The "Cherny Plan" to solve income inequality

In 2013, former secretary of labor Robert Reich released his movie “Inequality for All” which started the conversation of income and wealth inequality in America.  In early 2014 French economist Thomas Piketty published his book “Capital in the 21st century” which describes the culmination of many years of research into income and wealth inequality and his conclusion that capitalism inevitably and increasingly concentrates wealth in the hands of the already rich to the increasing detriment of the rest of us.  At the end of May 2014, the Nobel prize winning economist Joseph Stiglitz published a white paper describing his concerns about income and wealth inequality and providing recommendations for decreasing it.  Consensus in academic and intellectual circles is gathering around the idea that the game of capitalism we’ve been playing is working very well for the rich, but failing miserably for the rest of us.  

Does income and wealth inequality matter?  In early 2014 a team of researchers at the University of Maryland, partly funded by NASA, reported how they used a computer model to analyze a number of collapsed societies to determine the set of critical factors that lead to societal collapse.  What was most surprising about the paper was the identification of not just environmental or climactic destruction leading to societal collapse – factors described nearly a decade before in Jared Diamond’s book “Collapse” – but also that high levels of social inequality lead to societal collapse.  The paper states that most societal collapses were presaged by the splitting of society into primarily two societal divisions – rich people – the elite, and the rest of us – the commoners.

Today we live in an America in which just 1% of us own 40% of all the wealth of America.
The poorest 80% of us own just 7% of the nation’s wealth.  
Just 20% of us own 93% of the nation’s wealth.
The richest 1% of Americans take-home 24% of the national income.
In 1976 the richest 1% took home just 9% of the national income.
Since 2009, 95% of the economic recovery dollars have gone to that same 1%. 
Since 2009, the median real household income of Americans has declined by 4.4%. 

The historical data from the last few decades shows that while the rich get richer, the rest of us get poorer.  How much longer until America becomes the world depicted in “The Hunger Games” books and movies?  If we want American society to continue functioning for centuries into the future, so our grandchildren and their grandchildren have lives as good as or better than ours, income and wealth inequality matters more than any other threat we face. 

Unfortunately, none of the solutions offered by Piketty or Stiglitz seem to address the root-cause of our problem - how do we stop humans from dedicating their lives toward the accumulation of obscene amounts of money?  People living with fifty cats are considered mentally ill.  People with houses filled with decades of collected junk are considered mentally ill.  But people who own numerous houses, with bank accounts filled with millions or billions of dollars are considered not mentally-ill but “successful” mostly regardless of how those dollars were collected.  Our society helps people with mental illness and tries to keep them from hurting themselves and the rest of us.  Numerous studies have shown that a majority of people who collect and hoard millions and billions of dollars have highly sociopathic and psychopathic tendencies (think of Donald Trump). Clearly, their single-minded pursuit of dollars has hurt others (think of Wall Street’s recent bail-out).  Should our society continue to revere the obscenely rich, or should we help these poor sociopaths by controlling what they can do to the rest of us?

We are all born into a world ready-made for us. Unless history is examined, people think the way things are today is the way things have always been.  The historic record shows something much different.  Piketty’s work especially shows that for America, the best time to be either a business owner or an employee was when the American economy was growing faster than ever before or since, in the two decades after World War II.  In those years, American society was more financially equal than at any other time before or since.  Yes, America certainly had other social and racial inequality problems in the 40s, 50s, and 60s, but being able to join the middle class and provide a very comfortable life for a small family on a single salary, even as a high-school custodian – as my great uncle did – was entirely possible.  As Piketty’s work shows, in the ensuing sixty years until today, dollars have highly concentrated in the hands of the few with the most dollars – the inevitable result of running the game of capitalism undisturbed for a few generations. The same dollar concentration happened in America in the decades leading to the Great Depression.  It happened in France in the decades leading to the French Revolution. Extreme levels of income and wealth inequality will happen again and societies will collapse again, perhaps American society; as long as the majority of voters allow and encourage a minority of individuals to gather obscene numbers of dollars.   

How can we stop this psychotic quest for dollars?  By simply limiting the amount of dollars anyone can take home after taxes.  More importantly, by tying that maximum take-home pay limit to the minimum take-home pay limit.  We must implement not just a minimum wage, but essentially a maximum wage and clearly define the range between those two points.  I suggest 100:1 as the starting point for the conversation.    

100:1 take-home pay range.
Let’s link the financial success of the richest Americans to the financial success of the poorest Americans.  No American working full-time should take home less than 1% of what the richest Americans are taking home.  Conversely, no American should take home more than 100 times what the poorest Americans working full-time will take home. 

