Tax stuff I think is interesting. It is either copied from my primary blog on forbes.com http://www.forbes.com/sites/peterjreilly/ or stuff that I did not put there because being on forbes is a good gig and they have, you know, standards. Also some guest posts.
Tuesday, August 19, 2014
Occupy Wall Street - The Unfinished Business of 19th Century Reform
Originally Published on forbes.com on October 5th,2011
I have two consuming intellectual interests. Title 26 of the United States Code and the history of the United States from 1830 to 1870. My first bit of poking around about Occupy Wall Street was to see what specific tax proposals they were bringing up. I thought for sure that people would be talking about “carried interest“, the poster provision of many discussions of the unfairness of the tax system, but I actually didn’t find that or much about income tax at all. So taking off my tax glasses and putting on my 1840 glasses, I see people taking on the aspect of the 1840 reform agenda where we have made the least progress. One of the best summaries of what that generation of reformers hoped for is the song “One Hundred Years Hence”:
One hundred years hence, what a change will be made, In politics, morals, religion and trade. In statemen who wrangle or ride on the fence, Those things will be altered a hundred years hence.
Our laws then will be uncompulsory rules, Our prisons converted to national schools, The pleasure of sinning ’tis all a pretense, And so we will find it, a hundred years hence.
Lying, cheating and fraud will be laid on the shelf, Men will neither get drunk, nor be bound up in self, But all live together, good neighbors and friends, Just as Christian folks ought to, a hundred years hence.
Oppression and war will be heard of no more Nor the blood of a slave leave his print on our shore, Conventions will then be a useless expense, For we’ll all go free suffrage, a hundred years hence.
Although you can find other consumate combiners of the total perfectionist reform package you would be hard pressed to find someone who played it out more thoroughly than the Reverend Adin Ballou. Ballou’s generation of reformers was actually able to accomplish the abolition of slavery, although not without renouncing non-violence (or non-reistance as they called it). It would be two or more generations more, depending how you count, before women could vote. Somehow taming the beast of unrestrained capitalism so that there could be a form of free enterprise that didn’t create vast inequality and rampant materialism was a project that Ballou thought he had actually accomplished and was ready to go on the road with. Then came some accounting tricks and, in effect, a hostile takeover, and the Reverend Ballou went back to parish ministry and the writing of local history, family geneology and books that tried to sort out where it went wrong. I think it is a timely story as it illustrates what Occupy Wall Street is up against. I like to start the story with the principles that were opposed:
Provided, nevertheless, that capital shall never receive profits exceeding an annual amount equal to six percent per annum simple interest for the whole time of its investment in the funds of the Community.
Initial Constitution of the Fraternal Communion
Rule 97Enough is never enough.
Rule 242More is good ….. all is better.
Ferengi Rules of Acquisition
The community founded by Adin Ballou was one of several intentional communities started in the period between 1830 and 1850. In a bit of hyperbole, Emerson wrote that every man had the constitution of a new community in his pocket. The three most commonly mentioned are Brook Farm, Fruitlands and the Northhampton Association. Brook Farm is by far the most famous having the luck, good or bad, to be the model for the fictional Blithedale of the Blithedale Romance by Nathaniel Hawthorne, an occasional visitor, who defaulted on his financial pledge to the community. Ballou’s community ran longer than the three of them put together. Known variously as Hopedale and Fraternal Communion One (in retrospect Fraternal Communion One and Only) it embraced most contemporary ism’s – abolitionism, pacifism, feminism and temperance. At its core was a Christian Perfectionism that renounced all forms of coercion based on violence. This did not just mean not serving in the militia. It also meant not voting, serving on juries or suing. Ultimately, all “carnal” government rests on force.
Taking from the rich and giving to the poor was not the path chosen, though some advocated it.Fraternal Communion Number One of the Practical Christian Republic started out with 28 people living in one house.Despite their sharing high aspirations they got on one another’s nerves.It was planned that as they were able they would put up more residences.It was thought by some that the fair thing to do would be to have the people who didn’t put up any money be the first ones to move into individual dwellings.After all Jesus had said “The first shall be last”.Instead, the community adopted an economic model that allowed wages up to those paid a first class operative and a return on capital invested of 6%, later 4%.Thus they avoided the Scylla of Communism and drove some of the Robin Hood contingent out followed not long after by Brian Lamson who insisted that nursing mothers should be credited with 16 hours of labor a day.
