The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Monday, 28 March 2011

Fiscal Responsibility - Part 1: Wealth Redistribution, Chapter II: Consumption Taxes

Canadians are predominantly slightly left or slightly right of centre. They mainly want less deficit and more services. When voters see government spending go over the top, they are rightly concerned about it, and it becomes a hot political issue... but the national budget is not about "cutting" or "becoming leaner" to be more fiscally conservative. Fiscal conservativism is rooted in only spending what you have, not cutting the services you need. When voters see services cut, they are rightly concerned about it, and it becomes a hot political issue... but providing adequate services for the public isn't a financial issue, it's a matter of accomplishing the will of the electorate. Political parties seem to see "issues" in isolation from one another, like the problem of voters wanting lots of services is somehow perceived separately from the problem that the treasury holds inadequate funds. Most political parties seem to have their approach to budgeting backwards. What political parties don't seem to get is that these two issues are not a problem of leftist voters demanding more services and rightist voters demanding less expenditure.  The problem is that political parties won't do what will solve both problems: select exactly the services that Canadians require, and then raise the revenues to pay for them. Why these two issues continue to be handled in isolation to one another boggles my mind and deprives me of much-needed sleep.

This is why the first part of this plan is about finding more wiggle-room for the government to get its financial footing and fund the programs necessary to support the economy and, more importantly, the electorate. Once the government has the funds, then it can modernise the economy, and seek efficiency through devolution of services to the lowest natural level of government. The function of the federal government must be to collect and direct funds where they need to be. If programs from the Department of Veterans' Affairs or Health Canada (just for random examples) would be better delivered by cities, then cities should not only receive the money but receive the mandate to implement those programs. Here's a bit of foreshadowing: I think cities can do a lot of this stuff, and save money doing it. Each level of government should do what it's good at, and cities are the best place for direct service-delivery to Canadian citizens (and permanent residents).

Consumption taxes, in this scheme, cover off a little bit of each of these issues. In part, they engage all levels of government, they also assist in the delivery of service to Canadians, and offset the hidden subsidies of the items they tax. Except for the GST, all consumption taxes are geared at preventing harmful or costly activity from hurting the treasury too much. By engaging the power of consumption taxes, we can increase the coffers of the governments that fund the programs we require. We can also use them to penalise the inefficient and unsustainable, and make sustainable products and services more appealing to the consumer. In this way, we will assist the market in pushing consumption patterns from the unsustainable to the sustainable.

Consumption Taxes: from the unsustainable to the sustainable

Consumption taxes are an essential tool for governments to offset the costs of unsustainable and dangerous activity. Consumption taxes, in some ways, act as insurance policies: alcohol and tobacco taxes are a case in point. If you drink and smoke often, chances are higher you will contract a disease that is expensive to treat or cause a road accident. Though a few people might chafe at these concepts, look at the insurance industry: they may charge more if you drive a red car rather than a white one, because stats show more red cars are involved in accidents than others. Certainly we can accept that if red cars cause more accidents, drinking and smoking cost the economy more than not drinking and not smoking. The taxes on these products serve to offset the costs these activities incur, or can potentially incur, on the health system of the respective polity.

A solution to this can be implemented by engaging two rather disparate stakeholders: insurance companies and civil society groups. The former, because it has the greatest expertise at estimating the potential costs of a certain activity. The latter, because parts of it have a natural interest in limiting behaviour that is a drain on the treasury. I propose that insurance companies be allowed to bid on contracts to insure potential drains on the treasury. The lowest bidders on the tender will be allowed to participate in the program. The insurers must pay for all issues arising from their given program, but they keep the profits (if any) from the tax levy. Also included in the tax levy will be an incentive to civil society groups to reduce the behaviour that is a drain on the treasury. If the stats show a reduction in the activity, the participating groups get a donation. Insurance companies, of course, would stand to gain considerably through reductions in the behaviour, and therefore would be thrust together with the civil society groups through sheer self-interest... that benefits both the common citizen as well as the treasury. When you create a system that privileges cooperation - get this - cooperation happens. I've seen it before in academic writing on the Prisoner's Dilemma and I even tried it out myself: In a class of MBA students, I got the group to play an iterated version of the Prisoner's Dilemma. We split the group in half: I had the group where I explained the game in cooperative terminology. The actual professor of the class described the game using specially selected competitive terms. Guess what? The people who were instructed the game in cooperative terms were cooperative in the game. That was just changing the framing language of the rules! Imagine if there was monetary incentive for cooperation between groups in the system. Each group will reinforce the other in its own domain. A useful side effect of the engagement of both civil society groups and corporations under the benevolent guidance of the central government is the production of numerous warm and fuzzy anecdotes about working together to solve social problems. Never underestimate the power of a warm and fuzzy anecdote during a political campaign, especially when it can simultaneously involve corporations making money, civil society groups making a difference, and the government saving money. Triple win.

Consumption taxes are, however, more than simply tools to offset costs. They can also redress hidden subsidies. I was talking to a man who is in the mining industry about the price of gas at the pump, and he indicated (only partly correctly) that a large part of the cost of gas is tax. Yes, there is a lot of tax on gas, but not enough. This isn't because of carbon emissions or environmental impact or anything of the sort (though that does matter). No, it is principally because the petroleum industry receives ample subsidies from the government for supporting the overuse of gas. Let me raise just two:
1) Roads - while most people will scoff at the insinuation that roads are a subsidy to gas companies, we should remind ourselves that the suburb - that road-intensive invention of the 50's - necessitated a huge increase in road building. Trucks carry huge numbers of containers across country that could be handled more efficiently and cost-effectively by train, but instead we insist on maintaining enormous trans-continental stretches of road all so that cars and trucks can burn gas on it. Gas prices should reflect ALL costs inherent in road construction and maintenance at all levels of government. Canada is one of those weird and rare animals that has only a couple real toll roads. The rest are all totally free of charge. This needs to change, and users should pay.
2) Accidents - cars cause automobile accidents. All costs related to the direct car-related health problems should be borne by gas prices. Natural Capitalism suggests that car insurance payments be made directly at the pump, and this is not a bad idea. It is perhaps easier to simply ask the cities to make a cost estimate for emergency and police services related to traffic accidents and pass this directly on to the pump.

Again, through the engagement of civil society and all levels of government, the central government can identify the hidden subsidies being given to industry and offset them with appropriate taxation. Increased prices for these products means better services related to those products and, hopefully, reduced consumption and increased conservation.

Finally, there is a need to encourage  recycling and conservation as well as discouraging waste and linear production models. To list the fundamentals of such a consumption tax regime, I'd identify the following points:

  • If it isn't recyclable, add to its cost.
  • If it's within a class of "industrial nutrient" (something that can be reused over and over again in industrial processes) per Cradle to Cradle, give a rebate.
  • If it's virgin raw material, add to its cost.
  • If it's recycled material, give a rebate.

Taxing waste directly would also assist in its reduction.

All together, there are ample tools here to guide the market along a sustainable path and raise funds at the same time. The end result of this taxation regime must be a reduction in the taxed behaviour, and therefore a reduction in the amount of tax paid. This is fine. The key is to build up a head of financial steam in the beginning, and let off pressure as the economy changes tack. Part of the pressure will be let off simply by the economy shifting to sustainable practices. Part of the pressure will be let off by more responsible consumption. In the end, the government will take in much less money for all consumption taxes included in this regime, and that is exactly what this regime of taxes is designed to do: move purchasing behaviour from the unsustainable to the sustainable.

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