Tilting back towards healthy food

People like the occasional Twinkie or bag of chips, and that’s fine. The problem in our food system is that unnecessary junk has become pervasive. I buy tomato sauce with no added sugar. It tastes better, but it’s hard to find. Sugar gets added to all kinds of things where it has no business being. Corn syrup, of course, is everywhere. Artificial colors, starches, refined everything, and lots of salt in things where salt is not needed. Unless something is significantly likely to cause cancer, we don’t keep it out of food. Being likely to cause obesity, heart disease, diabetes and other issues is not considered relevant. That hurts us, and the increase in medical costs under Medicare, Medicaid, and our insurance premiums costs us money.

I don’t believe in messing with people’s food lives, so bans are to be used with caution. But corporations are very good at responding to incentives, even small ones. If they can save five cents on each of a hundred million bags of whatever, that’s five million more dollars to the bottom line. That provides a good opportunity for a relatively low rate of tax to drive important behaviors.

What would happen if we put an excise tax on sugar and corn syrup used in producing other food items? (I wouldn’t tax the bag or bottle a consumer buys. If they are cooking for themselves, good for them.) What if we taxed salt just a little, so that chip makers would still use enough to taste good but maybe a little less than before, and the thing that didn’t need salt replaces it with a little healthy spice? What if we allow food colors, but make them more expensive to the manufacturer so that he re-thinks using them? What if we put an excise tax on manufacturers’ use of refined flour, but not on the more whole-grain stuff that tastes better anyway? The producers of all the junk ingredients would scream, of course, but it could improve corporate behavior substantially while still allowing them to supply the particular junky items that people especially like. They would just use less of the bad stuff, and stop using it in places like tomato sauce where it really doesn’t belong.

Part of the reason for not favoring heavy government regulation of food is that they don’t do it well. They get captured by food industry lobbies and push foods that aren’t supported by good science. Remember when we were supposed to eat margarine made of trans-fats to replace butter? Educated consumers can make their own choices. Tax nudging based on a list of things agreed after public hearings, though, is unlikely to go dramatically wrong. Scientists are pretty sure about a number of things that we’d do well to consume a little less of. Burden those things, and less of them will find their way into our diets. If the regulators burden some of the wrong things, we will still be free to use our own knowledge and eat the good stuff anyway.

Nobody that I know of has tried this strategy yet. They have, in the face of huge opposition from the soft drinks industry, tried imposing sugary drinks taxes. Those are basically a good idea, I think, but have a couple of flaws. First, the science shows that diet soft drinks have effects on the body similar to corn syrupy drinks, so the target is probably too narrow. Second, when you target a particular thing people like, it makes it easier for the company to rally their supporters in opposition. Put a tax on high fructose corn syrup used in food and a tax on artificial sweeteners and it will be harder for the companies to convince consumers that the evil government is interfering with their rights.

As it stands, poor people tend to get a particularly large fraction of their calories from unhealthy junk. Would taxes on unhealthy ingredients hurt the poor? It’s not clear that they would. As we know, we have a problem of obesity in America from people eating too many unhealthy calories, and that problem particularly affects the poor. Junk food is addictive and the body has a hard time processing it properly. If companies use slightly more expensive ingredients and charge a little more, the poor will likely be able to satisfy their hunger for less money, because they will have less addiction-driven hunger and less hunger driven by the body searching for missing nutrients. Further, if people buy a little less of the junk because the price goes up, that won’t hurt them, even if they don’t replace those excess empty calories with anything else. So, this is an area where we probably don’t need to worry too much about distributional effects. The proceeds of the tax could be applied to reduce the deficit.

It is worth noting that while one could earmark the funds towards something like funding early childhood nutrition programs, it can be counterproductive to do things like that. When you use a tax to discourage something, your hope is that the tax will produce less revenue over time, as people and companies change their behavior. If the proceeds of the tax are earmarked for dealing with a harm that will fade away as the relevant behavior changes, that’s fine. But the need for early childhood nutrition programs won’t disappear just because companies start using fewer unhealthy ingredients. If the nutrition programs depend on taxes on junk, the programs could lose funding when they shouldn’t. Where a discouragement tax is likely to have a significant effect on overall prices, it makes sense to offset it by reducing taxes on labor. Where a discouragement tax won’t have that kind of dramatic effect on consumers, then going overboard on specific earmarks would be a mistake. We currently have gigantic budget deficits that need to be reduced. Letting some discouragement taxes just apply towards reducing the deficits would serve an urgent need.

