The cost of tax cuts

In the shadow of the elections victories of the Tea Party in the US election and the recent announcement of our own Campbell government here in BC to both cut income taxes while implementing a user fee for hospital stays, I thought it would be educational to take a sceptical look at taxes and in particular tax breaks.

Taxes have been a widely used tool by governments to punish ‘sin’ (in the form of alcohol and tobacco taxes) and to promote investment (in the form of tax holidays or credits like the capital gains tax). I am not going to get too partisan here. There are valid arguments on all sides about what are appropriate taxes and at what level those taxes should be – that is a discussion for a different day and perhaps a different show. What I would like to investigate here are two things: first that cutting taxes increases tax revenue (this was called Voodoo economics by G. Bush Sr., trickle-down economics by others but economist refer to this broadly as supply-side economics) and second that tax cuts are always good.

I shall address the former first. For those of us who had access to an US media source (or those who can remember any recent political campaign) every politician was promising to cut taxes; when asked how they would pay for these tax cuts, they would either respond by saying tax cuts cost nothing or they said they will reduce spending…when asked what spending, they would say something like “that fat in the system” or “improved efficiencies” – IE they would not cut anything. For example they often say they will cut “ear-marks’, but this only accounts for $3 billion out of a budget of $3.6+ trillion (with a deficit of $1.7 trillion)…or 0.08% of budget (0.17%  of deficit).

It seems popular among voters across the political spectrum. However, the recent dual announcements of our local government show the reality of the situation. Campbell announces a popular across the board tax cut of 15%. This applies to rich and poor alike (although not equally, but again that’s a different show*). This equates to a loss of over half a billion dollars a year. That is money the government will not have to provide services…like hospital beds. The government also recently announced a user fee on hospital rooms amounting to over $200 a week. Who is going to make up for the loss in tax revenues? The sick.

Environics Poll 2007

Now don’t get me wrong, maybe we are all happy with that, but most people when asked the question do they want to cut public spending (especially healthcare), they say no…in fact it is one of the few areas people show an innate socialist tendency.

Just to put the two into perspective, the median family will save about $350 a year in taxes.  The average hospital stay for an individual is 3-10 days (depending largely on age)…that’s a fee cost of $87 to $290 (and for those of you who say “well most people will not be in hospital that long” just remember that makes the fee even more onerous because it WILL effect most those who are suffering most and likely least like to afford it).

Okay, my math may be a little dodgy (mainly due to the lack of accurate numbers for ‘average hospital’ stay or the myriad of different income/fee/taxes an individual will pay) but the point should still be obvious. The hospital fee was not to pay for the tax cut but add in the added cost of medical insurance premiums[1], camping fees[2], transit fees[3], licence fees[4], tuition[5] and so on you will get there. (for those of us old enough, we remember when ‘user fee’ was a dirty word and the fees that did exist were token…not any more).

Cost of Bush's tax cuts

The point I am getting at, is if we want social services we have to pay for them as a society. That means when someone yells “tax cuts” remember they are also saying “cut services”. Maybe something you are comfortable with…maybe not but that is the reality of it. I was going to go on to talk about the wisdom of providing robust social services but that would be straying perhaps outside the bound of a sceptic podcast so we shall stop here and address the second point.

Many have claimed, largely Republicans and Monetarists, that cutting taxes increases tax revenue. On the surface this sounds paradoxical; however there is a shred of logic to be found. The idea, goes that if you cut taxes, those who have more money will invest in the economy, the economy grows, from this larger tax base you collect more absolute dollars even though the rate is lower. The idea works in reverse as well; increasing the tax rate will cause a contraction of the economy and a reduction in absolute dollars.

Often the example of the Reagan Revolution is used to prove this point…i.e. that it works in practice. However this is a flawed claim. As many modern economists have shown[6], including noble prize winner Paul Klugmen, the Reagan tax cuts did not improve the US economy and actually made government finances worse.

