Tag Archives: subsidies

The Definition Of Insanity

No–despite the title of this post, it isn’t about the insanity of the GOP’s meltdown over Kevin McCarthy’s inability to round up votes to make him Speaker–that will have to wait for a resolution. (Meanwhile, pass the popcorn…)

This is about one of America’s insane public policies.

A few years ago, research for a book required me to look more closely at the federal budget than I had previously done–especially at our bloated defense expenditures, but also at the persistence of various subsidies that may (or may not) have been prudent in the past, but clearly are counterproductive in the present.

One of those continuing subsidies supports the fossil fuel industry to the tune of twenty billion dollars a year. (That’s the conservative estimate–others put the number even higher.)

It’s bad enough that the government is continuing to support the use of an energy source damaging to the planet at a time when those funds should be incentivizing a transition to green energy. It is absolutely unconscionable that our tax dollars keep flowing to an industry that is enormously–embarrassingly, obscenely–profitable.

An industry that is also shameless.

I’ve previously defined the Yiddish word “chutzpah.” It is the word that first came to mind  when I read the following. (Okay, the actual first words that came to mind were too filthy to employ in this blog.)

Fresh off posting the highest quarterly profit in its history, the U.S.-based fossil fuel giant ExxonMobil sued the European Union on Wednesday in an attempt to stop the bloc from imposing its recently approved windfall tax targeting major oil and gas companies.

The Financial Times, which first reported the new lawsuit, noted that the challenge takes aim at the European Council’s “legal authority to impose the new tax—a power historically reserved for sovereign countries—and its use of emergency powers to secure member states’ approval for the measure.”

“The new tax is due to take effect from December 31 and will apply a levy of at least 33% on any taxable profits in 2022-23 that are 20% or more above average profits between 2018 and 2021,” the newspaper explained.

In a statement, Exxon spokesperson Casey Norton insisted the company recognizes that sky-high energy costs are “weighing heavily on families and businesses” but claimed the tax would “undermine investor confidence, discourage investment, and increase reliance on imported energy.”

Excuse me if I don’t sympathize. The tax would cost Exxon an estimated $2 billion through the end of next year—in other words, a fraction of the company’s 2022 profits.

Europe has experienced a mounting cost-of-living crisis, and passage of the windfall profits tax was intended to generate revenue to provide financial support to households and companies struggling with high energy costs.

Oil and gas companies like Exxon have been accused of exploiting global energy market chaos spurred by Russia’s war on Ukraine to hike prices and pad their bottom lines.

Ya think?

Exxon previously announced that the company had generated profits of $19.7 billion between July and September. That exceeded the profits of any other quarter in the company’s history.

Further evidence of corporate greed: the company has announced it will raise its dividends and expand its share buyback program, and it raised the pay of several of its top executives. (It increased the annual salary of CEO Darren Woods from $1.70 million to $1.88 million for the coming year.)

So–while consumers in Europe and the U.S. continue to struggle with elevated prices at the pump and with the inflation to which those elevated prices have substantially contributed, Exxon and its peers in the fossil fuel industry have chosen to reward their wealthy investors rather than contribute a small part of their bloated profits to the amelioration of problems they have helped to cause.

This revealing conduct joins the evidence that continues to emerge, showing that Exxon deliberately lied for years–actually, for decades– about  what the company’s scientists knew about the climate crisis and the central role of fossil fuels in creating that crisis.

Congress probably can’t punish Exxon for those years of lies, but there is no excuse for continuing to subsidize an industry that continues to profit handsomely from knowingly harming the environment and spitting on the common good.

The windfall profits tax that Exxon wants to evade would cost the company a fraction of its profits, and an even smaller fraction of what  American taxpayers fork over annually to the fossil fuel industry.

Continuing those subsidies makes about as much sense as handing a gun to the guy who came to rob you. it’s the definition of insanity.

