A very large, money-saving,cost-free investment in natural capital can be made by eliminating both the perverse subsidies now doled out regularly by governments to industries, and the practices, encouraged by those subsidies, that are heedless of the environment.
In a groundbreaking work of research and collaborative sleuthing, Dr. Norman Myers undertook an approximate accounting of the world’s perverse subsidies in six sectors: agriculture, energy, transportation, water, forestry, and fisheries. Ideally, subsidies are supposed to exert a positive outcome by helping people, industries, regions, or products that need to overcome cost, pricing, or market disadvantages. For example, education is subsidized so that parents don’t have to pay the full cost of their children’s schooling. Microprocessor development was heavily subsidized by the U.S. Defense Department for over a decade, and still is in specialized areas. Today, that looks like a brilliant investment.
Perverse subsidies do the opposite. They function as disinvestments, leaving the environment and the economy worse off than if the subsidy had never been granted. They inflate the costs of government, add to deficits that in turn raise taxes, and drive out scarce capital from markets where it is needed. They confuse investors by sending distorting signals to markets; they suppress innovation and technological change; they provide incentives for inefficiency and consumption rather than productivity and conservation. They are a powerful form of corporate welfare that benefits the rich and disadvantages the poor.
Germany pays $6.7 billion, or $73,000 per worker, every year to subsidize the Ruhr Valley coal regions. The high-sulfur coal produced there contributes to air pollution, acid rain, lung disease, the die-off of European forests (Waldsterben), and global warming. For less money, the German government could pay all workers their full wages for the rest of their lives and shutter every coal company.
In the mid-1990’s, Bulgaria was still spending over 7 percent of its entire GDP on subsidies to make energy look cheaper than it really was so people would be encouraged to use it even more wastefully.
Perverse subsidies can also be involuntary.
In past decades, the Swedes indirectly subsidized the electrical industry in the U.K. because their forests are unintentionally but heavily damaged by the sulfur-dioxide emissions of British coal-burning power plants. The British plants don’t have to pay for the damage they cause someone else.
Perverse subsidies can even be embedded in taxes.
For example, by taxing drivers for ownership of vehicles (registration) rather than their use, governments reduce the owner’s marginal cost of driving while raising it for society as the number of people driving increases. Owners who drive little subsidize those who drive a lot.
Dr. Myers found that governments are loath to cooperate to reveal their transfer payments to protected industries. Oligarchies, corruption, and/or lobbying can all contribute to discouraging full disclosure, much less interference. Subsidies are not regularly and officially tallied by any government in the world, including that of the United States. They are euphemized, concealed, or brazenly defended as pro-growth and pro-jobs by the powerful interests who benefit but are seldom revealed clearly or directly to the taxpayers who finance them. That concealment is not surprising, since the sums of money are enormous: $1.5 trillion a year represents twice the money spent on defense and weapons, and is a sum larger than the GDP of all but five countries in the world – larger, indeed, than the total GDP of the world’s seventy-four smallest countries. If even a third of these subsidies were transfer payments to the world’s poor, the income of 1.3 billion people with the lowest incomes could double.
In the United States, automobile companies and related industries have effectively been on welfare for most of the twentieth century. Hidden automobile costs total nearly $464 billion annually, from the expense of taxpayer-funded road construction to the cost of Persian Gulf forces earmarked to protect America’s access to “its” oil. But roads may be the most insidious of these beneficiaries because they are so often seen as vital for growth and jobs. Subsidizing them has led to suburban sprawl, urban decay, and highways to nowhere. Even a publication as conservative as The Economist has acknowledged the perversity of subsidies in this realm, perhaps influenced by the fact that in one-third of all European cities, traffic moves at less than nine miles per hour at peak times, and even slower in London:
If roads continue to be operated as one of the last relics of a Soviet-style command economy, then the consequence will be worsening traffic jams and eventual Bangkok-style gridlock. If, on the other hand, roads were priced like any other scarce commodity, better use would be made of existing space and the revenues raised would be used to improve public transport. The mere fact of making motorists pay their way would free capacity to such an extent that bus travel would become easier and faster, and subsidies could be reduced.
Not only did the magazine’s editorial come out squarely for road pricing and taxes for road use, but it suggested that governments could borrow against the stream of future revenue from such taxes, thus accelerating financing to improve public transportation. This is a useful and practical principle and one that can be applied elsewhere: Once perverse subsidies are eliminated, the stream of income from realized savings can be reinvested in further savings. Tunneling through the subsidy barrier creates a multiplier effect that starts to compound the investment and finance the restoration of natural capital.
