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The Role of Regulation in a Steady State Economy

by Brent Blackwelder

Regulations have played an essential role in modern attempts to curtail pollution, prevent abuses in the banking system, ensure safe food, and protect public health. They have been indispensable in checking powerful corporate interests that abuse the public trust.

Now, just on the heels of the global financial collapse and forty years after the first Earth Day, we are witnessing two frustrating failures in the United States:

(1) the failure of regulatory bodies to perform their duties, and

(2) the failure of regulations to achieve objectives contained in major laws (e.g., the coal strip mining law (SMCRA), the Clean Air Act and the Clean Water Act).

A prime example is the inability and the unwillingness of the government to implement the law and halt the obliteration of portions of the Appalachian Mountains by mountaintop-removal mining. Despite creative strategies by many citizen groups involving all branches of government — legislative, executive, and judicial — the erasure of the landscape continues. The destruction of these biologically diverse mountains in West Virginia and the wreckage of public drinking water, however, are not just environmental nightmares. They are also economic calamities that are completely incongruent with the principles of a steady state economy.  A corporation with a health, safety, and environmental record like Massey Energy would not even be able to maintain a license to do business in a steady state economy.

Better regulation could prevent problems like this nightmare on Kayford Mountain.

Regulations, including tax code changes and outright bans on particularly destructive practices, will be part of the landscape in a steady state economy, but we have to structure them differently. We need to change the dynamics that cripple much regulation today. Here are some key elements of the regulatory transition aimed at curtailing the abuses of corporations and preventing pollution:

(1) Make it vastly more expensive to pollute than to prevent pollution: no more token fines, legal delays, and slaps on the wrist.

(2) Increase taxes on pollution — it’s a no-brainer to tax what we want to reduce or eliminate.

(3) Apply special regulatory attention to the natural resource extracting industries (i.e., fossil fuel, timber, and mining). These industries are causing immense pollution and wiping out entire ecosystems. Extra disincentives should accompany any regulations on pipelines, drilling, reactors and other risky ventures where the consequence of an accident — natural or man-made — produces very damaging health or environmental impacts.

(4) Economize the use of raw natural resources in production processes and establish comprehensive recycling programs. In his seminal book, Cradle to Cradle, architect William McDonough has described such a strategy for reducing the enormous throughput of raw materials to a sustainable level.

Here are two examples to illustrate the above points:

(1) The U.S. strategy for phasing out the use of ozone-depleting chemicals under the Ozone Treaty of 1987 (Montreal Protocol) was a smashing success. It is a strategy worth implementing for other pollutants. The Congress set phase-out dates for a group of ozone-depleting chemicals and imposed a steeply increasing tax on their usage until the date of the ban arrived. In response, corporations stopped using the chemicals ahead of schedule, quite a different scenario from the usual foot-dragging.

(2) Yet another oil spill just occurred, this time on Montana’s magnificent Yellowstone River when an Exxon pipeline ruptured and spilled an estimated 42,000 gallons. In the past year the world has witnessed a major nuclear catastrophe in Japan at the reactors in Fukushima, run by Tokyo Electric (TEPCO), as well as a gigantic oil spill in the Gulf of Mexico when BP’s deep drilling went awry. In these and other similar cases the current global system privatizes the gains and socializes the losses (i.e., the corporations keep the profits, and citizens get stuck with the bill for the environmental disasters). Nobel-prize-winning economist Joseph Stiglitz observes that societies following this policy “inevitably mismanage risk.” With each passing day, it becomes clearer that we need to manage risk, not continue to mismanage it. Thus, regulatory controls on extractive industries must reflect the riskiness and magnitude of adverse outcomes.

In contrast to this discussion on improving regulatory approaches, the present Republican leadership has given a green light to eviscerating regulations across the board, much as former House Speaker Newt Gingrich attempted in the mid 1990s. This is part of a long-term, deliberate effort to frame regulation as being the problem, not the solution.

I suggest that we directly confront this ideology and switch the frame to view new regulatory approaches as problem-solvers that will achieve beneficial results for human civilization and the ecosystems we inhabit.