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Rich Man,Poor Man…

Let’s talk about welfare.

Usually, when you hear someone railing against “welfare cheats” and/or “encouraging dependency,” the objects of scorn are unwed mothers, people of color and other impoverished populations. The people who express these sentiments resent the use of their “hard-earned” tax dollars to help support people who are clearly unworthy.

There are a number of uncongenial facts that don’t influence those diatribes: the fact that our current social welfare system (if you can dignify it by calling it a “system”) is monumentally inadequate (most people who are struggling to put food on the table don’t qualify); a large percentage of those who do receive benefits are children, the disabled and the elderly; and– triggering my rant this morning– the most dependent and often unworthy beneficiaries are the rich.

A recent essay from Commondreams.org focuses on that last item, and details the ways in which wealthy Americans benefit from a wide array of tax breaks and government subsidies that somehow escape mention when Republicans complain about entitlements for the poor.

Those favorable provisions are often hidden in the tax code.The enormous stock market gains that investors have made since the end of 2008–estimated at some 30 trillion– can be held tax-free until the stocks are sold, and can also be passed virtually tax free by the super-rich to their children, who can take their inheritance subject to a so-called stepped-up provision which allows them to erase all the accumulated gains. In many instances, that means without paying a single dollar in taxes. As the author notes, “This massive subsidy for the super-rich, along with gift tax and estate tax loopholes, has allowed families like the Waltons to avoid paying their debt to society.”

Then there are what we euphemistically term “tax expenditures.”

Tax expenditures include mortgage deductions, interest and dividend exclusions, and reduced rates on capital gains. According to the Center on Budget and Policy Priorities, “the cost of all federal income tax expenditures was higher than Social Security, the combined cost of Medicare and Medicaid, or the cost of either defense or non-defense discretionary spending….These tax expenditures are ‘upside-down,’ providing their largest subsidies to high-income people even though these individuals are least likely to need financial incentives to engage in the activities that tax expenditures are generally designed to promote, such as buying a home, sending a child to college, or saving for retirement.

The total loss of tax revenue from just the mortgage and property tax deductions is nearly double the amount spent on public housing programs.

The Common Dreams article didn’t even mention the corporate subsidies I have so often criticized on this site: the subsidies for fossil fuels, payments to corporate farmers, and numerous, highly favorable tax provisions that allow corporations to evade taxes on huge profits, among many others.

Many of these provisions are defended as necessary to “incentivize” socially-useful activities, although research suggests that (with a few exceptions) there is very little evidence for that assertion, and in the case of those fossil fuel “incentives,” what we are incentivizing might more accurately be called “socially suicidal.”

Speaking of socially desirable activities, most Americans would include raising healthy well-adjusted children in that category. Making that task easier for poor families and/or single parents seems to me to be a better investment in the common good than incentivizing oil companies to locate new fossil fuel deposits.

But of course, poor people and single parents lack the means to hire lobbyists…

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Picking Winners And Losers

One of the most common–and persuasive– arguments posed by so-called “conservatives” against government regulation is that government should not be “picking winners and losers,” that the market should make those determinations.

So what about the enormous subsidies government provides to fossil fuel interests–subsidies that those same “conservatives” defend?

Paul Krugman had a recent column in which he discussed both the subsidies and the discredited economic theories offered to justify them.The column was prompted by the arrogant response of Stephen Mnuchin to Greta Thunberg’s speech at Davos. Thunberg  had called for an end to investments in fossil fuels; Mnuchin suggested that she go “study economics” before making what he implied were uninformed and childish recommendations.

(Krugman also noted that Mnuchin “doubled down” on his claim that Trump’s 2017 tax cut will pay for itself — despite the fact that, just a few days before, his own department had confirmed that the budget deficit in 2019 was 75 percent higher than it was in 2016.)

