NC Ch 8 : Capital Gains

This chapter is primarily about how to change the tax system to encourage natural capitalism.

The reason why we need to invest in natural capital and encourage natural capitalism is that using up resources faster than they are replenished will eventually have economic implications. Many people argue that we must not be running out of a resource since we are not noticing any change in the rate it is being used. That is because we are using things at a constant rate until it suddenly eventually runs out and then the rate of usage is suddenly 0.

The authors mention a book The Limits of Growth (1972) that looks at long-term consequences of existing patterns of consumption and production on factors like population growth, industrial capacity, food production, and pollution using the system dynamics model created by engineer Dr. Jay Forrester, an MIT Sloan professor and founder of the System Dynamics Group.

The importance of natural systems lies in that they provide services that would be impossible or at least prohibitively costly for people to do.

A number of economists who believe that the degradation of natural capital will limit economic growth : Peter Raven, Herman Daly, J. Peterson Myers, Paul Ehrlich, Norman Myers, Grechen Daily, Robert Costanza, Jane Lubchenco.

Subsidies and Taxes
Dr. Norman Myers examined world's subsidies in six sectors: agriculture, energy, transportation, water, forestry, and fisheries. (p160)

One notable example is roads as a subsidy for drivers. Road pricing and taxes for road use should be put into place instead of having society bear the brunt of having more drivers.

In contrast, "Indonesia heavily subsidized pesticides, resulting in massive use and equally serious side effects. Starting in 1986, the government banned many psticides and adopted Integrated Pest Management as official policy. By 1989, the subsidies were gone; pesticide production plummeted nearly to zero and imports by two-thirds; yet rice production rose by another 11% during the years 1986-1990."

In terms of using taxes as a way to inform decision-making, taxing wages and capital gains are a bad idea. Instead, taxes should be on pollution, waste, carbon fuels, and resource exploitation, all of which are currently subsidized. then "business can save money by hiring now-less-expensive labor and capital to save now-more-expensive resources." "The purpose is to lower the rate of return required to make an investment worthy. When there are high taxes on investment income, the rate of return must be correspondingly higher to justify investment. In part, that is why more money can be made by rapidly exploiting resources rather than by conserving them" (p165).

Jacques Delors, former chairman of the European Commission, is urging such a tax shift. Small trials are underway in Sweden, Britain, Germany, the Netherlands, and Norway. I wonder how they are going now.