Does Portland’s CEO Tax Indicate Progressive Shift to Local Focus?

Starting next year, publicly traded companies operating in Portland, OR will be subject to a new tax surcharge if their CEOs are compensated at a rate exceeding 100 times that of their median employee. Per a Dodd-Frank regulation approved in 2015, public companies must disclose details of CEO and worker compensation beginning in 2017.

Such companies will have to pay an additional 10% to the existing business income tax owed to the city, calculated as 2.2% of their net income less operating losses. Companies whose CEOs earn over 250 times more than their median employee will have to pay a 25% surcharge.

Officials from the city estimate the new tax will apply to about 550 companies and provide between $2.5 million and $3.5 million in new revenue to the city’s general fund, which funds basic public services.

The new measure is the first of its kind; proponents are describing it as an innovative step in countering growing income inequality–one that they hope other cities will adopt. Skeptics of the new tax, most notably the Portland Business Alliance, say  it won’t reduce income inequality and that the city government should instead try to work with local businesses to boost job growth.

Both parties have good points. In isolation, the surcharge isn’t likely to do much in the way of reducing inequality. For starters, under the new SEC law corporations are given wide latitude to calculate median worker earnings (it’s more difficult than it sounds when you have workers in multiple countries with varying types of employment). More practically, large corporations with highly compensated executives do relatively little of their business in Portland. The city, to its credit, seems to understand this and isn’t eager to overplay its hand, hence the relatively small amount of revenue being raised by the tax.

But if enough cities adopted laws penalizing high CEO-worker compensation ratios, it could conceivably make a big enough dent in corporate profits to spur a change (though this might look substantially different from what lawmakers envision).

That seems to be exactly what Portland’s government hopes to catalyze. “It falls to cities to do creative, progressive policymaking,” Mayor Charlie Hales said, “and this is exactly what this is.” The real story here might not be a change to Portland’s tax code, but instead a change to the arenas in which progressive politicians choose to fight for their policies.

Faced with a Republican-dominated federal (and in some cases, state) government, large cities, which overwhelmingly tend to elect Democratic leadership, could increasingly take it upon themselves to implement the changes that elude them on the national level.

In cases where progressives advocate for the expansion of existing laws, they could find it easier to achieve such policy at the local level. This is for two reasons: First, the politics and economics are more likely to align; second, doing so is largely consistent with our system of federalism that allows for local expansion of federal law.

Consider that many large cities have seen fit to implement minimum wages that exceed the levels set by the states in which they reside, which often themselves exceed the $7.25/hour wage set by the federal government.

Focusing on advancing progressive policy at the city level should, in theory, mollify conservative opposition that has long stressed the importance of local governance. However this doesn’t necessarily appear to be the case: two days after Birmingham raised its minimum wage to $10.10/hour, the state of Alabama passed a law retroactively denying cities and towns within the state the ability to set their own minimum wages. The law is being contested in court.

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The Hidden Cost of Public Health

Starting on January first of next year, the City of Philadelphia plans to impose a “soda tax” of 1.5 cents per ounce. The new law—already set to be challenged in court—has proved highly controversial, even within the political left where its revenue-raising potential is pitted against concerns over its regressive nature. The political right seems fairly uniformly unenthused.

But that’s boring. What’s really interesting is that Philadelphia’s government is avoiding calling the tax a public health measure, instead choosing to focus on the additional revenue it might generate, despite soda taxes’ endemic appeal to the public health profession.

Public health officials often laud soda taxes as a means of reducing demand for sugary drinks that are linked to obesity, diabetes, tooth decay and other maladies. The underlying economics are relatively straightforward—raise the price of soda and people will consume less of it. The hope is that doing so will reduce the incidence of the aforementioned conditions and curb associated healthcare spending.

But despite the wide approval of public health professionals, it’s far from clear that a soda tax is an appropriate solution in this scenario. Not only is there reason to doubt it’s efficacy, but in a sense, such a policy blurs the line between public and what we might call ‘private’ health in a way that marks a pernicious slide away from self-determination and seems to me unethical.

Using a tax to “correct” demand is one of the classic methods of solving collective action problems, which tend to involve public goods or open-access resources and often require regulatory oversight. President Bush’s cap and trade initiative in the 1980s, meant to reduce emissions of sulfur dioxide, is a successful example of such an endeavor.