Krugman explained why “Mnuchin was talking nonsense and that Thunberg almost certainly has it right.” He began with basic economics:

One can only surmise that Mnuchin slept through his undergraduate economics classes. Otherwise he would know that every, and I mean every, major Econ 101 textbook argues for government regulation or taxation of activities that pollute the environment, because otherwise neither producers nor consumers have an incentive to take the damage inflicted by this pollution into account.

But what about those subsidies?

The International Monetary Fund makes regular estimates of worldwide subsidies to fossil fuels — subsidies that partly take the form of tax breaks and outright cash grants, but mainly involve not holding the industry accountable for the indirect costs it imposes. In 2017 it put these subsidies at $5.2 trillion; yes, that’s trillion with a “T.” For the U.S., the subsidies amounted to $649 billion, which is about $3 million for every worker employed in the extraction of coal, oil and gas. Without these subsidies, it’s hard to imagine that anyone would still be investing in fossil fuels.

Krugman points out that, while Thunberg may be young, her views come “much closer to the consensus of the economics profession than those of the guy clinging to the zombie idea that tax cuts pay for themselves.” And he then concludes:

But could the economics consensus be wrong? Yes, but probably because it isn’t hard enough on fossil fuels.

On one side, a number of experts argue that standard models underestimate the risks of climate change, both because they don’t account for its disruptive effects and because they don’t put enough weight on the possibility of total catastrophe.

On the other side, estimates of the cost of reducing emissions tend to understate the role of innovation. Even modest incentives for expanded use of renewable energy led to a spectacular fall in prices over the past decade.

I still often find people — both right-wingers and climate activists — asserting that sharply reducing emissions would require a big decline in G.D.P. Everything we know, however, says that this is wrong, that we can decarbonize while continuing to achieve robust growth.

Given all this, however, why are people like Mnuchin and his boss Trump so adamantly pro-fossil fuel and anti-environmentalist?

Part of the answer, I believe, is that conservatives don’t want to admit that government action is ever justified. Once you concede that the government can do good by protecting the environment, people might start thinking that it can guarantee affordable health care, too.

Given the scale of subsidies we give to fossil fuels, the industry as a whole should be regarded as a gigantic grift. It makes money by ripping off everyone else, to some extent through direct taxpayer subsidies, to a greater extent by shunting the true costs of its operations off onto innocent bystanders.

And let’s be clear: Many of those “costs” take the form of sickness and death, because that’s what local air pollution causes. Other costs take the form of “natural” disasters like the burning of Australia, which increasingly bear the signature of climate change.

In a sane world we’d be trying to shut this grift down. But the grifters — which overwhelmingly means corporations and investors, since little of that $3-million-per-worker subsidy trickles down to the workers themselves — have bought themselves a lot of political influence.

And so people like Mnuchin claim not to see anything wrong with industries whose profits depend almost entirely on hurting people. Maybe he should take a course in economics — and another one in ethics.

Krugman’s being silly. No one in this administration can even spell ethics.

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Affording My Brave New World

An even longer one. Sorry.

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Even if you found yesterday’s post persuasive, a UBI seems politically impossible and cost prohibitive.

Politically, shifting from a paternalistic and judgmental “welfare” system to one awarding benefits based upon membership in the polity would not only require a significant culture change, but would be vigorously opposed by the large number of companies and individuals whose interests are served by America’s current patchwork of programs, subsidies and policies.

Then there’s the issue of cost.

Although Americans’ deeply-ingrained belief that people are poor because they made bad choices or didn’t work hard enough continues to be a barrier to a more generous and equitable social safety net, the most significant impediment to passage of a Universal Basic Income is the argument that has consistently been made to thwart universal healthcare– that America, rich as the country is, simply cannot afford such a Brave New World. This argument flies in the face of evidence from counties with far more robust safety nets: In 2012, the U.S. spent an estimated 19.4% of GDP on social expenditures, according to the Organization for Economic Co-operation and Development. Denmark spent 30.5%, Sweden 28.2% and Germany 26.3%. All of these countries have a lower central government debt to GDP ratio than the United States.