In practice, with today’s minimum wage of $7.25 an hour, the CEO of the Bank of America, or Morgan-Chase, or General Motors, or Google would take home just $1.5 million a year.  Raise the minimum wage to $15/hour and the maximum income level would rise to $3,120,000 per year.  Basketball star LeBron James, with an NBA income of $19M/year, would take home $3.12M/year.  So would Donald Trump.  And Bill Gates. And Warren Buffet.  Regardless of how much they had been paid or earned any other way.  Think about how people and employers would react to that limitation.

If at his current salary level of $19 million, LeBron James would pay $16M in federal taxes every year, both he and his team would probably decide that he should be paid considerably less than that, while still taking home the same amount of dollars, $3.12M every year. The end result for LeBron's team would be a considerably smaller payroll for both their players AND their owners and managers and investors.  Would that lead to lower ticket prices for NBA games?  Would it lead to more basketball teams forming in smaller cities?  Would it lead to smaller stadiums and arenas being built in more cities?  The bottom line, reducing the take-home pay of the people at the top of our capitalism pyramid would most likely lead to more innovation, more invention, a greater distribution of higher incomes across a wider swath of society (think of all the other kids who could now become NBA players with that many more teams) and much more investment at lower levels of the economy, helping ALL of us via a boom in capitalism.

I hear three objections to this plan – two from people who have never started or run their own business; the other from established business owners.  Some segment of American society has bought the myth that people only start businesses because of the possibility of unlimited riches. These people say that by creating a maximum take-home pay limit, entrepreneurs would no longer bother to start those businesses.  To this argument I say balderdash!  I’ve been in private industry for more than thirty years and started three of my own companies.  I’ve met dozens of entrepreneurs who have been much more financially successful than I’ve been, and I can assure you that the majority of those “job-creators” weren’t doing what they did solely for the potential riches.  Yes, earning a comfortable living is high on our list of priorities, but mostly we entrepreneurs are in it for the excitement of the game.  Win or lose, we’d still play.  A big pay-day is just a bonus, not the reason for the effort.

The other argument from the average American is that if we limit their take-home pay, the richest Americans will simply move overseas, taking their money with them.  A recent study showed that national tax rates have little to do with where the wealthy actually live and invest.  Instead they seek countries with the best standards of living – something America is falling behind on. 

Might these wealthy people then just cheat the system and hide their money?  I say let them show us exactly how little they care about the success of ALL Americans and become criminals in the eyes of the IRS. Instead of hiding in plain sight as the leaders of industry, sociopaths should be locked-up and kept from harming the rest of us.  

Local Community Mutual Funds
Established business owners are more concerned about the day twenty years from now when they sell their business.  What if the majority of that pay-day they’ve worked twenty years to achieve is all taken away in taxes?  For that reason, we would start a new type of investment security called a “Local Community Mutual Fund” (LCMF).  The LCMF would accept investment from people residing within a local community – city, county, region, or state – and distribute those funds to local businesses, organizations and individuals as equity investments, loans, and grants. 

LCMFs would have two goals – earn a return on their investor’s money, and improve the local community and economy. While LCMFs may only rarely earn double-digit returns, they would be tax-free, just as 401Ks and IRAs are.  So if LeBron James wanted to put a chunk of the rest of his $19million in one of his LCMFs, he could, without paying taxes on those earned dollars.

Much like the local banks of the early 20th century, LCMFs would exist solely to recycle the wealth from a community back into the same community. Unlike the local banks of the last century, LCMFs would be non-profit organizations and would never be subject to consolidation into larger national or international organizations with no interest in the local community.  Unlike investments in the stock market, LCMFs would not just enrich Wall Street banks or help some company halfway around the world, but would actually help local communities.  LCMFs would provide hundreds of millions of dollars previously locked up in Wall Street to local businesses, organizations and individuals all over the country from local investors with a personal interest in helping the local economy thrive.  LCMFs have the potential to start a renaissance of capitalism, innovation, creativity and invention in America. But a few more pieces of the puzzle must be in place before all that could start.

The Job Guarantee program.
First, Americans must not be afraid to risk everything on an entrepreneurial, inventive or creative venture. To eliminate that fear of failure and encourage people to take more risks with their educations, their careers and their lives, we must implement the job guarantee (JG) program.  The JG would provide a good job with a living wage and full health benefits to anyone who wants (and is able to keep) a job.