The idea is that if a resource is shared (in this scenario, air quality), then it makes sense to have a centralized agency impose regulations to account for the “social cost” associated with its degradation. If something can be proven to affect others (without requiring an onerous amount of nuance), there’s a compelling case for using coercive public policy to address it.

That’s certainly the case when air quality is concerned. But there are key differences between air pollution and obesity; even though they both affect people’s health, one is far more likely to be incurred privately. We all breathe the same air; but your neighbor drinking a Double Gulp everyday doesn’t affect your waistline. Someone else being fat doesn’t harm you. Right?

Actually, depending on how an individual’s healthcare is paid for, that last part is up for debate.

Soda drinkers tend to be poorer, (the same is true for users of tobacco, which is subject to similar tax-based deterrence) and therefore more likely to have their healthcare publically subsidized. In a not-so-tangential sense, that means it’s very much in the interest of the taxpayer that those people be deterred from such actions. After all, any tax dollars not spent on healthcare can be spent on something else or not collected.

In my view this poses an ethical challenge—does public financing of healthcare erode beneficiaries’ sovereignty over their health-related decisions? And, if it does, what sort of precedents are we setting should America switch to a universal healthcare system, which would effectively render all health public?

It does seem to be the case that as more resources are poured into social safety nets, there is increased incentive for societies to attempt to engineer the results they want through coercive means. The resulting policies range from ethically dubious taxation to outright illiberalism.

Take, for example, the rather harsh methods by which the Danish government discourages immigration and asylum seekers: seizing assets worth more than $1,450; using policy to force assimilation (in one city mandating that pork be included on municipal menus); cutting benefits to refugees by up to 45%.

A similar situation is unfolding in Sweden, where the extensive social safety net has turned immigration into a tug-of-war between classical and contemporary liberal sentiments. The Economist writes:

The biggest battle is within the Nordic mind. Is it more progressive to open the door to refugees and risk overextending the welfare state, or to close the door and leave them to languish in danger zones?

Closer to home, Canada has recently received some scrutiny for its habit of turning away immigrants with sick children so as to not overburden its single-payer healthcare system.

Some of this might sound cruel or discriminatory. Some of it is. But these are rational responses from systems forced to ration scarce resources. In a sense, it’s the ethical response, given that governments are beholden to their taxpayers.

It’s a natural goal for public health experts, economists, and others whose jobs are to optimize society to try to promote a healthier nation. Our national health and wealth would clearly be improved if obesity, diabetes, etc. were eradicated. And yes, that could conceivably be achieved by any number of forceful policies—what about a Trump-style deportation of the obese?!

But we must consider the costs as well as the benefits of such policies. Are the potential gains worth ceding dominion of our personal decisions to rooms of “experts?” Is it possible for the conversion of health from a private to public good to coincide with our liberal values?

I don’t think so, at least not in the extreme. If health becoming a public resource means that the government must take an increasingly paternalistic and protectionist role in our society, it’s not worth whatever we might gain—or lose around the midsection. After all, if people can’t be trusted to decide what food to eat, what can we be trusted with? If a soda tax is okay, what about a tax on red meat, sedentarism, or motorcycles? Surely we’d be healthier if we did less of each.

I do believe there is an appropriate role for government to play in promoting the private health of the masses, but it’s significantly more parochial than the sort of collective action scheme fetishized by academics. To loosely paraphrase the Great Ron Swanson: people deserve the right to make their own peaceful choices, even if those choices aren’t optimal.

Side note: I would also argue that there’s some pretty heavy cognitive dissonance at play here as far as soda taxes go. The federal government hands out generous subsidies—collected from taxpayers—to corn producers that make junk food and soda cheaper to consumers. If more expensive soda is the remedy, why not remove those subsidies rather than tax consumers twice?

How Should We Protect Our Environment?

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About a month ago, I was talking with some friends on the beach and the topic of environmental regulation came up. When I mentioned that I disagreed with strict environmental regulations and subsidies, it became less of a conversation and more of a melee. I found myself frustratingly inarticulate (3 hours of sleep and a bottle of wine) and was unable to give my argument the explanation I thought it deserved. This essay fulfills my promise to clarify some of my ramblings and, more importantly, it details what I believe to be the best strategy to address environmental concerns. For arguments sake, let’s set aside any disagreement over the disputed realities of climate change and its respective causes.

