Steady State Macroeconomics : Tax Policy of the Steady State

Preliminary monetary conditions

In the following post, we review the necessary tax reform that, complementing the monetary reform explained in https://alanfortunysicart.blogspot.com/2022/05/steady-state-macroeconomics-monetary.html should cover the main changes to achieve a steady state economy. 

Before we jumped in, let's remember the key changes in monetary policy we are asking for:

• Stablish 100% reserve banking and limit money creation to central banks
• Limit the supply of money as fixed as possible, and only increase to finance the transition of a steady state if tax reform take too long
• Audit debt, by recognizing some % of repudiation and distribute fairly the burden of the costs of repudiation

Clarification on interest rates and growth mandate

We did not answer the apparent contradiction between low interest rates and high inflation as a driver for growth, when sacred economics claimed that negative interest rates are required for a non growing economy. 

Before we jumped into the tax policy that would allow for a steady state economy, and that would affect the resulting interest rates or cost of money, let's make a couple of statements /colloraries:

1. Without limiting the total throughput or metabolism of the system, it is possible to have uneconomic growth with low or high interest rates. Low interest rates incentivates risk taking on debtor and penalizes savings on the creditor, which effect is greater depends on personal preferences and many other factors (taxes, liquidity preferences, expectations of inflation...).
2. The return on investment will depend on the tax policy, meaning that an effective tax policy should internalized uneconomic growth and incentivized development without growth. It is therefore the "raw" interest not sufficient to explain the effectiveness of low interest rates to avoid growth.

It is therefore not a contradiction, the claim that "higher interest rates forces debtors to pursue higher returns for investments or growth", but from that statement one cannot conclude that low interest rates are a necessary and sufficient condition to stop the growth mandate. They are necessary, but not sufficient.

Having said that we go to the tax reform necessary for a successful steady state economy.

Definition of success, sustainability and development

Here I am not aiming to define how each should define success, but rather come up with a general definition more in line with reported wellbeing and working communities that the poor usage of GDP as a proxy for development.

I will not enter to define why GDP is wrong, as there are many good articles describing the flaws in detailed, for example: https://www.sciencedirect.com/science/article/pii/S0921800913001584 where it is shown the decoupling with wellfare indexes.  I provide also full evidence why economic growth or green growth is neither possible in the long term nor desirable : https://www.researchgate.net/publication/350386086_Post_growth_A_case_for_prosperity_without_economic_growth.

Having said that, the idea here is to define what is the ultimate goal and definition of success:

"Prosperity is defined as the achievement of dignity, freedom and joy, for as many living being for as long as possible. The ultimate goal of the steady state economy is to ensure long lasting prosperity defining the optimal size of the economy and also letting individuals and collectives to decide the allocation of the limited endowment of resources its generation has".

 As you can read, I intentionally add dignity and not consumption, as dignity is a human right, while consumption of superfluous product not necessarily. Note also the intergenerational dimension, so the definition of limits and current endowments consider all living matter for a finite but long horizon. There is also the idea of an optimal size of the economy, as we do in micreconomics but not in macroeconomics, we reach a point where marginal benefits of growth equate marginal costs. Given the challenge to estimate that, a caution principle and insurance must be applied. It is also very important to embedd the democratic and decentralized allocation of decisions and usages of the planetary "cake".

We are not defending a top down microeconomic allocation here, rather an single cap and decentralized allocation of the different shares of that throuput permit for a given period. This should give rise to more broad participation in the decisions on how the economic transition is done, far from the current non-transparent and elitist green deal that we are living today.

I hope the below provides a useful framework to set a clear purpose for the steady state economy we want to implement. Let's start with the different policies now:

Cap and trade system of throughput

The very first thing required to drive towards a steady state economy is to define its size. In microeconomics terms, the size of the economy should be at the margins where and additional benefit of throughput equals its marginal cost. That may be doable for a single business or the aggregate of multiple businesses, but at nation or world level is rather challenging. 

Some parameters to define the optimal scale may help to define it.

• it has to be an scale where no planetary boundaries are crossed or risked
• it has to be a scale that ensures dignity for the current population while given space and resources for a sustained wellbeing of similar populations in the future
• it should not assumed not realised technological changes
• it should not take the current inequality as acceptable nor as immovable
• it should not assume population growth or even the maintenance of the current population levels
• it should be compatible with an economy working purely on renewable energy sources and materials

The list could be long and it is such a complex topic that could fill papers if not books. But the key point here is that we have evidence that many countries if not all of the "western" wall have cross their fair share historically and currently, and the optimal amount would certainly be lower than the current.

Note that, contrary to many projections, we do not assume increasing energy consumption or consumption in general, nor even population growth. Each nation/region should decide to have more cake per person or more people, but the size of the cake corresponding to them shall not change.

As one can see, there is a lot of multiple configurations for possible economies withing such limits: some nations will travel more than consume goods, others will go below the cap as they freely choose to work less and deep dive into care, joy, culture and community instead of production. Note also that innovation, while limited, could augment the wellfare impact of each throughput unit, and development does not stop, only aggregate throuput. Contrary to Nordhaus in his Climate Casino book, we are not going to deal with the same version of Iphone forever, but rather have a phone that last longer and is not using minerals that are very scarce and extracted by criminals.