It is true the US economy grew fast from 1983-89 however this is in contrast to the miasma of the severe recession of 81-2. Capitalist markets are cyclical, and this was not an unusual recovery. Private savings, something supply-side economics assumes from the masses to provide the capital for investment, continues to decline throughout the decade (7.8->4.8%). Meaning, the money for the recovery, as it was, came from spending savings and increasing personal debt. Finally, this trend is echoed in the US budget; when Reagan came to office the US debt as a % of GDP was 32.5%, when Bush Sr. left it was 66.1%. Clinton, who raised taxes, brought the rate down to 56.4%. The same happened in Canada, when we increased taxes in the 90’s and went from the ‘basket-case’ nation to arguably the country with the most stable finances.

Lastly, the multiplier effect. Not all tax cuts are equal. Tax cuts cost money; those who claim that it is not should ‘not’ collect their next pay-check and see if it costs them money. So, the current desire of governments everywhere is stimulus. When the government (or anyone really) spends money it has what is called, a multiplier effect on the economy; that is for every “Y” dollars spent it generates Y*x (or Y’) in the economy. So, if I give you a dollar and you burn it, which generates no activity in the economy, in fact it removes the dollar from circulation so has a negative multiplier effect. Now most people will spend it or ‘invest’ it (be it real investments or just in your bank account) and they have a positive effect; that is they generate more than a dollars worth of economic activity. The best way to think about this is if you spend the dollar, the merchant sells more, can now hire a new employee, and we will in turn make more dollars and spend them; the new employee generates the new value. An economist could spin a better story, but I think you get the gist of it – the one dollar generates more than a dollar of economic activity.

Relative stimulus effect

Having given the background, how do tax cuts fair as stimulus[7]? In general, every dollar of tax cuts generates $1.30 of economic activity compared to a dollar spent on increasing UI benefits would generate $1.62 or increasing food stamps generates $1.74. There is also the issue of WHO to give the cut to. Lower income people spend (out of necessity) every penny they make so a cut in their taxes (thanks to HST we ALL pay taxes even the poorest) will generate the most activity but they latterly also have the least money (the bottom 50% of household control about 3% of Canadian wealth). As you move to the other extreme, the very wealthy often ‘invest’ most of their tax cuts (earning more than they need), so less activity generated but because they make more money a big bang (the top 10% own around 58.2% of the nation’s wealth[8] in the USA its 1% owning 35%). However, in a global world, it is most likely their investments will be ‘trans-national’ or outside ‘our’ economy and thus lost completely to the system – complete fizzle.

Society, of course, is not only extremes but a lopsided slope of ‘everything-in-between’ (note percentages of wealth ownership mentioned earlier) otherwise it would be easy to define tax policy; the trick is to determine both purpose (stimulate consumption, promote manufacturing, decrease inflation) and effectiveness. History has given us lessons to learn from and one a sceptical economist should be able to apply.

 

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[1] http://www.tbs-sct.gc.ca/hr-rh/in-ai/2009/1124-eng.asp

[2] http://www.ctvbc.ctv.ca/servlet/an/local/CTVNews/20100331/bc_april_fee_increases_100331?hub=BritishColumbia

[3] http://edmonton.ctv.ca/servlet/an/local/CTVNews/20100331/bc_april_fee_increases_100331?hub=EdmontonHome

[4] http://www.hsd.gov.bc.ca/lclb/docs-forms/2010_fee_increase.pdf

[5] http://www.aved.gov.bc.ca/tuition/welcome.htm

[6] http://www.youtube.com/watch?v=-dQUIzzIOPo

[7] Recovery Act

[8] http://www.wsws.org/articles/2007/jun2007/cana-j20.shtml

* By this i mean 15% of $100k = $18k while 15% of roughly the median income, $50k = $7.5k. So, the tax applies the same but the benefit is very unequal.

Skeptivism

Let me tell you about my night with Deepak. Myself and a group of skeptics went to pass out information pamphlets at a performance of Deepak Chopra at Vancouver recently. We did not want to be too confrontational; wanting instead to reach out to those who have been taken-in by the mis-speak of Deepak. When asked by friends what we were doing I was at a bit of a loss; we were not exactly picketing or protesting Deepak – that would have been more aggressive and confrontational. To say were ‘just skeptics’ handing out notes seemed weak. It is also true that a number of skeptics are passive and live the skeptic life but don’t want to ‘preach’ or promote the cause. Then it struck me (well a friend of mine), it was skeptivism…skeptic activism.