While specific economic recommendations aren’t possible in the absence of concrete, “fleshed out” policy proposals, it’s possible to identify ways in which universal programs might be financed, and how they might affect economic growth. The short answer is that both the UBI and some version of Medicare-for-All could be funded by a combination of higher taxes, savings through cost containment, economies of scale, reduction of welfare bureaucracy, the elimination or reform of existing subsidies, and meaningful reductions in America’s bloated defense budget.

Debates over taxes rarely if ever consider the extent to which individual taxpayers actually save money when government relieves them of the expense of a service. Even now, requiring citizens to make out-of-pocket payments for such things as scavenger services (in lieu of municipal garbage collection), or private police and fire protection or schooling, would vastly exceed the amounts individual households pay in taxes for those services. Low-income citizens, of course, would be unable to afford them.

The American public is positively allergic to taxes, even when a majority financially benefits from them. If low-and-middle income American families did not have to pay out-of-pocket for health insurance, and could count on a stipend of $1000/month, most would personally be much better off, even if they experienced increases in their tax rates. They would likely see other savings as well: for example, if the U.S. had national health care, auto and homeowners’ insurance rates could be expected to decline, because insurance companies wouldn’t have to include the costs of medical care in the event of an accident or injury in their actuarial calculations. Research also predicts the country would see a decline in crime, child and spousal abuse and similar behaviors that have been found to increase under the stresses associated with poverty. (The extent of such reductions and the cost savings attributable to them is speculative, but a substantial level of abatement seems likely.)

Most tax increases, obviously, would be levied against those capable of paying them. Americans used to believe in progressive taxation, and not simply to raise revenue. Taxes on the very wealthy were originally conceived as correctives, like tobacco taxes, that should be judged by their social impact as well as their ability to generate revenue. High tax rates on the rich were intended to reduce the vast accumulations of money that serve to give a handful of people a level of power deemed incompatible with democracy.

A recent report from the Guardian calculated the results of (relatively modest) increases in taxes on the very rich.

Right now they pay about 30% of their income in taxes. Increasing their overall average tax rate by about 10 percentage points would generate roughly $3tn in revenue over the next 10 years, while still leaving the 1% with an average post-tax annual income of more than $1.4m. (That new tax rate, by the way, would be about the same as the overall rate the richest 1% paid back in the 1940s and 1950s.)

As indicated, in addition to reducing inequality, progressive taxation does raise money, and there is widespread agreement that the very rich aren’t paying their share. At the 2019 Davos World Economic Forum, Dutch historian Rutger Bregman caused a mini-sensation by telling the uber-wealthy assembled there than the “real issue” in the battle for equality is tax avoidance and the failure of rich people to pay what they should. Momentum is clearly building for more progressive tax rates than the United States currently imposes.

There is also growing anger directed at the generosity of various tax credits and deductions, aka “loopholes,” that allow immensely profitable corporations to reduce their tax liabilities (or escape them completely). The use of offshore tax havens and other creative methods of eluding payment devised by sophisticated tax lawyers employed by the uber-wealthy is an ongoing scandal.

Real-world experiments like Governor Sam Brownback’s tax cuts in Kansas confirm that, contrary to the ideological arguments against imposing higher taxes on wealthy “makers,” high marginal rates don’t depress economic growth and cutting taxes doesn’t trigger an increase in either job creation or economic growth. In 1947, the top tax rate was 86.45% on income over $200,000; in 2015, it was 39.60% on income over $466,950. During that time span, researchers have found very little correlation between economic growth and higher or lower marginal rates. In 2012, the Congressional Research Service published a research study that rebutted the presumed inverse correlation between tax rates and economic growth.