Caps are better than taxes as it ensures the limits are not exceed, which is not guaranteed with taxes (people may be very inelastic to very polluting activities).  In theory they are equivalent, but  we should not assume perfect knowledge of the optimal taxing rate, as it is very hard if not impossible to estimate.

Ecological tax reform

We have defined an optimal size of the economy, but we want to make sure that taxes are pushing for the internalization of bads and not all goods equally as we have currently.

For pollutants is important to tax at the point of extraction, as it will be more concentrated than the final consumption, and when importing fossil fuels, other polluting raw materials or final goods taxes on imports based on footprint will be in place.That will be heavily challenged by the WTO, but who cares!

The other important point is to stop taxing value addition. Currently we pay taxes for bio foods, basic sanitation goods, primary housing, public transport and even when we start a business before we even have any income (at least in many countries in Europe). Instead of that we will tax activities with low value added (high frequency trading, land rental) , high throuput (fossil fuels consumption, plastic, processed food, luxury goods, cars, swimming pools) or negative health consequences (tobacco, alchool, sugar drinks). That would make it much easier for business which are essential (food, energy, water, housing) much more affordable and also profitable than biz with negative footprint or social impact. There is not such a think as morally neutral taxes, or a country that taxes all equal. If we are going to apply so ethics or scientific policy into this, let's do it based on the common good and not biased taxation based on elasticities, lobby power, and other poor reasons.

Globallization have unequal benefits and costs, and made goods but also most salaries cheaper. Specialization has increased productivity but also at the expense of poor resilience among nations (many countries could not basically feed or heat their homes even at emergency levels). While global trade of certain goods and services will be still beneficial, it is important to ensure strategic goods such as food, energy, water, shelter,medical supplies, transport can be operated even with global shortages nationally. Instead of subsidizing coal or fossil fuels, or other inefficient and not strategic biz, we would support local food and energy chains, even if they are not the most "competitive" options. Let's use 'strategic' reasoning right.

Adressing inequality

There is not an exactly right number of inequality, but the trend is concerning. The promise of growth to lift all boats have little empirical support, as capital earnings (main source of income for the 1%) outpaced labor earnings always and with little exceptions (main source of income for the 99%). If you still challenge this, please look here :https://wid.world/.

In an economy that does not grow, such as the steady state economy, eliminating poverty and ensuring dignity requires sharing. This is essential for getting social support and maximizing wellbeing per unit of throughput (hope we all agree on the decreasing marginal returns on income). Minimum and Top wealth and income ensure dignity but keeps meritocracy on check.  https://equalitytrust.org.uk/taxonomy/term/92

Universal income, progressive taxation, cap on salaries across orgs are ways to achieve this. There are numerous policies in the catalog, the point here is that a steady state economy requires a safety net and put a limit on top incomes on the so call 1%. 

Stop counting GDP, and share the costs of "development"

As GDP is only a good measure of throughput, but not of wellbeing, it should either be left, or not use as a policy metric or a success criteria.

Instead, a dashboards of kpis that are much more related to wellbeing, sustainability and resilience should be made transparent and consider as success:

• mortality at birth
• reported sentiment of belonging in communities
• mental health issues related to social distress
• reported happiness
• social mobility
• education levels
• soil quality
• % land with high biodiveristy
• fisheries and ocean health
• renewable energy availability per capita, use by median citizen
• waste in tones
• local bio food produced
• water cleaningness
• hours worked per active person
• hours spend on caring and social work
• inequality
• % of people under som diagnosed addiction
• non-genetic % of diabetes, overweight...
• ...

That will give more visibility of the actual issues and successes of the society. The list is illustrative and each community should decide what to measure and to focus on as part of the democratic process, ideally with great engagement of both civil society and the scientific community.

There are some technical challenges, like how to power a good life only with renewable energy, but we will find ways to live decently with much less energy. Innovation should be energy/resource augmenting and not human replacing as it is now.

The success of the Steady State depend on political factors: Will the society take the challenge seriously or keep business as usual till collapse and possible war comes? Will the elite be short sighted and not give away some wealth for the common good? Will the politicians take some temporarly unpopular decisions? Will some countries hold up against the lack of freedom not to trade? Will the imperial countries, the WTO and others respect countries sovereignity to not grow and choose other type of globalization? Will economists become humble and learn physics,chemistry and biology when talking about planetary boundaries and the limits to grow?

There is no technical way out. The steady state economy requires politics and social movements, together with good science and enterpreneourship. The ideas have been lay out. Will we be brave enough to try?

"I would gladly give up medicine tomorrow if by doing so I could have some influence on policy with regard to soil. The world will die from lack of pure water and soil long before it will from lack of antibiotics or surgical skill.  But what can be done if the destroyers of our Earth know what they are doing and do it still? What can be done if people really believe that free enterprise has to mean absolute lack of restrain on those who have no care for the future? (Dr. Brand  1985)"