Taxes Roll Downhill

Early in the debate over financial reform, the banking lobby explicitly stated that any tax assessed on them would just be “passed onto the consumers”. Early in the debate on energy reform (aka cap and trade), Republican legislators explicitly stated that the cost of any tax or carbon credit would just be “passed onto the consumer”. We are not dealing with implications friends, we are dealing with explicit threats.

It is a fact that business passes its costs onto consumers; that is just the way it works. Consumers pay the cost of the product or service, and some level of premium (or markup) that goes to profit; this is how business exists. There is nothing inherently unethical or amoral about the capitalist marketplace, but neither is it a guiltless virgin worthy of unrestrained activity. When businesses externalize their costs to the community they operate within, it is the responsibility of we the people to decide how those costs will be paid.

Externalization is the process of passing through the costs of one’s activities to the community, without actually billing the community. When you roll down your car window and throw out a fast food wrapper, you have externalized the cost of processing that garbage. Somebody is going to pay for that garbage, either through official refuse collection, volunteer service, or simply by having a dirty city. The process of externalization in industry, is best suggested (recently) by the activities of Wall Street and British Petroleum.

Investment management works through the principle of risk versus return. The riskier the investment, the more return the entity will demand in compensation. Wall Street entities took on higher and higher levels of risk from the mid-90’s through the crash of the housing bubble. They did this without charging their customers for, or holding onto, sufficient capital reserves to cover that risk. Because the outright collapse of that industry would have destroyed our economic way of life, the firms were able to externalize the cost of that risk through the TARP funds and further bailouts.

We the people did not have a choice, because we the people had steadfastly refused to force the costs of those activities into the formal structure of those firms. The more restrictive regulations, fines, and taxes would have limited the profit potential of those firms and their direct clients; but those effects are easier and more amenable to accurate forecast. In other words, taxes and regulations are the devils we know. Would it be more expensive to trade in that environment? Yes. Would the “Street” lose some flexibility in financing takeovers, mergers, and other related activities? Yes. Would these measures destroy the capitalist economy? Certainly not!

In all matters relating to environmental degradation (translate that friends, as the destruction of all the things that make the Earth comfortable for humans), firms have been externalizing costs for years. The BP oil disaster is just an explicit example. Regulations that would have forced oil companies to follow clear guidelines could have prevented this disaster. A national energy strategy not focused on those resources in the United States that will be exhausted within the lifetimes of our great-grandchildren, would have prevented this disaster. Would they force the price of gasoline up? Yes. However, we have allowed speculators to force the price of gasoline through the roof for years, with only the speculators reaping the benefits. Why should not we the people push the price up for our long run benefit?

BP externalized the potential damage to the environment; they externalized the costs that will now be paid by the tourism and fishing economies of the the gulf coast and beyond. Oil and coal are not the only energy industries that could be job-producers. What costs will we the people pay if our fishing fleets no longer have a catch to harvest? What cost will we the people pay if coastal tourism economies are destroyed? We too often chose to buy at a discount in the present. With all of the talk about taxes being passed on to consumers, and debts being passed onto grandchildren, we have neglected the time honored practise of buying insurance against our greatest risks.

You get what you pay for. If you want cheap trades and a one and a million shot at being a millionaire, then you must accept the potential for bailouts, or the destruction of our nation’s financial system. Risk versus reward is a cruel and uncompromising mistress. If you want to buy into the notion that, when it comes to energy, the inmates must run the asylum, then you must accept the potential destruction of entire fisheries, and the jobs they support. If you want to keep energy as cheap as possible during your lifetime, then you must accept that your children or grandchildren will have to pay the costs of replacing the energy system in their lifetime. Fossil fuels won’t last forever. Ask yourself a question, and be honest; would it be less expensive for future generations to deal with this problem, or ours?

Democratic regulation of the marketplace is not socialism, and taxation that is paid towards the growth of our nation’s economic potential is not evil. Providing a framework within which companies operate that gives structure and accountability to the true costs of operation is not the death of capitalism. A solid framework enhances capitalism, allowing firms in the market to grow and thrive without destroying the communities they operate within. An thrive firms will; large business does not dry up and blow away in the face of fair regulation, it adapts. Regulations and targeted taxes are simply market pressures that all managers learn to deal with in business 101. What business 101 does not teach managers, is how to apologize for destroying a pension fund or ecosystem.

The Rational Middle is listening…