Climate change is affecting America’s weather, increasing the urgency of efforts to reduce carbon emissions and increase the development and use of clean energy sources. Yet the United States spends twenty billion dollars a year subsidizing fossil fuels, including 2.5 billion per year specifically earmarked for searching out new fossil fuel resources, at a time in human history when the development of those resources is contraindicated. According to Oil Change International, permanent tax breaks to the US fossil fuel industry are seven times larger than those for renewable energy. At current prices, the production of nearly half of all U.S. oil would not be economically viable but for federal and state subsidies.

During the 2015-2016 election cycle oil, gas, and coal companies spent $354 million in campaign contributions and lobbying, and received $29.4 billion in federal subsidies in total over those same years – an 8,200% return on investment. The OCI report concluded that: “Removing these highly inefficient [fossil fuel] subsidies – which waste billions of dollars propping up an industry incompatible with safe climate limits – should be the first priority of fiscally responsible climate, energy, and tax reform policies.” Not incidentally, eliminating these subsidies would free up funds for other uses, including the social safety net.

Then there are farm subsidies– another 20 Billion dollars annually. Arguments for and against terminating these subsidies are more complicated than for fossil fuel subsidies, but the case for means-testing them is strong.  In 2017, the USDA released a report showing that approximately half the money went to farmers with household incomes over $150,000. As Tamar Haspel wrote in the Washington Post, “That means billions of dollars, every year, go to households with income nearly three times higher than the median U.S. household income, which was $55,775 that year.”

Farm subsidies were created during the Depression in order to keep family farms afloat and ensure a stable national food supply. Since 2008, however, the top 10 farm subsidy recipients have each received an average of $18.2 million – that’s $1.8 million annually, $150,000 per month, or $35,000 a week. These farmers received more than 30 times the average yearly income of U.S. families. Millionaires are benefitting from a program originally established to protect family farms during times of economic distress.

Most citizens understand why government should not be providing billions of dollars to support companies that make climate change worse, or adding to the bottom lines of already-profitable corporate farms. Efforts to cut the military budget encounter genuine anxieties about endangering national security, as well as more parochial concerns from lawmakers representing districts with economies heavily dependent upon military bases or contractors. Those concerns may explain why U.S. military spending in 2017 was over 30% higher in real terms than it was in 2000.

The United States will spend $716 billion in 2019, and annually spends more than twice what Russia, China, Iran and North Korea spend collectively.

Critics of the military budget make three basic arguments: the budget is much bigger than threats to U.S. security require; very little of the money appropriated supports efforts to fight terrorist groups that pose the real threat in today’s world; and the countries that might threaten America  militarily are historically few and weak. (Russia, for example, has an energy-dependent economy roughly the size of Italy’s. According to America’s intelligence community, its efforts to destabilize the U.S. are made through social media, assaults by “bots,” and hacks into vulnerable data repositories, not military action.)

The massive amounts that America spends on its military are used to support bases and troops that are ill-suited to the conduct of modern-day defense. (Even the Pentagon has estimated that base capacity exceeds need by 20%) The existence of this enormous military capacity also creates an incentive to substitute military intervention for the exercise of diplomacy and soft power (as the Japanese proverb warns, when the tool you have is a hammer, every problem looks like a nail.)

An argument can also be made that we are supporting a military establishment that is prepared to fight the last war, not the next one.

As one military expert has written, “counterterrorism is poorly served by manpower-intensive occupational wars, which rarely produce stability, let alone democracy.” He argues the U.S. could safely cut the military budget by 25%; even if he is wrong about the size of the savings that could be realized, knowledgable observers suggest that modernizing military operations, restraining America’s all-too-frequent interventions into the affairs of other countries, and focusing on actual threats would translate into very significant savings.

The elimination of fossil fuel subsidies, and the reduction of farm subsidies and military expenditures would allow lawmakers to achieve substantial savings while pursuing important policy goals. The government ought not be abetting climate change or further enriching wealthy Americans, and it is past time to reconfigure national defense to meet the challenges of the 21st Century.