What Should We Tax?

by Herman Daly

Herman DalyFor some time a small group of ecological economists has been suggesting that we switch the tax base from income (value added to natural resources by labor and capital), and on to natural resources themselves. Value added to resources is something we want more of, so don’t tax it (either at each stage of production as in Europe, or at the final stage as income as in the U.S.). The resource throughput, beginning with depletion and ending with pollution (both real costs), is something we want less of in a full world economy, so let’s tax it. Even though resources in the ground and waste absorption services are free gifts of nature in the cost of production sense, they are nevertheless increasingly scarce in a full world. They need a price to be efficiently allocated and not overused. So let’s give them the needed price by taxing them, and use the revenue from the tax (or equivalent cap-auction-trade system) to substitute for the revenue lost from no longer taxing value added. The resource tax should be levied at the point of extraction (severance) so that the higher price will stimulate increased efficiency of use at all upstream stages of production, as well as in the final stages of consumption and recycling. Also depletion is spatially more concentrated than pollution, so in most cases a depletion tax is easier to monitor than a pollution tax.

In addition to this economic argument there is a political one. People do not like to see value that they added taxed away. They resent it, even while accepting it as necessary to fund public goods. But value that no one added, the original in situ value of natural resources and services, many people think should be common property, and most people think should at least be taxed for public purposes. If there is popular resentment it is against the resource owners who receive an unearned income (scarcity rent) over and above the value they truly add to the in situ resource by extraction and purification (echoes of Henry George). Of course oil and coal companies, and other extractive industries, will resist resource taxation (they currently enjoy government subsidies in addition to scarcity rents!), even though they would be expected to legitimately pass the tax on to consumers to the extent that markets allow. It is necessary that consumers, as well as producers, also get the higher price signal and become more efficient and frugal in consumption.

I have been told that we could not substitute resource taxes for value-added taxes because resource rents are a small portion of GDP while value added accounts for nearly all of GDP. You have to put the tax where the money is, I am told. But this is confusion between what is taxed and what the tax is paid with. All taxes are paid out of total income (money is fungible). But the question is, what is the tax proportional to — income or resource use? It makes much more sense for taxes to fall on resource use than on income. A resource tax falls on all citizens in proportion to their resource consumption, how much of a burden they impose on the biosphere, and not according to how much value they add to the resources necessarily extracted. Also, resource taxes are harder to evade than income taxes because, unlike resource depletion, income is not an easily measured physical quantity, but an abstract concept subject to manipulation by lawyers and accountants.

As to the reasonable objection that a resource tax is regressive with respect to income, that can easily be remedied by some combination of the following: (a) retaining an income tax on higher incomes, (b) spending the tax revenue progressively, including by abolishing existing regressive income taxes such as the payroll tax, (c) instituting a significant and progressive inheritance tax. Some object, less reasonably, that higher resource prices due to a resource tax will put us at a competitive disadvantage in international trade. But then so does an income tax, and it is not clear that there would be any net difference between the two in raising the same amount of revenue. In fact, any internalization of environmental and social costs would also raise prices and thereby create a trade disadvantage relative to countries that did not internalize those costs. However, the first rule of efficiency is to count all costs, not to run a trade surplus based on standards-lowering competition to externalize costs.

So why not shift the tax base from value added (earned income) and on to that to which value is added (natural resource throughput)? This would help us to count all costs and minimize depletion and pollution. It would stop penalizing the desired creation of value added by taxing it. It would reduce unemployment. It would use the revenue from natural resource taxes to substitute that from the eliminated value added taxes. The first value-added taxes to be eliminated would be the most regressive ones, thereby serving both efficiency and equity. This seems such an obvious improvement that one wonders why economists remain so in thrall to value-added taxation?

Opportunities for a Different Economy in 2011

by Brent Blackwelder

With last November’s election there are new governors, state legislatures, and a very different U.S. House of Representatives. The issues of budget cuts, tax reform, corruption, the global financial collapse and the rise in unemployment are high on the agenda. We have an opportunity to shape the debate on these issues and bring the steady state economy into the discussion.

Here are some of my ideas for 2011.

Public Education

We need to conduct a series of seminars or teach-ins across the country to challenge conventional economic thinking, to expose people to the concept of a steady state economy, and to find workable solutions to all the economic problems we face. If you would like a seminar or teach-in for your community or your college, please contact me. Such sessions would involve audience interactions with leading advocates of new economic approaches and would feature dynamic discussions of what a steady state economy would look like, how to accomplish a transition to such an economy, and opportunities for financial and economic reform this year.