Taxing corporate giants to give others a chance

Antitrust enforcement died with the Reagan administration. Neither the Republican nor the Democratic administrations since then have made any real effort to promote competition. American politicians don’t believe in the free market, despite constantly giving it lip service. They should. Well-regulated markets are a wonderful thing. (Adam Smith, by the way, was not an advocate of ruthless corporate empire building. He understood that companies should be regulated for their own good and the good of others.) Oligopolies (markets in which a 3 or 4 players dominate and refrain from real competition on prices or quality) and markets in which a single giant can buy or crush any new competitor (think Amazon, Google, Apple and Starbucks) are a different matter. They lead to high prices, stifle innovation, and control governments.

Companies like Amazon and Google are difficult to regulate effectively. It is hard to define exactly what Google does for a living, so it is hard to correct its market. Amazon could be broken up, but people seem to like having a universal vendor, so the pieces would tend to re-form into a new behemoth. Arbitrarily smashing such companies may not be the best thing, but we need to have some way to keep them from using their power to destroy any company that seeks to compete against them. Their sheer size and financial power give them an automatic large advantage in any field where they choose to play. We need a handicap to counter that advantage and allow new players to enter the fields.

What do you do when you don’t want to prohibit or destroy something, but you want to keep it in bounds? You tax it. Tax can be a perfect handicap. If Google, Amazon or Walmart will have more of their profits siphoned off to taxation than Jane’s Innovative Techworks or Ginnie’s Good For You Grocery would have, then the newer, smaller businesses would have a fair chance to get solid investors and to compete. If profits would fall by a third upon being acquired by Google, then Google will have a hard time buying out and suppressing other businesses. Such a handicap would not prevent Apple or Starbucks from being successful businesses, but it would keep them from destroying the competitive market.

What would such a tax look like? It could be a simple escalating tax on the U.S. revenues of corporate groups with global revenues above a certain level, starting small and gradually rising as they go far beyond that threshold. Due to the general issues of allocating taxing rights, the tax would be limited to U.S. revenues, but the threshold and the tax level would be based on global revenues of the group. Alternatively, it could be a tax on market capitalization above a certain level, but it would be harder to make that sort of a tax work within the international context without just hurting U.S. companies and promoting their would-be Chinese equivalents. One could have a hybrid where U.S. revenues of companies with market capitalization above a certain threshold were taxed based on that market cap.

Companies like Starbucks or Inbev that are not necessarily absolute behemoths but are giants in their field present a more complicated problem. In concept, one could have a market concentration tax that applies in any situation where the federal government has identified a market in which, say, more than 75% of the revenues go to 4 or fewer players. A lot of lobbying can enter into a definition like that, since you could get different results if you define the market as “coffee shops” rather than “hot coffee sales in restaurants”, or even “producers of beer sold in bottles and cans” rather than just “producers of beer.” Since the Reagan era, our enforcers tend to use the broader definitions preferred by big players. Assume for illustration, though, that the government could and would at least manage to define markets in a reasonably useful way. Once the market was defined, reasonably accurate statistics could usually be collected on total U.S. revenues at the appropriate level (producer, retailer, etc.) in that market. The tax could then be set based on the degree to which this year’s revenues of Company X exceed 20% (or whatever) of last year’s total market revenues at that level, escalating in increments as revenues exceed 30%, 40%, and so on. That would make it difficult for the concentrated players to buy or displace competitors. Would that give the big players some incentive to get lazy, since they would not profit as much through incremental growth? To some extent yes, but that effect should be overwhelmed by the room it would create for varied and creative competitors. Making the tax apply on the basis of revenues rather than units sold would avoid creating an incentive to just raise prices. It would not be a perfect tool, but it would be better than the current blunt weapons of antitrust enforcement.

