The Second Foundation
There are enough natural and human resources to feed, clothe and shelter the entire population in a nondestructive, ecologically-sensitive fashion, but the vast majority of the world's population lives in desparate poverty, while consuming natural resources at unsustainable rates and laying waste to the basic planetary systems that support all life.
The Second Foundation is an attempt to explore more harmonious and equitable social and economic systems. It starts by establishing a golden mean between those things which are best handled collectively - through group agreement or social contract - and those things which are best handled individually - at a family level.
The Second Foundation is a model economic system. We can, being small, play around with the form, tweak it to suit our needs, jazz it up or tone it down. We are creating a prototype based on whole systems, fair play, care and compassion, and ecological sustainability. Whether it succeeds or fizzles is entirely up to us.
How it Started
The Second Foundation practices a community of goods. Because our members have decided to hold all things in common, individuals have no legal claim to the collective holdings of the group. Instead, members serve as trustees of property they manage for the benefit of everyone, not excluding themselves. Some people find this concept intimidating, antiquated, or alien. Didn't communism fall with the Berlin Wall in 1989?
The Second Foundation began with a group of people who had lived under an experimental communal system for 13 years and then abandoned it. Among the features of the Farm's early system was the vow of poverty, which was an important part of the religious fabric of the group. After economic decollectivization in 1983, there were a number of people who began earning their own living, but still kept to the vows they had taken years earlier, feeling them to be life-long commitments. These few hold-outs for collerctivity understood that the vow was not a commitment to constant deprivation, but rather a graceful, elegant, and efficient relationship to the material plane. With or without the larger economic collective, the inner sense of the vow compelled families to live within their means and give any surplus earnings away to others in need, both within the community and outside. Many of those who started the Second Foundation missed the efficiencies of group income sharing that had existed before 1983: the burden-sharing for family and business decisions; the tool-sharing for home construction and gardening; and most of all, the tight-knit group process.
This shared sense of need to return to a measure of communal inter-dependence was the major impetus for the formation of a new economic experiment. The challenge was to design a format that minimized the drawbacks of both the communal society economy and the private family wealth system while drawing upon the advantages of both.
Today we call our vow the "vow of community," which reflects our principal goal, which is not to do without, but instead to live in harmony with each other, and within the natural world.
How it works
The decision to join the group is made first by the individual or family, and then by the whole group. For the individual, the challenge is to decide whether you want to give up a measure of privacy and autonomy (in your financial affairs) and to take on the added burden of a commitment to assist and participate in group decisions and the needs-fulfullment of a larger group. There are benefits which belonging to the group will confer upon you, like accounting and legal services, group purchasing and pension plans, and access to group resources. But support is a two-way street, and this is very much a participatory system.
When a Second Foundation member receives payment for work they perform, their paycheck is delivered to The Second Foundation's bookkeeper. The bookkeeper subtracts some percent for the group pension fund, some percent for administration and emergencies - or common welfare - and some percent for whatever group purchase plans (firewood, food, health care) might be currently in effect. After those deductions, the remainder is disbursed to the member family's personal checking account and the member is issued a blank expense voucher, or "chit" to fill in as the money is spent. When the member is ready to collect their next pay, they turn in the completed chit and the process begins again.
The Second Foundation is a hybrid, developmental form of communitarian association, an adjustable exploration into quasi-communal economic group-sufficiency.
The purpose of depositing all income in the Second Foundation account is to recognize that ultimately the group owns everything, and what it disburses to individual members is entirely within its discretion. This is our common treasury, or community of goods. The purpose of the "chit" expense vouchers is to keep track of everyone's spending, to look for economies of scale or purchasing power. The purpose of the individual rebate is to put incentive back into the system so people can directly feel the benefits of earning more, or less, within some reasonable range.
It was the sense of the Founders that one of the reasons that the communal experiment of the first 13 years failed was that it failed to rebate any earnings from one's work, and that this led to an alternate, underground economy, called "Saturday money," or "perks" which was wholly unregulated and generated disparate standards of living, envy, and privilege. It also led to discouragement by many hard-working and creative people who never received any compensation for their added efforts. Some people simply had no incentive to work, apart from the most minimal standard required to remain in the community.
Our chit banking system changes all of that. While rates of return may change, today most of what people earn is directly refunded for their discretionary use. Most families use this money to improve their housing, start small businesses, invest in job skills or their children's education, or to otherwise improve their family security for the future. Some put the money into hobbies, travel, or entertainment, which nourish the spirit, rest the body, and provide a stronger sense of self-empowerment and direction.