Financial Corruption and Tax Evasion

Financial corruption is undermining all aspects of governance. Tax dodgers are depriving governments around the world of essential revenues. The result is less money for enforcement of health, safety, and environmental standards and reduction of many vital social services. It doesn’t take long under such conditions for citizens to lose faith in the ability of the government to provide security and other meaningful services.

We can work on two tasks in 2011 to address these problems. First, we can solidify important legislative gains made last year to curtail corruption, by making sure new regulations have strong provisions to prevent tax dodging (note: the Administration will be writing regulations to put new agencies like the Office of Financial Research into action). Second, we can demand new laws to force disclosure of clandestine owners of offshore tax havens. Those who want to be part of grassroots efforts on these issues should contact me.

Tax Reform and Budget Cuts

The last election featured headlines about growing deficits, massive cuts in federal spending, and the influence of Tea Party activists. Republicans are demanding spending cuts on the order of $100 billion but are short on specifics. At the same time, Democrats are angling to avoid big reductions in domestic spending.

The win-win solution to the pending impasse on budget cuts is to go after offshore tax havens and other tax dodges that are costing our country $100 billion a year. More and more people and corporations are moving money they earn in the U.S. to offshore havens where taxes are inconsequential. Goldman Sachs used this technique to reduce the percentage of its income going to taxes from 34% in 2007 to less than 1% for 2009. Exxon avoided paying U.S. taxes in 2009 even though it had billions in profits. The Task Force on Financial Integrity and Economic Development reports that 83 of the top 100 U.S. corporations have subsidiaries in tax havens. Such tax avoidance by multinational corporations not only hurts taxpayers, but also costs the governments of developing countries an estimated $160 billion per year, according to a new report by ActionAid. Tax avoidance by corporations is a major factor in keeping poor people poor around the world. For example, in Ghana, SABMiller’s subsidiary Accra Brewery is the second biggest in the country with over $40 million in yearly sales, but through clever accounting, it has paid no taxes the past two years. At the same time Marta Luttgrodt, who sells this beer at her small food and beverage stall near the brewery, must pay a number of taxes to the Ghana Revenue Authority or she will be closed down. ActionAid estimates that the taxes SAB Miller has avoided paying could have put 250,000 children in school in the countries where the company operates.  Click here for more on this story.

Great Educational Movie

For a captivating picture of the global financial collapse of 2008, the bailouts, and the behavior of big bankers and Wall Street firms, the movie Inside Job is a must-see. Inside Job provides a comprehensible and dynamic overview of the collapse in the U.S. and around the world. If you are not already infused with a sense of outrage over the criminal behavior of so many involved in the scandals, you will be after seeing this movie. Help spread the word.

Key Changes in the Tax Code

Tax reform will be a major topic for action this year. Progressives need to be on the offensive and demand a better taxation framework. It is our civic duty to see that our tax structure is fair, that people live up to their responsibility to pay taxes, and that tax incentives do not encourage undesirable activities. For example, the tax code should impose fees on pollution and on products that harm public health. Often the reverse is true. The government has subsidized the purchase of gas-guzzling hummers and delivery of junk food into public schools. We should push both political parties to eliminate all government subsidies for the fossil fuel industry. If you want to be part of the subsidy debate on energy, please visit Friends of the Earth.

We have lot of work to do to build a sustainable and fair economy. But we also have a lot of opportunities to minimize perverse subsidies, eliminate tax dodging, create meaningful employment opportunities, and put the brakes on the financial roller coaster that is being driven by speculators. Contact Dr. Brent Blackwelder to follow up.

Two “Robin Hood” Taxes for the Price of One

Linking Climate Justice to Tax Justice

Co-authored by James S. Henry, economist, lawyer, and author of The Blood Bankers (Basic Books, 2005) and Dr. Brent Blackwelder, president emeritus of Friends of the Earth

The subject of taxes certainly isn’t the most riveting topic for cocktail party conversations. Most people don’t like thinking about the labyrinthine tax code or filling out convoluted forms. They certainly don’t enjoy paying taxes. But we believe that the time has come to reframe the debate on taxes and build up some popular passion and energy for a few basic adjustments to the tax code. With these simple, easy-to-implement changes, it turns out that we could move the economy in a direction that works much better for people and the planet, including a more stable climate.

We badly need to recapture the public discussion and debate on tax codes from the technical specialists and special interests, as well as the diehard anti-government reactionaries. The tax system is so critical to the functioning of any nation that as concerned citizens, it is essential for us to insist on making values like justice, fairness, and shared responsibility central to any political debate on this issue.