Federal job-guarantee funding in the form of grants for local community non-profit organizations would expand or contract as required to provide local jobs for local unemployed people. Anyone who wants a job paying what will essentially become the national minimum wage, would apply at their local unemployment office.  They would then be offered one of a number of jobs at one of a number of local non-profit organizations performing good and meaningful work in the local community. Think about how people and employers would react to this addition to the American social safety net.

First, recent high-school and college graduates would know that no matter what else happens, they could always get a good job at a nationally published wage. It may not be the kind of work one would prefer, nor in an area of anyone’s particular expertise (we can’t make these jobs TOO attractive), but it IS a fulfilling job nonetheless, providing needed services in the local community, and with full health benefits. In fact, many young people, or anybody of any age, may come up with ideas for new non-profit organizations and win job-guarantee grants from the program and begin putting other people to work. Any non-profit organization could apply for JG grants, but like any other grant-receiving organization, they must all show clear benefits to their community and progress toward their goal to continue receiving grants.

Young people who couldn’t find other jobs would likely see the job guarantee as the baseline income they could always rely upon. Hence when they finally do get a better paying job, they may likely keep their expenses at the level they know the job guarantee program could provide and no higher. That’s what I would have done. And knowing they could always fallback to the job guarantee program, they might be willing to take risks they wouldn’t have without that safety-net – risks such as moving across the country, or starting their own businesses, or joining small start-ups with little chance of eventual financial success but plenty of educational opportunities. 

Not just young people would benefit from the Job Guarantee program. Anyone at any age who loses their job could immediately jump into the job-guarantee program and continue getting health benefits and a minimum income while keeping their job skills fresh while continuing to look for other work, or perhaps developing their own entrepreneurial ideas. If every American kept their personal monthly expenses to a level no higher than the job guarantee program could provide, unemployment would no longer be a life and wealth destroying experience – as it was for me – but just another transition point in people’s lives. The Job Guarantee program would be the employee-buffer for the entire nation, providing a fresh and ready group of employees eager to move back into the private economy whenever it is ready to re-hire them.

Think about how this addition to the American social safety-net would affect the attitudes of both employees and employers.  First, business problems that employees are often too afraid to mention to their management today for fear of losing their jobs, would probably be talked about openly. If you knew you could always get a job in the job-guarantee program, would you speak-up about both injustices and potential business errors you see on the job?  Absolutely! The result would be better businesses, making both better employee-focused decisions AND business decisions.  How many businesses have failed because management had lost touch with their customers, while the regular employee could easily identify the problems about to bring the company down, months or years before it happened?  But no one dared speak-up for fear of reprisal. When every American knows that being fired doesn’t mean losing your house or going hungry, I can’t wait to see how employers will respond.

First, employers would have to respond by treating their employees better and paying them more than the job-guarantee program, just to keep them interested.  Also, employers would be much more likely to engage their employees more fully, expecting more than just mindless work from them and using them as actual business partners. When the inevitable business failures DO occur, company owners would likely be quicker to pull-the-plug knowing their employees would have the job-guarantee program to fallback upon – contributing to the creative destruction of capitalism at its best – fail-fast, fail-often.  And possibly, if management was simply incompetent, the employees, with investment from their Local Community Mutual Fund, could buy out management and make a go of the business themselves.  The end result for all of America would be better businesses with more engaged and involved employees and managers, all earning more money, and likely making more profits for the business. Additionally, employers would be happier to hire “fresh” workers directly out of the job-guarantee program, who may have just learned new skills or at least stayed up to date on their existing skills, rather than hiring “stale” workers who may have been unemployed for months or years.   

The national target income - $52k/year.
Businesses that focus more on their employees and pay them well should be rewarded for doing so with decreased taxes.  First, any employee making less than some amount a week – I suggest a thousand a week, $52,000 a year as the starting point for the conversation – should pay no federal tax – no income tax, no medicare, no social security – and their employer should also pay none of those taxes on their behalf.  Why are we penalizing both employers and employees for just barely making a comfortable living? Fifty-two thousand a year in earnings should become the national target income. Couples, both working, could take-home as much as $104,000 a year before they pay any taxes. Let’s set the target for America’s new and expanded middle-class at $1,000 per week.

Promote Benefits-Corporations.
Second, businesses that help their local communities and are certified as “sustainable” should pay reduced or no taxes.  Benefit-Corporations are a type of corporation that state in their formation documents that they will focus not just on profits, but on their people, their local communities, and the entire planet. Benefit-Corporations (B-Corps) are rated by an independent rating agency on their attainment of those statements and their overall sustainability.  The highest rating of 200 is given only to B-Corps that have, and maintain, completely sustainable business models and treat their employees very well.  B-Corps rated 200 should pay no federal income taxes.  Lower rated B-Corpos should pay higher corporate tax rates.  Non B-Corps would pay still higher taxes. 