Our pension fund is currently appreciating at the rate of more than $2000 per month, and that money is turned around and reinvested into the community's businesses as low-interest loans. This fund doesn't just invest in Second Foundation subsidiaries, but in other Farm-based enterprises. So, while only one person in six at The Farm belongs to the Second Foundation, the Second Foundation's economic power is shared out to the whole community.
The Second Foundation tries to strike a balance between, on the one hand, a planned central economy in which there are neither very rich nor very poor members, and, on the other, the incentives and disincentives of private control over wealth. The goal is to encourage greater productivity and creativity while providing thoroughgoing coverage of all members' real needs. Our balance is struck by dividing expenditures between those best managed by large groups (capital plant acquisitions; business decisions; expensive tool use; tax accounting; retirement planning; etc.) and those best left to the discretion of individuals or small family units (food, clothing, travel, home economics, recreation, etc.).
After ten years of operation, the Second Foundation appears to be a modest success. The IRS has repeatedly reviewed its accounting methods and given full approval to the system. In its second year, it achieved net annual earnings for its 30 members comparable to the earnings of The Farm when it was 800 members strong. If the entire Farm population had joined the Second Foundation when it began, the Pension Fund would now be more than $3 million dollars and interest alone would be enough to pay the running costs of the community. Dues and assessments of members could have been eliminated. As it is, the assets of the Second Foundation are today two times larger than the assets of The Foundation, even though The Foundation has 5 times more members. We think that may have something to say about the relative strength of communal economics.
Neither The Second Foundation nor The Farm as a large intentional community can be characterized as "pure" communitarian systems today. What they have become are complex, multi-dimensional, economic confluences. We are pushing the frontiers of structured communitarian support systems. As strange as it is to say, that seems to be the most comfortable and reassuring place there is to be these days.
Questions and Answers
Q: What's wrong with private enterprise?
A: One shortcoming of the standard Western economic model is its stimulation of competitiveness, not only between and within business and national market settings, but between and even within families. A second shortcoming is the waste inherent in the accumulation of individual, rather than tribal, wealth. A more efficient use of resources would share the capital costs of large tools among larger social units.
Q: Is the plan for the whole Farm to eventually join the Second Foundation?
A: No. When any social system reaches a certain size it encounters predictable barriers. The first barrier is in democratic decisionmaking. There seems to be a rock or hard-place choice between hierarchical decision-making and endless and often unresolved democratic meetings.
The second barrier is a reluctance to repose full faith and trust in powerful managers, knowing that everyone makes mistakes but people are less willing to suffer the consequences of others' mistakes than of their own. Under these conditions, managers seldom have very much real power, but are mere cogs in a larger machine that tends to bring everyone to a common level of mediocrity.
One conclusion we reached in our organizational meetings was that The Farm, even at a population of around 500 people, was quite difficult to financially manage as a collective. A more manageable size might be 30 to 100, so 30 was the size The Second Foundation started with. Rather than grow too much larger, we would prefer to see other groups organize their own extended families.
Q: Isn't communism dead? I mean, frankly, it just didn't work.
A: In The Farm's experience with a communal economy, we found a number of endearing characteristics which many of us still consider superior to the private family economic system we had come from and subsequently returned to. These characteristics included a sense of common fortune that served both to relieve unhealthy and sometimes unmanageable burdens and substitute group support; better efficiencies of labor division, such as childcare and tax accounting; the spiritual value of shared wealth, with its implicit requirement for greater cooperation; and the decoupling of life and liberty from the more alienable (as well as socially and ecologically destructive) rights of property and unrestrained acquisitiveness.
If we can find a compromise between laissez faire or regulated capitalism - the Western model - and inflexible state socialism - the Eastern model (though elements of each are in the other), we will achieve something the world has long been looking for - a middle way. The goal is to provide for everyone's real needs by maximizing sustainable resource use and minimizing waste and destruction.
Q: What are the legal requirements to become a 501(d)?
A: Section 501(d) has three basic requirements established by Congress. These three are:
A: Following a series of informal get-togethers, a draft set of agreements was circulated within the group. From that common foundation of agreement, the group laid out a six-point plan for creation and administration of a formal organization. All potential members were surveyed for their opinions about the plan. Draft bylaws were circulated and approved by the group. On October 20, 1988, the Second Foundation was incorporated in the State of Tennessee and on August 30, 1990, it received IRS recognition under section 501(d).
Q: Is it true that Second Foundation members don't pay taxes?