By framing all discussions of taxation with the jaundiced view that “politicians just want to raise your taxes,” critics have actually ended up promoting a tax system that rewards pollution and disproportionately exempts the wealthy from paying their fair share. Since more careful discussions of tax policy have become taboo, governments have ended up being deprived of revenues that are essential to provide services. Thus, the anti-government forces have created a vicious, self-perpetuating cycle: their programs to curtail revenues have often crippled government programs, helping, in turn, to reinforce the notion that government can’t get anything done.

The issue of government revenues has come to the fore as developing nations have tried to grapple with climate destabilization. Quite reasonably, they’ve been asking for assistance from the wealthy nations that, over the long haul, have undeniably been the biggest contributors to the problem, to help them pay the costs of adaptation.

The huge Copenhagen climate summit in December failed to achieve breakthrough results to reduce greenhouse gas emissions, but it did result in a pledge by the U.S. Secretary of State, Hillary Clinton, for $100 billion per year in climate adjustment assistance to poor countries by 2020. The actual amount required may turn out to be even larger, but if we start early and build up a reserve fund, we can be prepared – much like insurance. And the good news is, there is a way to obtain such large sums even in today’s difficult economic climate, while simultaneously helping to clean up and stabilize the global financial system.

The tragic earthquake in Haiti, although not caused by climate destabilization, graphically illustrates the sheer magnitude of physical and monetary magnitude of relief and adaptation measures that scientists predict may well be needed by poor nations as the earth’s climate is disrupted.

Our revenue plan involves two very modest, complementary transnational “climate change surcharges” on groups that not only could readily pay them, but also richly deserve to pay them: major banks and their superrich, often tax-dodging global corporate and individual clients.

The first component is a variation on the well-known “Tobin tax” on foreign currency transactions, originally suggested by Keynes in the 1930s. The version of the Tobin tax that we are proposing would be even less intrusive. It would only apply to wholesale foreign exchange transactions, not to retail customers. Nor would it really be an international tax, imposed on countries by some faceless OECD bureaucracy. Each country signatory would agree to introduce legislation to adopt its own national version of a “model” tax. Each country’s own tax authorities would be responsible for collection and enforcement. Given the astonishing $4 trillion per day of such transactions, a tax of less than a dime per $1,000 of transactions would yield at least $50 billion per year. A similar low marginal tax rate on all international financial transactions, including stocks, bonds, options, and derivatives, could readily collect at least twice that amount.

The second new revenue stream that we propose is an “anonymous wealth” tax. This involves levying a modest 0.5% annual “climate aid” withholding tax on the estimated $15 to $22 trillion of liquid private financial assets — bank deposits, money-market funds, mutual funds, public securities, and precious metals — that we and other analysts have estimated now sit offshore, almost entirely untaxed, in anonymous accounts, trusts, and foundations. This tax could raise at least $25 billion to $50 billion per year.

Furthermore, the administration of all these “private banking” assets is heavily concentrated in the hands of a comparative handful of leading First World banks, including all of the key players in the wholesale currency market, as well as the leading players in the recent financial crisis, and the largest recipients of “too big to fail” assistance.

This means that the anonymous wealth tax and the transactions tax complement each other neatly. The first one addresses the huge stock of undisclosed offshore wealth and income that has fallen through the cracks, while the other addresses the ongoing speculative activity that has been fueled by the accumulation of all this restless, internationally mobile private capital. From an administrative standpoint, major international banks, the “systems operators” for this highly problematic global financial industry, are perfectly positioned to help clean up its “bads.” In that sense, we can view these two modest taxes as “financial pollution” taxes, which will help to compensate the rest of us for bearing the costs and the risks of easy tax avoidance and excessive speculation.

In sum, we believe that these two modest tax proposals constitute a bold new potential solution to the problem of paying for climate adaptation, and a way of linking “climate justice” to “tax justice.” They not only are administratively and politically feasible, but most important, they also happen to be the right things to do on ethical grounds.

Administrative feasibility. This year the G20 and the IMF have already had very serious discussions of several variations on the Tobin tax, and just this week the European Parliament passed a resolution supporting it. Nevertheless, for reasons that are unclear, the U.S. Treasury Department and White House economists have been resisting. Apparently the economists are concerned about “market efficiency,” while the Treasury is still concerned about Wall Street.