In some cases, the word “perverse” is too innocuous a description for the ways that various businesses are underwritten.
Take, for example, the subsidies for agriculture provided by the twenty-nine member nations of the Organization for Economic Cooperation and Development (OECD). They total $300 billion per year, and are designed to suppress or restrain surplus production. In contrast, raising agriculture to Western standards in developing countries where food is not in surplus would cost only $40 billion per year.
Similarly bizarre, while U.S.gasoline prices fall to their lowest levels in history, American subsidies to fossil-fuel industries exceed $20 billion per year.
Between May 1994 and September 1996, the U.S. government honored an 1872 mining law by transferring land containing $16 billion worth of minerals to private parties for the sum of $19,190 – nearly a millionfold less. Any down-stream damage to streams and rivers will be paid by taxpayers, who will not receive a single penny of royalties. Already, an estimated $33-72 billion of cleanup at abandoned mining sites must be underwritten by those same taxpayers.
In all, polluting American industries, according to the Congressional Joint Committee on Taxation, will get $17.8 billion more in tax breaks over the next five years. Fifteen direct subsidies to virgin resource extraction and waste disposal industries will account for another $13 billion in the same period.
In farming, the U.S. government has set up a veritable universal sprinkler system for subsidies. It subsidizes agricultural production, agricultural nonproduction, agricultural destruction, and agricultural restoration, and for good measure, it subsidizes crops that cause death and disease, by giving over $800 million a year to tobacco farmers. American taxpayers heavily subsidize the 3,400 gallons of water it takes to produce one dollar’s worth of California sugar beets. Taxpayers paid to drain the Everglades, subsidize sugar producers with price supports,and cover the damage to wetlands and the Gulf from phosphate runoff and pesticide poisoning – and are now spending $1.5 billion to buy back some of the 700,000 acres that they had paid to drain and sell at below-market prices in the first place. We subsidize cattle grazing on public lands ($200 million), and then pay for soil conservation services to try to repair the damage. And most notoriously, even wealthy landowners are paid to keep their land out of production. (The Conservation Reserve Program pays out $1.7 billion a year, meant to reduce soil loss but apparently structured partly to subsidize the rich.)
The irrationality of agricultural subsidies is confirmed by many World Bank studies. Three examples suffice.
Indonesia heavily subsidized pesticides, resulting in massive use and equally serious side effects. Starting in 1986, the government banned many pesticides and adopted Integrated Pest Management as official policy. By 1989, the subsidies were gone; pesticide production plummeted nearly to zero and imports by two-thirds; yet rice production rose by another 11 percent during the years 1986-90, thanks to the ecosystem’s recovering health.
Bangladesh’s removal of fertilizer subsidies, which had amounted to 4 percent of the national budget, made food prices drop through increased competition.
Throughout the developing countries that subsidize irrigation with some $22 billion a year, “massive underpricing of irrigation water has resulted in substantial overuse” and is a “major factor behind the water-logging and salinization problems being experienced in many countries,” yet has benefited mainly medium-sized and rich farmers. U.S.agricultural subsidies teach precisely the same lessons.
While Americans subsidize environmental degradation, cars, the wealthy, corporations, and any number of technological boondoggles, the clean technologies that will lead to more jobs and innovation are often left to the “market:’ Free markets for sound investments are advocated in the same breath as corporate socialism for unsound investments – if they benefit the advocates. Between 1946 and 1961, the Atomic Energy Commission spent $1.5 billion to develop a plutonium-powered airplane; it was so laden with lead shielding that the vehicle could not get off the ground. Tax-free bonds enrich owners of sports franchises who build stadiums, and then build the requisite roads and highways so that fans can leave games quickly ($9.1 billion a year is the lost federal revenue from tax-free municipal bonds)
Then there is the money donated to dying industries, federal insurance provided to floodplain developers, cheap land leases to ski resorts, bailouts to felons controlling savings and loans ($32 billion a year for 30 years), roads into National Forests so private forest-products companies can buy wood at a fraction of its replacement cost ($427 million a year) while taxpayers make up the losses to the Forest Service, long the world’s largest socialist road builder.Those are some of the activities that our tax policies encourage. What they discourage, apparently, is jobs and well-being.
