Capital for the people – an idea whose time has come


If the American states are, like the former judge of the Supreme Court of the United States Louis Brandeis once put, the “labs of democracy,” then it’s worth taking a close look at what’s going on in California right now.

The threat of higher taxes and a political atmosphere to “permeate the rich” has led some wealthy residents of Golden State, including a number of tech entrepreneurs, to to leave for cheaper pastures like Austin or Miami. This, in turn, raised concerns that greater migration would impact not only the state’s tax base, but the growth and innovation that has made California the world’s fifth-largest economy. .

It is an exceptionally tense situation. While no one these days has much sympathy for wealthy people or businesses (as evidenced by the recent justified fury over the ProPublica is leaking showing how low taxes the richest Americans pay), or truly believes in the trickle-down economy, the threat of fiscal and regulatory arbitration by other states is real.

The good news is that California is applying typically creative thinking to the problem. What if there was another way to harness the wealth of businesses and citizens for the benefit of all?

One of these ideas that is gaining popularity is what is called “pre-distribution”. Unlike traditional methods of redistribution, in which the state taxes existing wealth and then uses it to support various projects and components, pre-distribution is about tapping capital in the same way that investors do and then using it to support various projects and components. the product of capital growth (which as we know far exceeds income growth) to finance the public sector.

The idea of ​​allowing more people to own capital has actually been around for some time. the CalSavers program, established in 2016, allows people such as temporary workers or independent contractors who do not have access to private sector retirement accounts to contribute to professionally managed funds in a state-run system.

Similarly, proposition 24, the California Privacy Rights Act, was passed last year and will come into effect in 2023. This effectively creates a sort of stealth sovereign wealth fund, in which 93 cents of every dollar raised through fees paid by companies for privacy breaches (which , given the nature of surveillance capitalism, are likely to be substantial) can be invested by the Treasury, and the proceeds of any gain used to pay for government operations. “It’s one way to help us avoid having to raise taxes,” said California Senate Majority Leader Robert Hertzberg, a Democrat.

He, along with very wealthy Californians like former Google CEO Eric Schmidt and Snap founder Evan Spiegel, have proposed that the concept be expanded to something called “universal core capital.” The idea is that the seed money contributions from companies or philanthropists could be put into a fund that would then be used by individual Californians for things like retirement security, health care, etc.

Already in Budget 2021-2022, Gavin Newsom, the Governor of California, proposed to use part of the state’s fiscal surplus this year – which, along with the federal Covid relief, put a extra charge $ 100 million in public coffers – to open college accounts for every low-income first-year student in the state.

We can imagine going further and ensuring that the State takes a small equity stake, perhaps 3 to 5%, in start-ups, because countries like Israel or Finland already do. Considering that the current value of publicly traded companies in California is around $ 13 billion, this isn’t a stupid change. If the state could have taken even a small stake in top-tier companies a few decades ago, there would perhaps be much less of the “Occupy” vibe of Silicon Valley in California. this moment.

Pre-distribution should not, in my opinion, replace taxation. He could not fill the void, and taxes are in any case a way to strengthen the sense of citizenship and belonging. But it must be considered as a new source of income particularly well suited to a time when network effects and Intangible assets concentrate wealth not only in fewer hands, but in fewer businesses that can generate outsized earnings with far fewer employees.

It could also help better align public and private incentives and rewards. The massive wealth accumulated by big business is partly due to the strength of the public commons – good schools, decent infrastructure, basic research, etc. As economists like Mariana Mazzucato note frequently, why should taxpayers foot the bill for, say, laying high-speed fiber without gaining any commercial benefit?

Indeed, if the pre-distribution works in the California lab, hopefully it gets passed in some way at the federal level. The Obama administration actually tried to implement its own nationwide version of the CalSavers program, called myRA, but it failed in part because the funds were only invested in ultra treasury bills. low yielding securities at a time when the market as a whole was rising much faster.

Even at this politically polarized time, it is an idea whose time may be right. Pre-distribution is backed by unlikely bed mates like the hedge fund Ray Dalio and left-wing economist Joseph Stiglitz. Perhaps this is because while it doesn’t fundamentally change the market system, it expands shareholding: a mix of capitalism and socialism that suits our time.

rana.foroohar@ft.com



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