Here's how my system works:
People can't think of more than 200 people as "people". They may know that they exist, but the 201st person is only a stereotype; a doctor or a street sweeper, some minority or a economic class.
It is actually a physical handicap; human brains are limited by some structural mechanism. Primates with specific kinds of social brain regions live in specific kinds of groups; and it just so happens that humans have 200-person sized brains.
Of course, this can be improved with training, and there's nothing wrong with living in a world with more than 200 people in your "clan"- it's just uncomfortable, and can lead to inhuman behavior, because people literally see the victims as non-human "others".
And it seems that humans "in the wild" naturally form clans of 200 or so. Aboriginal groups around the world live in such groups, naturally splitting when the band grows much larger than 200 people. Even Amish communities split at such sizes.
Consider at what point a company switches from being a "new, agile startup" or a "lively, family business" to being a "corperate monolith" or a "faceless firm".
I suggest that this limit be embraced, and that our culture be built with this in mind; by breaking down administrative divisions until they include, on average, one hundred people.
I must note here two things: One, that does not mean that cities can't exist- just that they have neighborhood organizations that are part of the larger and legal structure of the whole city. Life would not mean that you are a part of the clan's will, just that your whole participation in the government can be, if you choose, just talking to and voting for an activist neighbor for neighborhood manager; or, if you want, working your way up the ladder to whatever position you are suited for.
The other important note is that these communities only function when it is possible to change where you live; in these band-and-village communities, ones where they are forced to be sedentary lead to social strife, while allowing mobility from one clan to another leads to people finding the kind of community they like and staying there.
So, assuming we have 8 billion people on earth and we want them all to be in one government, how many levels of such a government would you need, if each one consisted of, on average, 200 people elected from the next level down?
since 200^5 is 320,000,000,000, which is somewhat more than 8 billion, five levels should be plenty. The fact that one is only five elections away from being leader of the entire world, and that no matter how distant someone is, you are only seven steps removed from them, is a powerful tool for peace.
As for capitalist/communist- this superseeds that. It's democratic, in a sense, since everyone votes at least for the local election. But as for economic decisions, the way it works is that each level may pass laws that effect all those below it; a city may pass a law that all neighborhoods must maintain one park within them, or such.
One would never be under tyranny, however, because one could always be allowed to go to some other group.
As an interesting side-effect of this, since this only describes legislative entities, the bureaucracy might end up being entirely separate of the state; most likely, it would be the duty of the legislator to ensure that his paperwork is done, and he would most likely contract this out to outside firms.
The ideal is that all of the government services would emergently appear in such a way, and only in those regions that it's needed or wanted.