In 1996, the federal government raised $1.587 trillion in taxes, over 80 percent of which came from taxes on individuals, in the form of either personal income taxes or Social Security levies. Another ii percent was from corporate income tax.58 Two-thirds of personal income tax is derived from the sale of labor, while one-third is from taxing dividends, capital gains, and interest. By taxing labor heavily in the United States (and even more in Europe), the system encourages businesses not to employ people. The system works, and taxpayers then have to pay the social costs for unemployment. German businesses are especially adept at not employing people because German social taxation nearly doubles the cost of each worker. Taxpayers then have to pay the social costs for unemployment, further raising taxes. Germany has just begun to reduce employment taxes by raising gasoline taxes.
Taxes and subsidies are, in essence, a form of information. At the most basic level, they cause change. Everybody in the world, whether rich or poor, acts on price information every day. Taxes make something more expensive to buy, subsidies artificially lower prices. Thus, when something is taxed, you tend to buy less of it, and when you subsidize, you reduce prices and stimulate consumption. A practical step in moving toward radical resource productivity would be to shift taxes away from labor and income, and toward pollution, waste, carbon fuels, and resource exploitation, all of which are presently subsidized. For every dollar of taxation that is added to the cost of resources or waste, one dollar is removed from taxes on labor and capital formation. A tax shift is not intended to redefine who pays the taxes but only what is taxed. Work is freed from taxation as is business and personal income. Waste, toxins, and primary resources make up the difference. As the cost of waste and resources increases, business can save money by hiring now-less-expensive labor and capital to save now-more-expensive resources. As business saves by increasing resource productivity, higher resource taxes may ensue, because there will be a smaller base of resources and waste to tax. That, in turn, will spur further research and innovation in resource productivity. A positive feedback loop develops that incrementally generates more demand for labor while reducing demand for resources – and, importantly, less need for taxes in the first place, because the tax shift will reduce many of the environmental and social problems that government budgets seek to address. Economist Robert Ayres writes:
I believe many of the problems with slow economic growth, growing inequity, unemployment, and environmental degradation in the western world could be solved, in principle, by restructuring the tax system. The fundamental cause of under-employment is that labor has become too productive, mostly as a result of substituting machines and energy for human labor. The underlying basic idea of the change would be to reduce the tax burden on labor, so as to reduce its market price – relative to capital and resources – and thus encourage more employment of labor vis-a’-vis capital and especially fossil fuels and other resources. If there is any implication of neo-classical economics that seems to be beyond challenge it is that shifting the relative prices of factors of production (i.e. labor, capital resources) will eventually induce the economy to substitute the cheaper factor (labor) for the more expensive one (resources). For the same reason, I want to increase the tax burden on activities that damage the social or natural environment, so as to discourage such activities and reduce the resulting damage.
A tax shift of this nature has to be steadily implemented over time, so that business has a clear horizon over which to make strategic investments. Further, the time span must be long enough – at least fifteen to twenty years – so that existing capital investments can continue to be depreciated over their useful lives. This provides a window wherein gradual changes can occur (such as reducing the use of and reliance on fossil fuels) but also a clear long-term signal that allows for acceleration of progress through innovation. In the end, the goal is to achieve zero taxation on employees, whether on wages, income, or employer contribution. Except for lower-income workers, a tax shift should leave the tax burden on different income groups roughly where it is now, and there are numerous means to accomplish this. (The Social Security tax is the most regressive and punitive tax of all, requiring the lowest-income worker to pay the highest rate as a proportion of total income.)
Though it sounds elitist if not outlandish to shift taxes away from personal investments or corporate income, the purpose is to lower the rate of return required to make an investment worthy. When there are high taxes on investment income, the rate of return must be correspondingly higher to justify investment. In part, that is why more money can be made by rapidly exploiting resources rather than by conserving them.
The higher the rate of return demanded on investments, the greater the likelihood of natural capital’s liquidation. When lower rates of return are coupled with higher resource taxes, incentives shift dramatically toward restoration and regeneration of natural capital. The important element to change is the purpose of the tax system, because the Internal Revenue Code, with its more than nine thousand sections, has no mission or goal.
It is easier, as the saying goes, to ride a horse in the direction it is going. The inevitable increases in the costs of natural capital should motivate us to get ahead of the curve. Shifting taxes toward resources creates powerful incentives to use fewer of them now. Simultaneously removing personal and employer taxes on labor creates new arenas of employment opportunity, since the cost of employment is reduced without lowering income. This in turn encourages many resource- saving activities, like closing the loops on material flows, disassembling products, and remanufacturing and repairing products, that currently look costlier than virgin resource use. This illusion is caused by keeping labor artificially expensive and raw materials artificially cheap. Many economists would say, let the markets dictate costs; taxation is interventionist. True, tax systems are by their very nature interventionist, but unless we abolish government, the question for society is how to intervene. A tax shift attempts to match price to cost. The present system is dissociative. People now know the price of everything but the true cost of nothing. Price is what the person pays. Cost is what society pays, here, now, elsewhere, and into the future. A pesticide may sell for thirty-five dollars a gallon, but what does it cost society as it makes its way into wells, rivers, and bloodstreams? Just because markets do not address value, goodness, justice, and morals does not mean that such concerns can be safely ignored.