Normally, I am not a fan of revenue taxes in the global economy. Why? Because if a company knows that it will face a ten cent tax on a dollar of revenue for sales into the U.S. but will not face that tax on sales into Canada, it will simply charge ten cents more for U.S. sales. Consumers will suffer the full cost of the tax. With a market concentration tax that’s not so bad, because the main point is to allow other companies to compete. If the behemoth raises its prices by ten cents, then Ginnie’s Good For You Grocery can win customers. However, this does suggest that the revenues from such a tax should be earmarked for a particular purpose. They should be distributed to state governments that agree to reduce their sales taxes accordingly, or else they should be refunded to consumers in the same manner as carbon taxes.

Stock buy-backs are theft – tax them

The problem with stock buy-backs has been described well by another source, so I will borrow here:

Researchers have linked the prevalence of executive stock option plans to management’s fondness for engaging in stock buy-backs.[1] The math here is fundamentally straightforward, if not entirely simple. Executive stock options give managers the ability to make money from an increase in share prices, but not to profit from dividends. Say a company with a 1000 shares outstanding and a per-share price of $10 ($10,000 total value) issues 100 executive stock options with a strike price of $10, i.e. the right to buy 100 new shares for $10 each. The company earns $2,200, or $2.20 per existing share, so that (all else equal) it now has a value of the original $10,000 plus $2,200 for the cash-in-pocket, or $12,200.  From the market’s point of view, the price per share should now be computed by assuming that the executive stock options are exercised. That would bring in another $1,000 for the share exercise, for a total company value of $13,200, and would leave 1,100 shares outstanding. $13,200 divided into 1,100 shares is $12, and so the share price should rise to $12.[2]  If the company pays out those earnings as a $2.20 dividend, the share price will drop back to $10. In that case, management’s options would be worth nothing, management would get no benefit from the dividend, and the existing shareholders would get $2.20 per share. Now suppose that, instead, the company uses $1,200 to buy back 100 shares at $12 a share, and the executives then exercise their options. The company will then have 1,000 shares outstanding, $1,000 of remaining cash earnings, and $1,000 from the option exercise. It will thus have a value of the $12,000 distributed over 1,000 shares, or $12 a share. The executives will therefore have received value of $2 per share on their 100 options, or $200. The prior shareholders will likewise receive $2 per share, rather than $2.20 in the dividend scenario. If the executives chose to exercise their options without paying a dividend or doing a buy-back, they would receive the same $2 a share.

Through stock buy-backs, then, corporate management can shift funds from the pockets of the shareholders into their own, while saying that this is simply compensation for management’s great work in making the company grow in value. In our example, though, and commonly in real life, that “growth in value” just arose from refusing to pay shareholders their cash profits. Stock buy-backs give management the same profit on their options that they would receive if they paid out no money at all, but since they involve cash going to a portion of the shareholders they offer the image of money “being paid out to the investors.” In reality, they involve management picking the investors’ pockets.

Okay, so it is a trick, it has aggravated a phenomenon (sky-high CEO pay) that most Americans despise, it makes it more difficult to judge real corporate success, and it de-links management focus from operational factors that would really add shareholder and societal value in favor of unproductive, but simpler, financial games. Could it nonetheless be that lowering dividend pay-outs stimulates growth and boosts the economy? While many people choose to think so, the real answer is “no.” Robert D. Arnott and Clifford S. Asness did an interesting study
in which they checked to see if lower dividend yields and higher within-corporation investment were correlated with higher subsequent growth. They found exactly the reverse. There is a strong positive correlation between dividend pay-out ratios (i.e. the percent of earnings paid out as dividends) and subsequent earnings growth. It is particularly interesting to note that the authors tested whether this appears to be due to management engaging in empire-building through making unproductive investments. Their data was consistent with that hypothesis. In times of low pay-out, more investment was occurring, but that investment was relatively unproductive in producing future earnings or GDP growth.[4]

[1] See, e.g., Christine Jolls, Stock Repurchases and Incentive Compensation, National Bureau of Economic Research Working Paper 6467 (1998), http://www.nber.org/papers/w6467 (finding that the average executive in her sample of firms with repurchase activity enjoyed a $345,000 increase in stock option value as a result of the repurchase activity).

