Interest, Capital Gains, Profits and Rent are Good, and Accounting can Improve them.

Making money from investing drives economic activity to create the things we want for less effort. Businesses make money by making a profit. Calculating a profit is difficult and how much profit is made includes the product price and how much of the profit we give to buyers through discounts. The rules to calculate profits are set by governments so that government can take some of the profits as tax and use the money for the public good.

Economists know that calculating profits and tax is inefficient and like simple tax rules such as a goods and services tax. However, there is a simpler way: find an algorithm to calculate profits and taxes at the time of each business transaction using the rules set by the government. The government, through the financial system taxes profits from Capital separately from trading goods and services at different times and in different ways. We can create a more efficient system by calculating all the taxes and profits at each sale.

Doing this removes the need for Capital Markets, the need to accumulate Capital to pay profits and taxes and increases the productivity of the financial system. For products where most of the cost is the cost of Capital, we can double the use of a given amount of Capital while still using the same government accounting and tax rules.

Community Capital — Combining Capital with Payments

Today accounting separates money into Capital and Operations. Capital is the use of money to make more money. Operations money is the use of funds to pay for production. Standard accounting turns Capital into a product bought and sold on Capital markets. Separating money into two types wastes money converting from one to the other, slows investment, leaves large amounts of Capital uninvested, and reduces the number of people who can invest. Instead of treating money as two separate types, we can treat all money as one when we move it from buyers to sellers and separate Operations costs and Capital costs at the time of payment with accounting procedures.

Instead of thinking of Capital as a separate type of money that earns money, we think of all money as the same. Whenever we transfer money to an organisation, we think of it as part Capital and part cost of production. When products are given to the buyer, the buyer receives their goods and their Capital back. The longer the time between giving the money and the return of money, the greater the amount of Capital. If more Capital is given back than received, that is a Capital gain and is noted.

The price of a product includes the cost of Capital, production and profit. With today’s accounting, the seller gets all the money, including the cost of Capital, and keeps the Capital used to create the Product. This is unfair as the seller has charged for the Capital and kept it. However, it is impossible for any single sale to separate the costs, which vary with time and price. To overcome this, we can estimate the cost of Capital used. Instead of leaving the Capital used with the seller, we can move it to the buyer in the Balance Sheet.

Giving Capital to the buyer means the buyer takes an interest in preserving the Capital in the existing business — but it also transfers the Capital to those who use the products the Capital produces, replaces the need for Capital Markets, and speeds up the transfer of Capital making it available for immediate use. Today Capital accumulates in overpriced assets and is not used until the Capital is sold by the business. By changing the accounting, the Capital is immediately available.

The approach puts in place negative feedback control loops that automatically set prices, control investment, lead to reduced consumption of physical resources, and repair, recycle and reuse of products. It spreads the extra Capital more evenly across society, involves everyone as investors, and builds social Capital or trust.

An Example and Outcomes

For example, let an organisation invest $1,000, and each transaction of $100 uses $10 of invested Capital, $80 of operational costs, and creates $10 of profit. For each transaction, the total amount of money in the business increases by $10. All of this is available to take from the business. With the new accounting, the total amount of money increases by $10, but $10 of Capital in the business transfers to the buyer. The $10 of Capital can remain with the buyer, but more likely, they will sell it to an investor as it is available. The extra money available is now $20, not $10.

It achieves the same outcome on prices assumed by proponents of free-market economics, and it removes the need for a market to transfer Capital. It controls prices because of the mixture of investors and buyers owning Capital, with all having a say in the choice of investments. Investors like prices to increase, while buyers want the prices to decrease, but buyers want prices to increase when they become investors.

Governments will like the system as tax can be estimated and paid at the time money transfers and potentially remove the yearly exercise of tax payments and refunds. The system transfers money from investors to buyers and will reduce the need for many social benefit transfers of tax, reducing the need for taxes.

Economies will become efficient because the cost of the tax and finance systems will drop dramatically without changing the existing rules around tax. The boards of companies will concentrate on buyer benefits of reduced prices, leading to long-lasting, easily repaired, and recycled goods and services.

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Kevin Cox

Kevin works on giving individuals control over their online information - particularly their financial information with local communities.