To be clear, let’s look at what would not be taxed. You would receive your whole paycheck. The only deductions would be discretionary contributions to a retirement plan such as a 401(k) or to a charity. If you were an independent contractor, such as a plumber, graphic designer, or consultant, you would pocket all billable income. Small businesses would not pay income taxes, nor would corporations. And there would be no taxes on interest received on savings or bonds, or on retirement plans, or on savings for college tuition.
What would be taxed? For starters, gases that cause climatic change. The atmosphere is not “free” when there are 6 billion other people who have to share it in the near term, and untold generations after them. If you want to put gases there, you have to pay. Nuclear power would be heavily taxed, as would all forms of electricity nonrenewably generated. Diesel fuels, gasoline, motor oils, nitrogen oxides, and chlorine would all pay their share. Air traffic of all kinds, from commercial to light aircraft, would be taxed (their fuel is now tax-exempt worldwide), along with all vehicular use and public roads. Motor vehicle insurance premiums would be collected at the gas pump, eliminating government subsidies of uninsured drivers. Pesticides, synthetic fertilizers, and phosphorus would join tobacco and alcohol as heavily taxed commodities. Piped-in water would be taxed, as would old-growth timber, harvests of free-run salmon and other wild fisheries, grazing “rights; irrigation water from public lands, and depletion of topsoil and aquifers. From the ground, coal, silver, gold, chromium, molybdenum, bauxite, sulfur, and many other minerals. Any waste sent to a landfill or incinerator would be taxed (“pay-as-you-throw”), at such interesting rates that most landfills would cease to exist. Some, like those in Japan, may even be excavated for “resources.”
The result of the partial listing is that every individual and business can “avoid” taxes by changing behavior, designs, processes, and purchases. This works. Many a municipality has greatly extended the life of a nearly full landfill by taxing unnecessary inputs to it and using the proceeds to reward reduction, reuse, and recycling. Denmark’s landfill taxes increased the reuse of construction debris from 12 to 82 percent in less than a decade, twenty times greater than the 4 percent average rate seen in most industrial countries. Holland’s green taxes have cut heavy-metal leaks into lakes and canals by up to 97 percent since 1976.
Thermal insulation and superwindows in such a world will have a bigger payout than Microsoft stock. You will be able to make Warren Buffet returns by simple investments in hardware-store technologies.
When you save money, you will also be saving the environment for yourself and your children. For those who say that such a shift is regressive, bear in mind that it is the poor who bear the greatest burdens from environmental degradation. They cannot afford water filters, to live in the clean suburbs, to vacation in the mountains, or to obtain military deferments from Persian Gulf oil wars. They get the low-wage, high-risk jobs in solvent-laden dry cleaners, pesticide-laced farms, and dust-filled coal mines. In addition, the $1.5 trillion in annual subsidies previously outlined go almost entirely to business and the rich.
The intellectual inevitability of such a tax shift increases with time. Jacques Delors, former chairman of the European Commission, is urging its adoption there. Inquiries and small trial shifts are already under way in Sweden, Britain, Germany, the Netherlands, and Norway. Europe will lead because the solution offered by a tax shift addresses two key problems: environmental degradation and high structural unemployment coupled with jobless growth. The tax issue is alive in the United States, but the arguments are primarily ideological ones, chiefly conservative and libertarian, rather than constructive ones about aligning tax signals with social needs. Regardless, as Europe and other countries move toward tax shifting, it will force the United States to follow, for the very simple reason that it will lower our competitors’ labor costs while spurring their innovation. It will also help to ensure that the economic vitality stimulated will moderate, not worsen, the burden on natural capital.
These concepts are a startling reversal from the response to the environment that has been offered by the thousands of trade organizations, 60,000 lawyers, and 90,000 lobbyists clustered in Washington, D.C., who spend $100 million a month in direct lobbying expenses. Not liquidating natural capital means that business will not only have to conserve existing natural capital but will have to forgo corporate welfare and find ways to invest in increasing the supply of its limiting factor. The good news is that one of the most economical ways to do that is to reduce the amount of materials required by industry to provide the services needed by its customers.