As I see it, there are two types of motives for conservation: one is economic, the other political (though we might also consider it emotional). The former is aimed at establishing that natural resources have utility beyond that which can be obtained by harvesting them. For example, a specific fish population is valuable to us not only as food, but also in the ocean, since it plays a part in the larger ecosystem upon which we depend. The latter might be described as conservation for conservation’s sake. It is not only common, but expected for world leaders to address climate issues by wielding political power (the UN recently met for its 21st conference on climate change since 1995). This has nothing to do with promoting efficiency and everything to do with satisfying an agenda. I feel comfortable saying this because there is a very clear, simple solution to environmental degradation—at least on the national level.

A sound environment is valuable to all of us. There is no doubt that rapacious consumption of natural resources would lead to adverse and possibly catastrophic consequences. The difficulty lies in the fact that the costs of environmental degradation are not always apparent, nor are they isolated to specific locations or populations. When people consume natural resources or conduct activity that pollutes, and don’t compensate society for the entirety thereof, they are externalizing part of their costs. This externalization is tantamount to a subsidy, and a particularly difficult one to measure at that. For this reason, we cannot rely strictly on a free-market system to sort out environmental issues. In this, government can be a useful tool because it has the unique ability to tax.

I am of the mind that environmental protection is the most worthwhile capacity in which the government can be involved in the economy. There is, however, a right and a wrong way to go about achieving such goals. The wrong ways are through subsidies and quota-based regulations that encourage market inefficiencies and prioritize certain industries unfairly. The right way is through corrective taxation: a process by which environmental costs can be accounted for and passed on to the consumer. This can be achieved by traditional pricing methods and non-market valuation.

It would be disingenuous of me to present this as a novel idea. Most of us have heard of corrective taxation, though perhaps not by that name. The most notable examples are probably carbon tax proposals, whereby producers would be held accountable for the cost of carbon output during their production, ultimately passing that cost on to the consumers (it is also used for non-environmental purposes, such as in the case of so-called “sin taxes” applied to curb consumption of alcohol, tobacco, etc.).

A bleeding heart may object that no price can be put on clean drinking water, the rainforests, atmospheric carbon content, etc. They are, of course, incorrect. An easy way to do this would be to calculate the cost of correcting the damage caused. For example, let us stipulate that the consumption of 1 gallon of gasoline produced negative environmental effects that would cost $0.50 to fix.  Adding a $0.50/gallon corrective tax to the final cost of gasoline would compensate for these impacts. This would accomplish 4 goals:

  1.     Internalizing costs that were previously externalized
  2.     Procuring funds to alleviate the impacts of environment-harming consumption
  3.     Curbing demand for environmentally harmful products
  4.     Promoting the most efficient products—thus increasing quality of life

The market is the most valuable tool we have in the effort for conservation. It incorporates the best rationing mechanism humanity has yet to devise: price. The answer is not to try to circumvent this process, but rather to help it more accurately reflect reality and then use it as a tool to determine how resources should be consumed. Unfortunately, much of the current rhetoric surrounding environmental protection pays little heed to the dismal science. Rather than address these issues through the price system, some prefer arbitrary quotas and subsidies. The inferiorities of such policies are legion, but I’ll have to content myself with addressing their main deficiencies.

The purpose of economics is to promote the most efficient use of resources, natural or otherwise. Creating a quota or cap that cannot be surpassed distorts this process. The reason for this is that circumstance may dictate that an object’s value changes from one time to another. Quotas do not–and cannot–take this into account because they aren’t receptive to demand. No matter how well calculated a quota is, it can’t respond to shifts in the economy or ecosystem.

For a thought experiment, pretend that with the intention of preserving forestry, there is a forest of 500 trees that cannot be cut down. No one would deny that those trees have utility in the forest: they provide shelter to animals, filter water and carbon, and much more.

However, when something changes, those same trees could be better utilized in another capacity. If, for example, a nearby railroad track which was the only means by which to reach a city were to be destroyed it may very well be that some of the trees are more valuable as railroad ties, and thus should be extracted from the forest and put to that purpose.