[2] Reality is more complicated. The market will probably not value the $2,200 of retained cash as worth $2,200, because the market usually does not quite trust management to invest that money efficiently, based on the market’s experience with corporate managers in general. But this illustration is directionally correct.

[3] Robert D. Arnott and Clifford S. Asness, Surprise! Higher Dividends = Higher Earnings Growth, 59 Financial Analysts Journal No. 1 Jan./Feb. 2003 at 70-87 .

Id. at 80-81.

Stock buy-backs, in short, are theft from the shareholders for the primary benefit of overpaid CEOs. They are bad for business and bad for America. They should be discouraged.

How to do so? Tax them. Impose a 10% (or higher) tax on the gross amount of all stock buy-backs by publicly-traded companies. That would be easy for U.S.-parented groups. Ideally, though, we would do the same for all buy-backs of stock listed on a U.S. exchange, regardless of where the parent is located. Because the tax would not be aimed at the taxable income of the corporation or of the shareholder, but rather is aimed simply at a particular corporate practice that is harmful to society, it can be structured as an excise tax, which would keep it from being complicated by the provisions of our income tax treaties. Corporations and their shareholders could avoid it entirely simply by refraining from the bad practice and distributing their profits to all shareholders via dividends, like companies used to do before a badly designed U.S. tax policy made stock options dominate management thinking.

Once upon a time, would-be reformers took aim at CEO pay (which was then quite low by today’s obscene standards) by limiting deductions for pay above a certain dollar amount. Lobbyists did their thing, and an exception was put in for “performance based” pay, money that the executives could only earn by achieving certain targets. Because stock options only gain value through an increase in share prices, it was decided that stock options were inherently “performance based.” Executives quickly figured out that they didn’t actually need to perform, they just needed to do stock buy-backs. These days (I know you will be shocked to hear this) executives spend a large amount of time and effort figuring out how to maximize stock buy-backs while meeting the quarterly expectations of the Wall Street stock analysts. They do not spend so much time figuring out how to create wonderful new products and services or improving efficiency or making the lives of their workers better or reducing pollution. What badly designed tax policy did, good tax policy can help to undo.

Supporting farm laborers everywhere

As a general proposition I enjoy Stephen Colbert, but it was painful to watch his Congressional testimony on immigration. He was trying to make the point that people should not be hostile to immigrants, and pointed out that visaless Mexican farm workers do backbreaking work for trivial pay while being sprayed with pesticides under conditions that American workers would find unacceptable. His apparent conclusion from this was that we therefore should be happy that the government does not enforce laws against hiring people not legally in the country, because otherwise who would put up with such work? By the same token, if Cajun oil workers from swampland Louisiana are willing to breathe toxic chemicals, lose limbs on oil rigs and get blown up in unsafe facilities, our reaction should be “thank God those guys are willing to do that – otherwise the oil companies would have to spend money to have safe practices and facilities!”

Sorry, Stephen, but wages, hours and conditions that are unacceptable to white Americans from middle class parents should be viewed as unacceptable for any worker in America. We aspire to live in a society where nobody who is willing to work hard and do their best has to accept an awful life. Flooding the labor market with people who don’t have a good choice in life and who are therefore willing to accept terrible pay and conditions, simply so that employers don’t have to pay more, improve conditions, stop poisoning people, or stop workplace sexual harassment, is an evil thing to do to American workers and to the immigrants in question.

The fact is that the wages paid to farm workers make up a trivial percentage of the price you pay for food in the supermarket, about 8 cents on the dollar for produce and less for things like grain or soybeans. We could triple their hourly wages, shorten their hours, and make their conditions humane with only a minor bump at the check-out. The argument against improving life for farm workers is not that it would force a dramatic increase in food prices, but rather that it would cause industrial food producers to shift production abroad to where they could continue to exploit and poison luckless foreigners in their own countries.

But there is a simple solution to that. Human rights campaigners have been busily pointing it out in the discussions surrounding NAFTA, the trans-Pacific partnership, and other trade agreements, but the media generally ignore them. All one needs to do is to permit agricultural tariffs to be set at a level that is designed to equalize the incremental cost of domestic food produced using reasonable wages, hours and conditions with the cost of foreign food. That would not require a huge tariff, because again most of the price of food is not attributable to labor costs.

