small business owner, and is the first real philosophical argument against it. My response, everyone is taking a risk, it’s just that some risks are higher than others, and this difference in risk is reflected in their salaries. Even my buddy who argued the most cogently against the idea conceded that even the people at the bottom take some risk. There is an opportunity cost to taking any job. Will it take you away from your family or reduce your time with them? Will you have to live somewhere you’d rather not? Will you have to take odd hours that are not good for your health? Will you pass up a job that may be more profitable but less secure or take one less profitable but more secure? What if the company goes bankrupt and just shafts you on your pay? What if you make life changes for a company and it goes out of business costing you your home and savings? Yes, these are smaller risks then the risks that business owners take when running a company and they may need to front their salary to pay workers to get through a bad month, but they are also making much more money in the end (assuming a successful business). Just like the Distribution Stake, a business owner or CEO’s outsized salary already accounts for their proportionally greater risk. Feel their risk is not properly accounted for? Raise their salary. There is no ceiling, only a floor. Business forces are the only true limit on salaries.

Everybody’s salary is going to get cut — Except for those already on the bottom floor, yes, this is likely and I addressed this in my proposal. Market forces will deal with this the same way they account for current alternative forms of compensation like stock options, pensions, bonuses and tips. It’s important to repeat that this is not corrupting the wealth generating powers of capitalism. It is just insisting that everyone involved is included.

So That’s The Plan

The beauty of this plan is its simplicity, its self regulation and its attractiveness to so many disparate political factions.

Some set percentage of first dollar company income minus legally obligated costs is given directly to the employees of the company in direct ratio to their percentage of the sum of the company’s salaries.

All businesses from the smallest mom and pop up to the largest multi-national. All employees from the CEO down to the janitor. Their fates tied to each other, more profits from successful companies flow to the lower and mid-level employees and the high level executives have downward pressure applied to their outsized compensation packages without any artificial, government mandated limits. And no one can claim it isn’t completely fair. It’s optional, an alternative to paying a likely higher percentage in corporate taxes. The motivations of both business and employee are realigned towards making a more productive and profitable company. The money is injected directly back into the economy rather than filtering through the government. And the people that receive it actually worked to earn it.

There will, of course, be problems. Shady people will always try and find the legal weaknesses in the plan that can be exploited to benefit those at the top and deny those at the bottom. Adjustments will be needed, for sure, but such is a modern capitalist democracy. The hope and promise is that it is simple and straightforward enough to be mostly bulletproof in addition to being attractive to a large segment of the American population on both sides of the political aisle.

Disclaimers

I am not a politician, an economist, a scholar, a businessman, a lawyer or even a lowly pundit. I am not much more than an armchair philosopher who had an idea that probably isn’t even that original. I haven’t done extensive research or even read my own reference links in full to be honest. But I am extremely attracted to this idea and have no other way of birthing it to the world than to write it down, post it somewhere and ask people to have a look and tell me what they think.

So? What do you think?