Why should a company who is doing everything right for their employees, their communities, the environment, and the planet pay ANY taxes? That is behavior that should be rewarded, not penalized. Conversely, why do we not penalize with much higher taxes, any company which shortchanges their employees, screws their local communities, pollutes their environment, and helps to destroy the planet? Taxes are the best “stick” we have to discourage “bad” behavior, and encourage “good” behavior. Let’s use them.

Real-world evaluation.
So would this five-point action plan work in the real world?  Would all the companies that have provided us with the best technologies over the past few decades – Apple, Microsoft, Google, FaceBook – still exist if their founders and investors could have never taken home more than three million a year?  Absolutely.  None of the founders of those companies expected to make millions or billions of dollars and they would have done exactly the same thing if their maximum annual take-home pay had been limited.  In fact, they and their investors might have made some better, longer-term decisions given that limitation – decisions that would have brought in more profits more gradually.

Would General Electric, Boeing, Walmart, or Exxon/Mobil still have the same business models if they had to pay considerably higher taxes for their mistreatment of employees (Walmart), or their destruction of the planet (Exxon/Mobil)? Or would their investors demand these companies become 200-rated B-Corps to eliminate federal income taxes?

General Electric, like IBM, or Monsanto, has reached its current size primarily through acquisition of smaller companies in an effort to continue increasing revenues year over year to increase their stock price.  Without the need to continually show significantly increasing revenues, why acquire little companies that are more profitable on their own?  Investors and business owners both will probably be more satisfied with the continuing small but steady profits provided by smaller companies instead of the big pay-days involved in mergers and acquisitions. General Electric would probably spin-out numerous corporate divisions as individual and more innovative companies, dividing their stock and likely increasing the value of that combined stock for their investors.  Boeing would probably change their business model just a little as their options for spin-outs are limited and their need for consolidation is great.  However, they may show lower corporate profits as they find paying their employees better will provide higher returns to their investors when they become a B-Corp.  Walmart would clearly have to increase their employ compensation plans and decrease their owner’s profits.  It would be very interesting to see what the investors of Exxon/Mobil would demand. At this point, there is little reason other than inertia for Exxon/Mobil to continue mining fossil fuels and we might just see their investors demand they go completely sustainable and carbon-neutral with algae-based oil instead. 

In all companies, these five actions will likely initiate some changes – the 100:1 take-home pay range that links the financial success of the richest Americans with the poorest Americans; the Local Community Mutual Funds that shift dollars from Wall Street back into local communities around the country; the Job Guarantee program that reduces fear of failure or disaster by providing a job to anyone who wants a job; the national target wage of $52,000 per year which eliminates all federal taxes on the first $52,000 earned by any American;  and the support of B-Corps which use the power of capitalism to make America the best it can be.  Those changes will mostly reduce the concentration of corporate profits from the hands of a few people – the executives and investors – and leave more of those dollars within the company.  That increase in dollars within the company would probably be put back into research and development, higher employee wages, improved working conditions, and paying for the economic “externalities” which are currently passed-off on the rest of us, like employee healthcare and childcare, and production waste streams. 

In short, if we implement all five actions described above, all American businesses would be stronger and healthier, though probably smaller.  Companies would invest more of their income into long-term survival instead of short-term profits – into their people, their customers, their suppliers, their distribution networks, their communities, all their physical assets – and less into raw profits passing through to investors. With that transformation, companies would be internally stronger than they’d ever been, making them a better long-term investment, increasing the trading value of their shares on the market, but likely reducing their free cash available at the end of the year for investor dividends.  With most of their profits invested locally in their physical assets, and no one demanding short-term profit growth, local communities would no longer live in fear of the company picking up and leaving for overseas.  Because of that, fewer if any tax incentives would have to be granted to lure expanding companies to new locations.  Instead, an educated and skilled work force, in a town with good distribution channels and a high quality of life for their employees, would be the main criteria for relocation.

Implementation of these five actions, what I’m calling “The Cherny-Plan” until someone comes up with a better name, would lead to an America which would be a free-market capitalist’s dream come true.  That is, for everyone except the handful of people currently taking home more than a few million a year.  But many of those multi-millionaires also support cutting their maximum take-home pay with the argument “how much money do I need to live a comfortable life”?  For all those reasons, it’s time for America to implement the Cherny-Plan that together strengthens local communities and uses the power of capitalism and markets to improve the lives of EVERY American.  Let’s take our American democracy back from Wall Street and create an economy that works for ALL of us by implementing the Cherny-Plan.