Skeptivism is what we as skeptics do best. Like political activist we are acting…educating…we are casting a light on issues that the broader population should know about. Skeptivism is the effort that skeptics do to advocate for skeptism. We need more skeptivism because as quick as we shine the light of reason and science on one quack another shows up. At the Deepak event I heard, for the first time, about a ‘new healer’ who uses chromotherapy healing that seems to be the next big thing in the metro Vancouver.

To that end, how can you get into skeptivism.

First be informed – subscribe to Radio FreeThinker on iTunes (while at it, you might also subscribe to Skeptoid and SGU). Check out some blogs like Pharyngula or SkepticBlog. Check out science sites like Nature or Scientific America.

Second, get connected – checkout Sceptics-in-the-Pub, Café Scientific. Join a group – UBC FreeThinkers or Center For Inquiry. All on Facebook

Third, get involved – check out events in your community, talk (not yell) to your friends about skeptic issues (global warming, anti-vax, alt-med), and don’t let your friend think fiction is fact.

Lastly, be effective – Skeptivism is advocacy and education it is not mounting the barricades and eliminating the enemy (Skeptic warriors do that work). It is not directly confronting the hard-core believers but in ensuring the deceived, ill-informed and gullible are given the knowledge they need to exercise their own skeptism. It is also to make sure whenever the pseudo-scientist/Quack-med/New-ager tries to convert and confuse another flock of people, we are there to provide an alternative…a lifeline from the misinformation, illogical and (often) false information pushed by those who profit from the unskeptical.

Now get out there, it is Skeptivism in action!

Bio-Fuel – Food/habitat for fuel?

This is another segment in our series on alternative energy, in the past we have talk about nuclear energy and this week we are going to talk about another alternative to our traditional Petro-coal economy – Bio fuels.

First, what are bio-fuels?

Simply put, these are fuel sources that are derived directly from organic sources – ie plants. The simplest bio-fuel that we all may be acquainted with is firewood. But firewood cannot replace gas, but the real promise of bio-fuels can be seem more in things like palm or canola oil – we are all acquainted with these now as cooking oils.  Another promising bio-fuel is alcohol.

So, how do bio-fuels help?

Bio-fuels, in general, are seen as possible saviour to fuel-intensive society because they are renewable and are claimed to be carbon neutral. The current state of the technology…

Bio-Alcohol – extracting sugars or starches from wheat, corn, beets, sugarcane, etc… and fermenting then into alcohol or as its better known in the fuel sphere – ethanol. This is the most pervasive of the bio-fuels because of its easy adoption as an additive to traditional gas. If you see at the gas station ethanol blends, like Mohawks Natures Blend, they usually have up to 10% ethanol. You can find in more and more locations E85, which is 85% ethanol however this is not universal because it requires modification to the standard car engine.

• Pros – Like with all bio-fuels it is renewable and it is based on a tried and true current technology –so no waiting for future development
• Cons – Diverts food from people to cars, requires significant energy inputs to produce (ie for the distillation of the alcohol)

Bio-Oil – The use of vegetable oil as a fuel with little or no process. Vegetable oil can be, with little processing, be used directly as a fuel in a modified car. You might have seen these on TV almost a decade ago portrayed as deep-fryer or chip cars because they would recycle used deep-fryer oil as a fuel. Pure Oil (or not recycled) fuel come from plants that are not part of the human food chain and can grow on ‘agriculturally marginal’ lands – for example the Camelina which was used as a fuel oil in the bronze age but not a current agricultural crop.

• Pros – renewable, Recycled is tried and test (it was used during WWII fuel shortages) but Pure Oil still in the research stage, recycle existing waste.
• Cons –Recycling not really economically sustainable on a grand scale, threatens natural habitat not presently used for agriculture.

