Wednesday, August 3, 2016

Extractive Industries, Economic Rent, and Henry George's Idea of Taxes on Rents

My most recent posts have been quite political. However, this post will primarily be about economics. In various posts, I've discussed the basics of capital and wealth creation. In those same posts, I touched on rent-seeking and how it's essential to avoid such behavior. This post will largely be a spin-off of htose posts. In order to continue, we must first recall the definition of economic rent: an economic benefit received by adding nothing (usually reducing)--on the net--to productivity.

As I've discussed previously, acts like environmental degradation are effectively a form of rent-seeking. In the case of extractive industries, the firms receiving rents from extractive industries are rent-seekers. Why? When you dig out coal from the ground, it destroys the landscape, the air, and often the water. It's the same thing with fossil fuels more generally. These firms get revenues for something that destroys the landscape, the air, etc..

Usually, the most common form of economic rent would be land rents. So in the mid-19th century, there was a great American economist by the name of Henry George who proposed a Land Value Tax as a way to deal with land rents. In today's world, rents from extractive industries are a much larger problem for reasons ranging from environmental degradation like deforestation to climate change. Obviously, the LVT does nothing to deal with rents from extractive industries.

Hence, I'm now proposing a tax on all extractive industries. Regardless of where an extracted material comes from, there will be a flat tax imposed on the extracted material when used as an input in production. For example, as soon as crude is sucked out of the ground and sold, there will be a flat tax imposed on that price wherein the revenues go towards the federal government.

Although there's a tax on extractive industries, there is no added tax for items refined on those products. For example, there will be no tax on gasoline because gasoline isn't extracted. Gasoline is refined from an extracted material. There also won't be a tax on solar panels, but there will be a tax on the silicon used in the production of solar panels in the supply-chain. So this tax will affect value added industries little, especially if there's a lot of parts in the supply-chain. On the other hand, it's impact on industries who have little value-added in their supply-chain will be much larger (relatively speaking, of course).

I've seen various people think of a value-added tax (VAT) when I say a tax on extractive industries, but this is nothing like the VAT. A VAT is a tax on the value-added section of goods. The Extractive Industries Tax (EIT) that I'm proposing is nothing like that. It's only a tax on the initial purchase of a raw material from a company that does resource extraction. We are not taxing anything across the supply-chain. It is purely a tax on extractive industries to add in the negative externalities of extractive rents that aren't in the market price.

Of course, fossil fuel extraction today isn't just not taxed or encouraged, but the behavior is actively subsidized. In the US, the International Energy Agency (IEA) estimates that fossil fuel subsidies total close to ~$550 billion annually. So we currently have incentives that not don't account for negative externalities from extractive rents, but actively incentivize firms to increase profits from extractive rents. In the line of Henry George, we must first actively eliminate all subsidies that go towards all extractive industries and then place a flat tax on extraction (as described above) that'd bring in ~$500 billion in the first year. I'm proposing a tax that's ~50% on all directly extracted mineral resources both within the borders of the US and for any item that uses extracted minerals built into global supply-chains that wasn't extracted domestically as an addition to the current cost. This would be applied by simply calculating the total valuation of all of the extracted minerals on global markets at the time of importation into the US and then tacking on the tax value to that total valuation.

This tax would clearly incentivize renewable energy by relatively increasing energy costs from extracted sources. Such a tax would also incentivize the use of less raw materials in the domestic economy more generally. It'd reduce the total inputs into our economic system while incentivizing the ability to produce more outputs with less inputs. In other words, this kind of a tax would incentivize genuine capital formation instead of increased income from extractive rents.


  1. Makes no sense. Assuming you are correct on environmental degradation (which I don't believe the stats support), a US "extraction" tax would simply push up the value of such commodities and shift extraction overseas. It's a safe bet that environmental regulations are weaker outside the US (and particularly in developing countries) so all you've done is raise the cost to consumers while creating additional economic damage. Of course, that damage will be outside the US and often in poor areas, so no one probably cares.

    1. If you read my post fully, you'd clearly see that I discuss the specific scenario of how and why the application of this tax wouldn't push extraction overseas because the valuation of extracted materials overseas is actually accounted for when these goods are brought to the US for the first time in global supply-chains.

      Please FULLY read my post before making such nonsensical claims. And yes, it will increase the costs to consumers. That's kinda the point. It's to push consumers away from goods that're heavily reliant on extraction towards goods that're more reliant on the value-added aspect of the supply-chain. Hence, the goal is to incentivize capital formation.

    2. Also, the stats definitely support me here. Extractive rents are well-noted in economics (and throughout financial history). In fact, it goes back hundreds of years--even thousands. There's always a cost towards extraction.

      As for stats backing it up, they actually do. For example, if we take something like coal, it releases more radiation into the air than nuclear (much more). In the case of mineral drilling or oil drilling, the impacts on earthquakes (from fracking or mining) have been well noted. Just because you do not initially see the costs doesn't mean they're not there. There's a difference between what meets the eye and what really is.

      There's always a cost. The question is whether the costs are hidden or knowable and can they be bounded. The question is about payoff and risk. To think deterministically will get us in real trouble here.

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