Labor-protection tariffs are not a generally good idea, because they just encourage U.S. employers to substitute automation and hurt everybody. For farm labor, though, if the choice is between current farm labor conditions or automation, go ahead and send the robots to the fields. If we can’t otherwise make the jobs humane, I would not regret eliminating them and trying to find something else useful for the workers to do.

With food tariffs, in contrast to the carbon-equivalent tax, it would be best to have exemptions for producers who have been certified by a reliable authority to pay appropriate wages, to have U.S.-equivalent work conditions, to avoid using pesticides banned in the U.S. and to avoid exposing their workers to poisons. Food tariffs are intended to avoid having the elimination of U.S. exploitation of farm workers drive increased exploitation of farm workers abroad. If a given farmer does not mistreat workers, then he should be able to sell his produce to us at an unburdened price. Ideally we would work with the other developed countries in the OECD (which tends to be more efficient than the U.N.) put together a competent and incorruptible inspection body to support such a system. This would help farm workers everywhere, it would not cause significant harm to U.S. consumers, and it would provide tariff revenue that we could put to good use in reducing employment taxes or supporting family farms.

Then we could enforce our employment laws and watch while U.S. agribusiness figures out how to make farm work something that Americans are willing to do. I’m willing to bet that they will find themselves capable of solving that one if we stop enabling the callous exploitation of non-voters. We citizens just need to recognize that we have been facilitating an evil system while convincing ourselves that we are somehow being enlightened angels through our tolerance of undercutting the market power of farm labor. Finding the concept of “jobs that Americans aren’t willing to take” acceptable puts us in the category as the colonial Americans who thought it was fine literally to work indentured servants to death (a common practice) or the later Americans who thought the conditions of certain farm workers in the South were a necessary part of agriculture. We should be beyond that now. Proper tariffs can help us to get there.

Taxing carbon rather than labor

Maybe you don’t believe that carbon dioxide contributes to global warming and you don’t think that even the possibility that it does would be worth worrying about. Maybe the fact that pregnant women and small children have to avoid eating fish because it’s full of mercury from coal doesn’t bother you. Maybe the summer days on orange air quality alert status are fine by you. Even so, if you have to discourage one of them, would you rather discourage productive labor or the burning of coal and oil?Forget about Obama’s foolish proposal to implement tradeable carbon credits. Obama talked a good game, but he didn’t do much of anything for the environment until after Hillary had lost the election. His carbon-trading proposal had a lot more to do with enriching Wall Street parasites than with addressing global warming. Here we are talking about a straight tax on carbon, imposed on the fuel, with a carbon-equivalent border tax on imported products.

The proceeds would go to reducing the employee side of FICA taxes, structured as an exemption for the first $X of FICA wages, so that the benefit would be skewed towards lower-wage working people. Part of the revenue would be paid out as a bump in social security and other federal retirement payments and in state revenue sharing for welfare payments in proportion to the effect of the carbon tax on goods purchased by retirees and by those unable to work due to disability, but that may largely happen automatically through inflation adjustments in benefit levels.

A carbon tax should be phased in over at least three years to allow businesses and consumers to adapt. That would give everyone time to invest in lower-carbon alternatives before the full burden of the tax starts to bite, and would allow time to react to any unanticipated problems in administering the tax.

The carbon-equivalent tax on imported products would require agreeing on a proper tax amount for a large number of products, but that could be made manageable. The tax would not be based on the actual carbon profile of the particular imports. Instead, it would be based on a generic profile of products computed as though they were produced using coal-generated electricity. Domestic manufacturers of a given product (if there are any) would be asked to provide the data for a given product; they would have incentive to help to ensure that the competing product was subject to an appropriate tax.