Andy Stern lists a number of ways a UBI might be funded, including “cashing out” all or most of the existing 126 welfare programs that currently cost taxpayers $1 trillion a year. The UBI would make many if not most of these programs unnecessary.

Stein also lists a number of targeted tax proposals, including a Value Added Tax (VAT), that have been suggested by economists supportive of a UBI. As he points out, these and other proposals constitute a “menu” of possibilities. (Another example: If the UBI allows workers to cover basic essentials, taxpayers would be relieved of the need to supplement the wages of McDonalds and Walmart workers,  saving government some ten billion dollars annually.) If and when America has a Congress that is serious about reforming both our democratic decision-making structures and our social infrastructure, that menu provides a number of options from which to choose.

America’s problem is a lack of political will to confront the special interest groups that currently feed at the government trough, not a lack of realistic funding mechanisms.

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Follow The Money

Want to know what America’s real priorities are? Easy; just follow the money.

Some of what we find when we examine federal spending isn’t a surprise. We’ve all watched as the Trump Administration has eviscerated the EPA, for example, so cuts and rollbacks there may infuriate but not surprise us. After all, Trump has dismissed climate change as a “Chinese hoax,” eliminated subsidies for clean energy, and slapped tariffs on solar panels.

Given this administration’s well-known bias against science, evidence and clean energy–not to mention Trump’s fondness for the dying coal industry–I shouldn’t have been surprised by the general thrust of a recent study of America’s federal subsidies for fossil fuels  by the International Monetary Fund.

But I was.

Because the amount of the subsidy was staggering.

The United States has spent more subsidizing fossil fuelsin recent years than it has on defense spending, according to a new report from the International Monetary Fund.

The IMF found that direct and indirect subsidies for coal, oil and gas in the U.S. reached $649 billion in 2015. Pentagon spending that same year was $599 billion.

The study defines “subsidy” very broadly, as many economists do. It accounts for the “differences between actual consumer fuel prices and how much consumers would pay if prices fully reflected supply costs plus the taxes needed to reflect environmental costs” and other damage, including premature deaths from air pollution.

Since most observers consider the U.S. defense budget to be hopelessly bloated, the fact that fossil fuel subsidies exceed that budget is absolutely mind-blowing.

The study concluded that if fossil fuels had been fairly priced in 2015–i.e., priced without those direct and indirect subsidies by the federal government– global carbon emissions would have been reduced by 28 percent, and deaths from fossil fuel-linked air pollution would have been cut in half.

People (like me) concerned about the environment may not have recognized the enormity of the fossil fuel subsidies, but most of us were pretty sure that a lot more federal dollars go to support fossil fuels than are directed to programs incentivizing the development of clean, alternative energy. The IMF study confirmed that suspicion.

And then there’s the extent to which our financial support of fossil fuels exceeds our investment in education. Seeing those numbers was another gut punch. After all, Americans give lots of lip service to education; we’ve had “education Presidents,” and it is the rare politician who doesn’t make education a prominent part of his or her platform.

Nevertheless, according to Forbes Magazine, that same IMF study determined that the U.S. spends ten times more money propping up the fossil fuels that drive climate change than we spend on education.

Globally, fossil fuels receive 85% of all government subsidies. What if we diverted just a portion of the U.S. subsidies and used that money to improve public education?

Virtually every candidate for the Democratic Presidential nomination has expressed concern about climate change, and an intention to combat it. Voters can determine just how committed they are to the environment by asking whether the candidate plans to continue the obscene subsidies that waste our tax dollars, pad the bottom lines of immensely profitable oil and gas interests, and prevent us from effectively addressing an existential threat to the planet.

Just think what we could do if we redirected a substantial portion of the defense budget (as, interestingly, the Department of Defense itself has advocated) and entirely terminated the unnecessary, wasteful and arguably immoral subsidies for fossil fuels.

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