These concerns are overblown. Of course all taxes interfere with perfect markets to some extent, but no one except radical anarchists are proposing that we all return to the mythological Eden of a tax-free world. This is especially true in a world with highly imperfect markets, where facts of life like imperfect information, excess financial speculation, financial crimes, ineffective law enforcement, and pollution often justify tax policies that offset these market imperfections.

The question in any real world situation is always whether the revenue generated is worth the price of any extra inefficiencies. We believe that in the case of our two specific proposals, the revenue gains dwarfs the inefficiency, if any. For example, in the case of the .005% levy on all wholesale and interbank foreign currency transactions among major currencies and cross-currency derivatives, such a tax could be implemented at very low cost, with limited opportunities for evasion. The wholesale foreign exchange market is already completely electronic, and highly concentrated. Indeed, in 2009, for example, more than 60 percent of all trading was handled by just five global banks — Deutsche Bank, UBS, Citigroup, RBS, and Barclays. This growing market generated over $4 trillion of transactions per day, more than twice the volume in 2004.

Similarly, in the case of the withholding tax on anonymous offshore wealth, the top 50 private banks in the world have more than $8 trillion in private financial assets under management, and another $4 to $5 trillion in assets under custody. Indeed, the top 10 alone account for nearly half of this amount. So long as the taxes were implemented uniformly across anonymous customers, it would be simple for these institutions to levy .5% annual withholding taxes on these assets.

Political feasibility. In principle, the revenue plan proposed here should be by far the most politically pain-free way of fulfilling Secretary Clinton’s Copenhagen climate aid pledge. It concentrates the costs on a very tiny, privileged group that is supremely able to afford them — the world’s wealthiest 10 million people on a planet with 6.8 billion humans.

From this angle, this proposal should attract widespread support from religious congregations and other nongovernmental organizations that are concerned about equity and global development. It should also attract support from national tax authorities, law enforcement agencies, and homeland security agencies that continue to see a large share of proceeds from international tax evasion and the underground economy slip through the cracks, despite their best efforts. Of course it should also attract support from environmental groups, and from public officials who are concerned about finding ways to pay for essential government activities without going deeper into debt.

Finally, this proposal could gain traction from the public outrage over the lingering effects of the financial crisis and the taxpayer bailouts that have been received by wealthy financial institutions that were “too big to fail.”

Moral justification. The moral foundation of this proposal is the idea of combining “global climate justice” with “global tax justice.” Global climate justice reflects the polluter pays principle — the judgment that it is fundamentally fair for rich countries to pay for most of the costs of adapting to climate change, since they have been overwhelmingly responsible for greenhouse gas emissions in the first place.

The concept of “global tax justice” reflects the judgment that it is fundamentally fair for the financially wealthiest citizens and corporations in both poor and rich countries alike to pay at least some taxes on their worldwide incomes and/or wealth to support their home countries.

One key source of the trillions in private funds that we propose to tax is underreported capital flight — money that is secreted offshore and invested abroad beyond the reach of domestic tax authorities. A second major source is under-taxed corporate profits and royalties that have been parked offshore in tax havens by way of rigged transfer pricing schemes. A recent report by the charity Christian Aid estimated the annual cost of these transfer pricing schemes to developing countries, in terms of lost tax revenues, at $160 billion per year. A third source is the myriad illicit activities that constitute the global underground economy — corruption, fraud, insider trading, drug trafficking, “blood diamonds,” and innumerable other big-ticket, for-profit crimes.

The ownership of the trillions in untaxed financial wealth is incredibly concentrated. At least 30 percent of all private financial wealth, and nearly half of all offshore wealth, is owned by world’s richest 91,000 people — just 0.001% of the world’s population. The next 51 percent is owned by at most 10 million people, comprising only 0.15% of the world’s population. About a third of all this offshore wealth has been accumulated from developing countries, including many of the largest “debtors.” And almost all of it has managed to avoid any income or estate taxes, both in the countries where it has been invested and the countries where it originated.

Tax policies are at their best when they provide the right incentives, secure funding for needed public goods and services, place the burden of payment on the right parties, and make progress toward a more equitable society. The proposed “Robin Hood” taxes on anonymous wealth and foreign exchange transactions meet all these criteria, and they are easy to administer. They are precisely the kind of progressive tax changes that we should all be happy to discuss, even at a cocktail party.