There are at least two ways to structure the border tax, one of which is better than the other as a policy matter but would require more international negotiation. The less desirable version would only impose a border tax on products from countries that do not impose an adequate carbon tax of their own. Such carbon-equivalent taxes have been discussed in the past and appear to be generally viewed as a fair trade practice. However, that version would have issues. For example, if South Korea imposed its own carbon tax on televisions, a product that nobody manufactures in the United States, their carbon tax would tend to increase the price of televisions sold to U.S. consumers without the revenue being available to reduce U.S. FICA taxes. In the other direction, a carbon tax imposed on U.S. exporters could hurt the competitiveness of our manufacturers.

Ideally, then, we would instead impose the carbon-equivalent tax on all imports and provide a carbon-equivalent rebate for exports. We would agree with our trading partners for them to do the same. Each country would then be able to compensate its own consumers for the pricing effects of the tax, and would be able to set its own tax rate. So long as the carbon-equivalent tax was set at a level that roughly corresponds to the domestic burden of the carbon tax our trading partners would not have a legitimate right to complain.

Where taxes on labor discourage hiring and accelerate the day when we will be replaced by our new robot masters, a carbon tax would boost economic activity by stimulating the green economy. Solar and wind power, insulation, new conservation technologies and the like are all more job intensive than coal mining or petroleum production. New technologies would give America an opportunity to benefit from what remains of our advantage in innovation. This would all make employees more valuable rather than less, improving worker market power and helping to rebalance our economy while promoting growth.

Further, it would improve U.S. national security. The government loves to talk about how rampant coal mining and fracking improve American energy independence, but in practice both Democrats and Republicans are still sucking up to the Saudis, the guys who sponsor the crazy-violent Wahhabi version of Islam that gave us 9-11 and who have encouraged us to attack normal, peaceful Muslims. A true green economy would put that sort of foolishness behind us. We won’t get a green economy through regulation. We have to encourage everyone to WANT to use less fossil fuels. A suitable carbon tax would do that.

By the way, the OECD (hardly a radical body) agrees that green taxes are a superior way to raise revenue.

About this blog

American tax policy is stupid, as are most tax proposals. Our federal, state and local governments need money (though they could do a much better job with the money they have, and could spend money on helping people in preference to killing people), so taxation is necessary. However, taxation is a burden that discourages things. What do we choose to burden through taxes?

Currently, our first choice is labor. If a regular person goes out to do something productive, they pay income taxes and social security taxes. Is labor really the thing we most want to discourage?

Our second choice is value creation within the United States. The international tax system allocates taxing rights based on where value is created. That makes sense in that nobody can earn a profit outside of a society whose government provides the security, infrastructure and trustworthy markets that make modern commerce possible, so the government that provides those facilities should be able to charge for them. But charging for them burdens U.S. value creation. We exercise this right and tax value creation in the U.S. more heavily than value creation elsewhere. We have the right to do that, but do we really want to burden U.S. value creation?

We choose to tax capital – i.e. rich people, the ones that we used to call capitalists, who make most of their money from having money – very lightly. It should be noted that the media have created intentional confusion between capitalists and two-earner professional couples. Those couples, who work for a living, may be in the top 5% or even the top 1% but they are a different species from the capitalists who earn fabulous amounts of money from having money or from handling other people’s money. Most capitalists (I exclude people like Elon Musk who actually take risks and create things) are parasites who do nothing productive, and instead impose financial friction on people who are trying to be productive. They are sold as being risk takers, but in general they exemplify the old W.C. Fields bit about poker. Rube: “Poker – is that a game of chance?” Fields: “Not the way I play it, no.” They contribute heavily to politicians, but it is otherwise difficult to see why they should be treated more favorably than labor.

We tax the value of homes. If you maintain and improve your home, you pay more tax than if you trash it.

We tax buying things. If you participate as a consumer in the economy and create opportunities for employment, we tax you. If you keep your money under a mattress, we don’t.

Some taxes – sin taxes on tobacco, for example – makes sense. They burden things that cause poor health and cost us all money via Medicare, Medicaid, the welfare system and the health insurance system. For the most part, though, our tax system seems to have been designed to be as perverse as possible. Why do we tolerate this? Why don’t we seek a better way to raise money?

This blog is intended to suggest some alternative ideas that would shift the burden to things that we would like to discourage, or at least not encourage. If you like any of these ideas, please pass them along. The establishment is happy with things the way they are. They will not change unless we demand a better system.