How can we know if this is the case? If there is a strict prohibition on harvesting the trees, it’s a non-starter. No amount of demand can warrant the removal of the trees from the forest. However, if we have a complete account for the value of the trees in the forest and can incorporate that into the price of the wood (passing that cost on to the consumers as an internalization of the environmental loss), we can form a clearer picture. All we would need to do is weigh the value of the trees in the forest against their value as railroad ties—ultimately a means by which to get goods–upon which some of them may be dependent–to people.

What is the forest’s integrity worth? What if there is urgently needed medicine on board? What if a store is waiting on a shipment of laptops? Where is our tipping point in this decision? These are questions we can answer with non-market valuation (the process by which we will determine the value of the trees) and price, if given the opportunity.

It may sound implausible or perhaps even unethical; I assure you that it is neither. This is the way that we have been deciding how resources are consumed and procured for centuries. There is a huge network of cooperation in which materials (or anything) are directed by the price people are willing to pay for them. This system is one of the greatest advantages of a market economy, and it is so far unmatched by any centralized model.

The purpose of this thought experiment is to underline that decisions are made on an equilibrium; there is a point at which even a very large cost becomes the more attractive of two options. This same scenario can be extrapolated to Arctic drilling or mining coal. These aren’t things that people (or corporations) just do for no reason. To deride them for being “profit-hungry” is to miss the point. They can make money doing those things because those things are the means to achieve an end that people value; in this case, everything from turning on the lights to staying warm in the winter. However, we should make sure that the full cost of such activity is passed on to the consumer.

The point I’m trying to make here is that strict regulations that implement quotas or prohibitions take whole options off the table—and that’s not a good thing. The concept of utility is utterly absent from such approaches. They lead to inefficient allocation of resources, which can mean anything from waste to starvation to loss of life. Our conservation efforts should be aimed at promoting the greatest quality of life for people, while acknowledging that a sound environment plays a part in that equation.

Subsidies are equally villainous, even when used for industries that we consider to be “good”. Instead of propping up inefficient industries (if they were huge successes, as people claim, they wouldn’t be reliant on subsidies) while sometimes aggravatingly continuing to subsidize the “bad” alternative, we should let the market do its job, once we have put effective environmental taxes into place. The government should not be picking winners and losers. Doing so precludes the development of innovative technologies in the future and reduces industry competition.

Think about it. If the cost of oil plus a corrective tax to produce a certain amount of energy is still exceeded by the cost of producing that amount of energy through solar panels, why not take the first option? The point of technology like solar panels is to be more efficient and ultimately lower costs. If it isn’t, it’s not doing its job and it needs to become more competitive. Human labor and capital, represented in this exchange by money, are also valuable resources and there is no sense in wasting them. After all, we want our lives to improve, not worsen.

This is politics, though. Instead of a rational approach to curbing emissions, we are treated (read: subjected) to bureaucratic tendencies to measure input instead of output when crafting policy. Indeed, as Ira Stroll points out, Clinton’s plan to set up half a billion solar panels across the country conflates a means with an end. Having a lot of solar panels is a ridiculous goal. Lowering emissions is a smart goal, the solution to which can rely partly on solar development, as well as other industries–some of which may not even exist yet. There is no reason to divert resources to a politically favored product that isn’t yet competitive. As Stroll points out, that would be a great way to prematurely litter our country with inefficient infrastructure.

Subsidies are additionally invidious because they often involve perverse transactions of wealth from the poor to the wealthy. If the government is going to be involved in redistribution, it should be to support the poor. When users of advanced, expensive technologies enjoy tax credits and direct subsidies, they are doing so at the expense of less wealthy tax/rate payers. The kind of corrective tax I am proposing would also be of a regressive nature, as is any tax on consumption. In order to offset any damaging effects on the poorer taxpayers, tax credits could be issued to cover some of the accrued costs. Or perhaps our progressive tax system will be enough to offset any adverse effects spurred by this consumption tax.

Perhaps the greatest advantage of a such a program would be its simplicity. I think it’s a safe assumption that a program like this could eliminate a lot of the overhead cost associated with environmental overhaul. Importantly, it eliminates the top-down central model that ignores basic economic realities and puts progress in the hands of individuals. History has a lot to say on the benefits of markets. Who knows how much time, effort, and money could be saved by circumventing the regulatory web woven by ever increasing branches of federal and state governments?