After 17 years, the community was doing so well that Adin thought he could hand off the leadership and focus on the Practical Christian Republic, which would be a network of Hopedales, ultimately covering the world. Grandiose as the scheme may appear, he was better grounded than most such visionaries. Hopedale was real and it seemed to work. As a matter of fact, it probably really did work until George Draper convinced Adin Ballou that it did not. I’m not sure exactly how the convincing happened, but I like to think of it as a meeting between the two men – no brandy and cigars, this being Hopedale.
On February 5th 1855, the financial report of the community was presented.It showed assets of $65,420.24 and liabilities of $65,270.09 for a deficit of $145.15.The community did not have a negative net worth however.Included in “liabilities” was $41,300 in joint stock.This was the amount of money that had been contributed by members.Thus, the community was in a strong position from a balance sheet viewpoint.In calculating the net income that had produced the small deficit there were payments for labor of community members of about $16,000.
At our presumed meeting, though, George Draper says to Adin.Ah Reverend Ballou, but have you considered depreciation?Depreciation?Yes, there should be journal entries decreasing the carrying value of tangible assets to reflect wear and tear.What would your deficit be then?
William Draper, George’s son, in defending what amounted to his father’s hostile takeover of the community made much of the depreciation issue.He saw that as a reflection of the community’s poor accounting.He related the story of a tool.The original cost was never depreciated and even worse each time there was a repair the cost of the repair was capitalized increasing the book value of the used tool.If you, like I, reminisce about the famous frauds through the ages you will recall that this was what they were doing at WorldCom.If earnings were, off they would decrease repairs and increase fixed assets to get back on target.It doesn’t hold a candle to the complex machinations at Enron, but it got the job done.The WorldCom boys wouldn’t have fooled William Draper who learned good fixed asset accounting from his dad, George.There is one little hole in his analysis though.Included in the Hopedale balance sheet was about $145 in tools.If the single overvalued tool that so horrified the Drapers, father and son, were the only tool and it was effectively worthless, the assets of the community would be reduced by less than 1%.
Adin thought that George gave the community a good deal by arranging that none of the members would be responsible for any debts.Subsequently George bought brother his brother Ebenezer’s share of the enterprise in order to sell it to son William – at a profit.William resented that at the time but later in life came to believe that it was character building.You can read about this sad story in a book called fromCommune to Company Town.You must go hunting if you want to find the story of the tool.It appears in William Draper’s autobiography, which is not easy to come by.
So the government of Fraternal Commune One turned into the Town of Hopedale. The business turned into Draper Corporation. The spiritual piece ends up with the Hopedale Unitarian Parish, which thanks no doubt to Draper money looks more like a cathedral than most any other small town Unitarian church in Massachusetts. William Draper paid for a statue of Adin Ballou which is still there. Draper Industries which had a reputation for being an enlightened employer, at least when its employees didn’t get involved in that nasty union stuff, continued to do business in Hopedale into the 1970′s. Some of the enlightenment in its employment practices was surely an echo of its communal roots
Hopedale was not the only business with philanthropic roots that lasted into the twentieth century. Mutual savings banks, mutual insurance companies and not-for-profit hospitals were gobbled up by the Ferengi in my lifetime. I sometimes think of us as the cash out generation. I remember someone commenting that some venerable institutions were immune to the trend. Nobody was going to take the First Marine Divison public. It is true that did not happen and I remain sure that it will not – but Blackwater was founded by a Navy SEAL.
In case you don’t know the Ferengi are an alien race in the future imagined by the creators of Star Trek. The 24th Century humans who run the Federation have evolved not only technologically, but also morally. In order to have interesting stories many of our more entertainng if less endearing traits are attributed to aliens. The Ferengi are noted primarily for their greed and live by a series of principles that are quasi religious in nature and known as the rules of acquisition. Adin Ballou and my friendTom Cahill are genuine 24th Century human beings. Most of the rest of us including myself and no doubt a goodly percentage of those now at Occupy Wall Street suffer under the affiction of Rule 284 – Deep Down Everyone is a Ferengi.