A: No. That is a common misconception. A 501(d) is like a partnership. There is no taxation of the business activity of the corporation, but profits are taken up on each member's individual tax return. The net earnings of the corporation, after expenses are deducted, are aggregated and divided into equal pro rata shares, or dividends, which are reported on Form K-1. If a large group of non-earners (seniors and children, for instance) are included in the membership, the reportable income of all members could fall below the taxable level, but this is not unlike living in a family with lots of dependents.
To Uncle Sam, you are not a name, but a number. Specifically, you are a nine-digit social security number. The Second Foundation has it's own number. To the computers at the Treasury Department, these are the numbers that determine what income is taxed, and to whom. If you work within The Farm, for a Second Foundation business, or under a Second Foundation outside labor contract, your paycheck is made out to The Second Foundation and the transaction is applied to the number. If you work for an outside employer without a contract, your paycheck is made payable to you, and the transaction is applied to your social security number. That means you are responsible for paying taxes on those earnings. In the past, new members have made the mistake of thinking, "Oh, now I belong to the Second Foundation, I won't have any income tax," and neglected to have their employer withhold the usual percent from their payroll. When April 15th rolled around, they were shocked to learn that they would have to come up with thousands of dollars in taxes, penalties, and interest.
Whenever someone earns money from outside employment, there is also the possibility of double taxation. First the employee is taxed on his or her wages, and then, after they turn the money into the Second Foundation, the corporation issues a pro rata dividend which is taxable again. The only way to avoid this is to not run the paycheck through the Second Foundation (since it has already been taxed and is legally yours). However, this means it is not applied towards group expenses and does not augment your pension fund or other benefit packages. Outside income can also lead to a disparity in standards of living within the group. As a result of these problems, the Second Foundation strongly discourages members from having outside (non-contract) employment. If too many of us did that, we could even lose our 501(d) status.
Q: Is it possible to work as a contract laborer for an outside employer?
A: Yes, although some employers have difficulty understanding how the Second Foundation works. If an employer is unwilling to contract through the Second Foundation or a subsidiary, the member/employee may incur tax obligations on those earnings. On-the-Farm labor arrangements with non-TSF businesses are formalized with contracts and payments are made directly to the Second Foundation. In some cases, in order to clarify the work relationship to outside employers, the Second Foundation has set up separate business divisions or secondary corporations to handle the labor services of members. Examples include Michael-Freeman (electrical and plumbing), Albert Bates P.C. (legal), and Richard and Christine Schoenbrun P.C. (medical). Contracts or subsidiary relationships between these businesses and the Second Foundation avoid the pitfall of double taxation.
Q: What do you do about Social Security?
A: Because there is no employer-employee relationship between a 501(d) and its members, a 501(d) corporation is exempt from withholding for Social Security, unemployment, workers compensation and other payroll deductions. In lieu of Social Security, the Second Foundation recovers a percentage normally withheld and puts it aside into our own pension fund. However, members are encouraged to arrange to contribute the minimum 40 quarters of withheld earnings to Social Security in order to qualify for baseline federal benefits. In order to do this, members in need of 40 quarters take up their pro rata shares as self-employment income (using schedule SE to covert their dividends to earned income) and pay the minimum social security tax. Moreover, for some taxpayers who take up their dividends on schedule SE and convert them to earned income, there is an earned income credit available which more than offsets the self-employment tax. To share this benefit more equitably, we have been pooling our earned income credits and assisting those who are disadvantaged by the tax system.
Q: Do you pay kiddie tax?
A: No. Because each child under the age of 14 is liable for taxation on dividend income in excess of $400 annually, we have decided as a group not to bring children into membership until they reach age 14 and apply for membership.
Q: How to you pay for health insurance?
A: Because there is no employer-employee relationship, there is no group health insurance for Second Foundationers. Presently we take advantage of good primary health maintenance practices, personal savings, and purchase premiums for Tenncare where applicable.
Q: How is the Second Foundation governed?
A: We hold an annual election of officers who arrange group meetings, notify members of forthcoming decisions, take minutes, and supervise the bookkeeping. Decisions are reached by consensus minus 10 percent, or 90 percent approval on any action taken.
Q: Can someone who doesn't reside within The Farm be a member of the Second Foundation?
A: No. One of the requirements for 501(d) status is that we all live together. As a practice, the Second Foundation does not entertain applications from persons who are not first members of The Foundation.
Q: How does one join the Second Foundation?
A: Come to an open meeting and familiarize yourself with the system. Think about the pros and cons of joining the group and consider whether you should try to organize a newer group. If you are ready to apply for membership, ask for and complete our standard application form.
For more information contact:
The Second Foundation
P.O. Box 220
Summertown TN 38483
© 1993, 1995, 1998, 1999, 2002, 2005 The Second Foundation