Bio-Diesel – Vegetable oil again but this time highly processed to for a more ‘standard’ hydrocarbon chain. Like ethanol it is often used as an additive to fossil fuel diesel, up to 15%, although modified or special designed engine are appearing able to handle B100 or pure bio-diesel. Bio-diesel is produced by mixing veggie oil with sodium hydroxide and methanol, the resulting compound is then processed to remove impurities and you get bio-diesel.

• Pros – renewable, some forms well established, some forms high yield and used non-agricultural land (algae and the bio-oils mentioned earlier)
• Cons – Requires significant energy inputs to create, established forms remove food from the system the other forms result in loss of natural habitat and are future tech.

Bio-Gas – The capturing of methane from decomposing organic material. This is usually the end product of natural bacterial digestion. There are two main ways to capture this gas, one is to “cover existing landfills” and collect the gas natural leaking from these dumps. This reduced local air pollution and takes a greenhouse gas and puts it to some use (although it will still ultimately be a greenhouse gas one way or another). Another way is to create “waste dumps”, be it manure or other bio-mass and again capture the methane emitted by the decomposition process. These tend to be cheap to produce, at least on small scale, making them ideal for less developed nations.

• Pros – Cheap, natural, and in the small scale well established
• Cons – relied on waste, hard to scale up (while remaining efficient and environmentally acceptable)

Bio-Hydrogen – the use of photosynthesis to produce hydrogen from water. Hydrogen has been seen, and therefore developed, as an alternative fuel source (at least for transportation). So the science of using hydrogen is well developed. However, the stumbling block has always been the actual production of hydrogen, which currently is an energy loss system (ie more energy in than out). Bio-hydrogen could solve this problem by producing the hydrogen organically, than making it an positive energy system.

• Pros – cheap, environmentally sustainable, renewable
• Cons – distant future tech

Now that we know what we are talking about, bio-fuels are very controversial.

First, current levels of technology rely heavily on crops like soybeans, corn and sugarcane. Do we notice what these things have in common? Yes, they are all also food crops. In 2008 there were riots around the world over the perceived food-shortage due to the idea that these crops were being diverted from tables to cars.

To answer this question we need to assess three points:

How much ‘food’ has been diverted?

To figure out how much potential food has been diverted we need to get a rough estimate about the amount of bio-fuel produced. Bio-Diesel about 6.5 billion litres, Bio-alcohol about 40 billion litres and the others don’t primarily rely on food crops. To simplify our analysis, we will just focus on the Bio-Alcohol, or better known as ethanol, because it’s better understood and accounts for about ¾ of bio-fuel production.

According to The World Bank, it takes about 2.4 kg of maize to make 1 litre of ethanol, so using that as rough average, which works out to be about 96 billion kg of maize. In Brazil, which accounts for the largest production of ethanol, sugarcane is used. Using that as a base about 2.2 kg of sugar is used to make 1 litre of ethanol, or about 88 billion kg of sugar a year. Well, of course it’s one or that other not both, so about 35% is from sugarcane and about 55% from maize.

Compare this to world production of maize (785 trillion kg) and sugarcane (1.6 trillion kg), it amounts to a small percentage (<0.007% maize and <2% sugar). There was a marked rise in crop prices in 2008 (which sparked the world riots) but that was largely (as time has shown) the result of commodity speculators – speculators quite likely influenced by the very organizations that were protesting food for fuel. So, one could make the argument that every little bit counts, but as a percentage, animal feed far out paces ethanol productions, so one could make a more compelling argument for veganism.

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTWDRS/EXTWDR2008/0,,contentMDK:21501336~pagePK:64167689~piPK:64167673~theSitePK:2795143,00.html

http://www.biotechnologyforbiofuels.com/content/1/1/6

http://www.ethanolrfa.org/

How is that diversion compared to ’boutique’ crops or crops sent to wealthy nations?

