Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Econ-Utopia: Environmental Tax ShiftingAn Econ-Utopia, brought to you by the Center for Popular Economics.Econ-Utopia: Environmental Tax Shifting By Jonathan Teller-Elsberg, CPE Staff Economist June 28, 2006 In the U.S., talk of tax reform usually means debates about taxes on income and wealth. A little less common are discussions of flat taxes and a shift from payroll, income, investment, or property taxes to consumption taxes-that is, a federal sales tax. We've seen the miserable results of lowering taxes on the rich, and we'll be dealing with the massive government debts for decades to come. Flat taxes are simply another way to lower taxes on the rich, under the guise of simplifying the tax system. (To be sure, simplifying taxes is not exactly something to dismiss out of hand-the system is far more intimidating than it should be.) The supposed advantage of a shift to consumption taxes is that the shift away from payroll and/or other taxes should lead to more jobs. This is because a payroll tax makes it "expensive" for a business to have an employee. If the payroll tax is reduced or eliminated, the business will have more money available to hire additional workers. The problem with consumption taxes is that they tend to be regressive-meaning that they fall hardest on lower-income members of society. Another type of tax reform that deserves more attention is the environmental tax shift (ETS), also known as the green or ecological tax shift. The idea here is to increase taxes on activities that result in environmental damage and use the money generated to reduce other taxes by the same amount. As with the consumption tax idea, most proposals center around reducing payroll taxes. Many proponents of ETS believe it can result in a "double dividend" of benefits. The first is a reduction in environmental damage, and the second is a boost in employment. It may seem strange that shifting taxes can lead to much good, if the total amount of taxes remains the same. After all, a business might pay less in payroll taxes, but if it simultaneously pays more for the fossil fuel energy it uses, it doesn't necessarily have any extra money available to hire new workers. The economic theory behind the double dividend is that the relative cost of an employee will become lower, while the relative cost of using energy goes up. If managers can figure out a way to do so, the business will be better off by relying on more human labor and less fossil fuel based energy. The result is more employment and less pollution. ETS is being tried in a number of European countries on a moderately wide scale. While computer modeling of the economic effects of ETS generally predicts desirable outcomes (reduced pollution without a reduction in overall economic activity and with growth in employment), there is not yet enough real-world evidence to say for sure if the double dividend occurs from a full-scale tax shift. Even without a double dividend, many people concerned about the growing crisis of global warming feel that a single dividend of reduced use of fossil fuels is reason enough to make the shift. Because of similarities with a generic consumption tax, environmental taxes could be regressive in their overall effects. If a carbon tax replaces the income tax, poor people who paid little or no income tax will then face higher prices for their transportation and heating needs, while rich people who paid high income taxes will save more from that reduction than they pay in new energy costs. But the specific structure of a green tax system can also lead to fairer results. New environmental taxes can be accompanied by reductions in pre-existing regressive taxes, or by reducing other taxes in a way that enhances their progressive structure. The overall result can be neutral or even a move towards a more progressive tax system. Sources and resources: Jeff Hamond, Hardy Merriman, and Gary Wolff. "Equity and Distributional Issues in the Design of Environmental Tax Reform." Redefining Progress, October 1999. http://www.redefiningprogress.org/publications/pdf/ETR_equity.pdf Alan Sanstad And Gary Wolff. "Tax Shifting and the Likelihood of Double-Dividends: Theoretical and Computational Issues." Redefining Progress, February 2000. http://www.redefiningprogress.org/publications/ets_doublediv/ets_doublediv_execsum.html Erkki Koskela and Ronnie Schöb. "Alleviating Unemployment: The Case for Green Tax Reforms." European Economic Review, No 43 (1999), pp. 1723-1746. http://www-f.uni-magdeburg.de/~vwl1/forschung/forschung_dateien/alleviatingUnemployment.pdf J. Andrew Hoerner and Benoît Bosquet. "Environmental Tax Reform: The European Experience." Center for a Sustainable Economy, February 2001. http://www.rprogress.org/newprograms/sustEcon/eurosurvey.pdf Wikipedia. "Ecotax." A nice overview of environmental tax ideas. http://en.wikipedia.org/wiki/Green_tax_shift. Wikipedia. "Feebate." Explanation of a tax reform similar to ETS that can be implemented towards specific goals, such as increasing automobile fuel efficiency. http://en.wikipedia.org/wiki/Feebate. Ministry of Finance (Sweden). "The Budget for 2005: A Commitment to More Jobs and Increased Welfare." Includes some details of Sweden's ETS. http://www.sweden.gov.se/sb/d/4173/a/30037. World Resources Institute. "Tax Reform and the Environment: Why and How?" http://pdf.wri.org/green_fees_tax_whyhow.pdf © 2006 Center for Popular Economics Econ-Atrocities are the work of their authors and reflect their author's opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles. The Center for Popular Economics is a collective of political economists based in Amherst, Massachusetts. CPE works to demystify economics by providing workshops and educational materials to activists throughout the United States and around the world. If you would like more information about CPE please visit our website at www.populareconomics.org. If you would like to automatically receive CPE's Econ-Atrocities by email, subscribe (or unsubscribe) by going to the following link: http://www.populareconomics.org/site_files/subscribe.html Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Short Run: Drug Treatment Pays for Itself Many Times Over Drug Treatment Pays for Itself Many Times Over An item from "The Short Run" in the May/June issue of Dollars & Sense. A study of drug treatment programs published in the journal Health Policy Research has found that every dollar spent on treatment saves $7 in costs ranging from health care and mental health services, to criminal activities and resulting incarceration, to lost earnings. The authors conclude: “Even without considering the direct value to clients of improved health and quality of life, allocating taxpayer dollars to substance-abuse treatment may be a wise investment.” The study focuses on drug treatment programs in California, where, in 2000, voters overwhelmingly supported Proposition 36, which requires treatment rather than incarceration for drug offenders. The results confirm an earlier UCLA study that found that the state saved $2.50 for every dollar spent; the Drug Policy Alliance projected a savings of $1.4 billion for the first five years of the state’s new emphasis on treatment. Send significant, outrageous, or hilarious tidbits related to the economy to: Short Run Editor; Dollars & Sense; 29 Winter St.; Boston, MA 02108; or email us with "Short Run Editor" in the subject line. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Econamici: Economan Captures the Knowledge EconomyReview of David Warsh's Knowledge and the Wealth of Nations David Warsh's engaging new book Knowledge and the Wealth of Nations tells two stories. One story, beginning with Adam Smith, covers the history of thought about the relationship of economic growth and economies of scale. Warsh finds in Smith a contradiction between the huge technical economies of the pin factory, which should create monopolies, and growth driven by competition between many firms. From Allyn Young forward, he sketches the lives and ideas of major 20th century economists who addressed or neglected Smith's puzzle, while building the mathematized economics of today. The players include George Akerlof, Kenneth Arrow, Robert Barro, Edward Chamberlin, Paul David, Gerard Debreu, Milton Friedman, John Maynard Keynes, Paul Krugman, Robert Lucas, William Nordhaus, Paul Romer, Paul Samuelson, Robert Solow, Joseph Stiglitz, John Von Neumann, and many more. The other story details Paul Romer's struggle to develop a new mathematical growth model that would solve Smith's puzzle, culminating in "Endogenous Technological Change" in 1990. This model challenges the now classic 1956 model of Robert Solow, by explaining innovation rather that treating it as manna from heaven. I found the book at least as interesting for its depiction of elite academic economists as for its account of growth theory. Warsh views his economists as "a cat looking at kings." They are "the best and the brightest." In 1985 "[a]t the age of forty-eight, Robert Lucas has become the most influential economics theorist in the world…" Or, "At age forty-nine, [John] Taylor is on his way to becoming one of the fathers of the profession…" These economen -- for they are all men -- sally forth like heroes on the Trojan battlefield. Only it's the "Saltwater" (Cambridge MA and allies) heroes versus the "Freshwater" (Chicago) heroes. Sometimes they collaborate; sometimes they go mano a mano against a single opponent--as does Romer against Solow. Hovering over the scene like Athena and Hera are two women, neither of them accorded Warsh's usual encomia. They are Joan Robinson, originator (with Edward Chamberlin) of the idea of "monopolistic competition," and Jane Jacobs. Jacobs, known for her keen observations on the economy of cities, was not even an economist, let alone a mathematical economist. I confess to skepticism. I find no contradiction in Adam Smith. I have difficulty with modern macroeconomics, which disregards factor proportions and prices, as well as distribution. I cannot swallow growth theory--especially the aggregate production function into which Romer incorporates knowledge acquisition. Warsh's heroes battle for honor and glory--the admiration of colleagues, publications in top journals, prestigious professorships, the Clark Medal, the Nobel Prize. And they experience the sheer joy of solving puzzles. But, has their new mathematical arsenal enabled them to capture a better understanding of the economy, as Warsh assumes? Surprisingly and annoyingly, Knowledge and the Wealth of Nations lacks citations and bibliography, though at least it has an index. David Warsh edits www.economicprincipals.com, a weekly subscription column on the doings of the profession. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Solidarity; new website contentI am out of the office today in an act of solidarity with the international working class: I'm about to go down to my neighborhood pub to watch the US/Czech Republic World Cup match!Meanwhile, enjoy the new content I've added to the Dollars & Sense website over the weekend. a Resources page: http://dollarsandsense.org/resources.html a Promote D&S page: http://dollarsandsense.org/promote.html a Donate page, complete with a mini-lesson on financing independent media: http://dollarsandsense.org/donate.html Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Econamici: The Mother of all Bungles in IraqThe Mother of all Bungles in Iraq Introductory Economics Lesson One: Price controls can backfire. Exhibit A: New York City rent control. Landlords neglect repairs, and harass poor tenants into leaving. Meanwhile, well-to-do renters pay thousands of dollars in "key money" to owners or supers to obtain choice apartments. Exhibit B: Iraqi oil price control. Remember when the Provisional Authority took over in Iraq under the direction of Paul Bremer? In its eagerness to impose free markets, the Authority privatized most public enterprises, throwing thousands out of work. Yet when it came to oil, astoundingly, it retained Saddam Hussein's policy of paying subsidies to hold prices well below market! In "Attacks on Iraq Oil Industry Aid Vast Smuggling Scheme," (Sunday, June 4) The New York Times reports the predictable result:
One assumes the Authority feared repercussions--either rioting by ordinary Iraqis accustomed to low gas prices (after waiting in line for three days), or sabotage by the vast network of local officials and tribal chiefs dependent on oil smuggling. A recent deal with the International Monetary Fund to forgive Iraq's debts includes a provision to end the Saddam-era oil subsidies. But the new Iraqi government, even more than the Provisional Authority, may fear public response--not to mention resistance of corrupt politicians. There could have been--and could still be--an alternative: Issue coupons to Iraqi families in the amount of the average per-family subsidy, and let oil prices rise to market. In effect, give the subsidy to Iraqi families instead of to smugglers. Meanwhile, financed by US taxpayers, insurgents and criminals continue the slaughter. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