So, what other things remove food from the system? We already briefly mentioned animal feed, but another one is organic farming. Again, not wanting to make moral arguments about the ethicy of organic farming, the bare fact is that it is (at best) 5% less productive than ‘factory’ farming…meaning organics take out three to ten times more food than bio-fuel.

How much of the increase in crops are the result of bio-fuels and how much the result of speculation in bio-fuel?

In late 2007 and 2008 there was a huge issue regarding the pricing and availability of food crops. There were riots throughout the world as people complained that food crops were being diverted to fuel production and (more supportable) that the “bio-fuel rush” was causing a huge increase in food prices and thus causing more malnutrition and starvation among the world’s poor. It is true that for many developing nations the cost of importing food increased as much as 25%; the price of wheat doubled and many other crops (rice, soybean) and their derivatives (milk, meat) reached all-time highs in 2008. However, although more resources are being deployed into the production of bio-fuels, the price of most food crops has notable reduced, most to prices lower than 2007 levels.

Now many leaders of the developed nations claimed the rise was due to increases in world population and the increased demand placed by them on the global system. But this has only increased (ie more people today than yesterday), so one would assume a stable or increasing price for food crops – which is not true. Some blame increased ‘neo-liberal’ policies (which I think are inherently immoral) but again, these fail the price stability test. The only thing that seems to account for the temporary increase is “the market” in the form of commodity speculations. Now some might argue the law of “supply and demand” – Daniel?

IF, there is a problem, its root is our system of distribution – resources go not to those-in-need but those-in-greed…or those who can afford it but that is a topic of another show)

Another are of controversy is that some crops, including canola and palm oil, are being planted in virgin land, notably rainforest land being ‘converted’ to crop land. Parallel to this, a number of people around the world have claimed to be displaced from their land by large ‘corporate farms’ to grow these bio-fuel crops. Now this is perhaps more important than the idea of “food or fuel” because these crops are seen as second generation bio-fuels – the future of bio-alternatives.

To answer this question we need to assess some points:

How much land is being used by bio-fuel crops?

Now most people note that deforestation and ‘crop-conversion” has increased the most for bio-fuels compared to other uses. However, because bio-fuel use was so small to begin with, as a percentage of the whole it is still quite small. It is hard to assess exact numbers but the research I have done shows that most deforestation is for…well wood, although clearing for cattle production is also significant. In fact, the only real pressure that bio-fuels seem to put on ‘virgin land’ is to provide cover for logging (ie. Land set aside for bio-fuel is really just used as an excuse to cut down old growth forest) and it grows well in the poor soils that rain-forests grow in (ie. Once cleared, biofuel crops will ‘absorb’ the ex-rainforest land). Another area that shows an increase in bio-fuel crops in the reclaiming of swamp lands. This is notable in Palm oil crops in Indonesia and Malaysia.

http://news.mongabay.com/2007/0516-ethanol_amazon.html

Compared to other land-use, are these lands significant?

As implied above, although it is true that bio-fuels are having more of an impact each year, they are still relatively insignificant compared to other threats. The threat possed by wood harvesting is magnitude greater. That said, there is one area that maybe there is a good case – reclaimed land. Although in a pure human-centric capitalist view point, swamps are unproductive and are ‘improved’ by transforming them into ‘cash crops’, however environmentalist would argue that the loss of bio-diversity that swamps and similar ‘marginal’ lands possess is a great harm both to humanity and the biosphere as a whole – that there is something more important than money. In an odd way, the unproductiveness of these lands have served, in the past, to protect nature…that protecting, thanks to bio-fuels, seems to be lifting.

Again, another side issue not truly related to bio-fuel but more about equality, capitalism and environmentalism.

http://en.wikipedia.org/wiki/Food_vs_fuel#Biofuel_from_food_byproducts_and_coproductshttp://en.wikipedia.org/wiki/Bio-fuel
http://www.time.com/time/health/article/0,8599,1701221,00.html

http://www.businessweek.com/magazine/content/07_06/b4020093.htm

http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/07/28/000020439_20080728103002/Rendered/PDF/WP4682.pdf

http://www.sciencedaily.com/releases/2009/02/090225091525.htm