ASSOCIATION
SOCIAL TAX

Social Tax Reform (created in 2003)
An original idea by Robert A. Green, CPA

Enough is enough. It’s time for companies that do harm to the general public to take responsibility for their actions. This can be accomplished by the creation of a “social tax.” Instead of companies being taxed on their earnings, their tax would be dependent on the damage they cause to society. Consider:

A tire company makes a defective product, putting the safety of thousands of people at risk. A tobacco company knows its cigarettes are dangerous and harmful, yet continues to market them to the public. An energy company admits to cheating on its finances, leaving millions of investors with losses while the executives live in luxury.

These real-life examples are becoming far too commonplace in today’s society. What’s worse is that regardless of what happens to these companies – fines, lawsuits, etc. – it will be the average American citizen that winds up taking the brunt of the damage. Any losses in earnings by the companies can be written off come tax time; any payments will be covered by insurance. You can bet that those costs will be passed on to “the little guy.”

Yes, the implementation of a social tax is a radical change. However, as you’ll see in the sections that follow, it’s an idea whose time has come.

Here is an email from someone who appreciates this idea. Click here.

By Robert A. Green, CPA

While the system of capitalism used by the United States was the envy of the world for many years, it has – almost overnight – now become a pariah. How? Capitalism exposed its ugly underbelly – those who took the biggest advantage of the capitalist system put their own profits ahead of society and weren’t required to take responsibility for it.

Corporate America (and many big corporations in other countries) disrespected society by doing things to cause social damage and costs, and profiting from it. Capitalism has few controls to prevent this type of dysfunctional behavior – it is, for the most part, a system based on voluntary compliance. Control is handled through minimally invasive government regulation (“deregulation”) and a reliance on a tort system where attorneys sue companies and force them to be responsible for “social costs.”

The current system is well intended, but it is not good enough to prevent major problems. Many corporate executives have lied about their financial statements, selling their own stock to state pension funds and the general public. When the accounting scandal is uncovered, the stock drops like a rock, and the pension funds and individual stockholders end up with huge stock market losses. This is one example of “social costs.”

When companies sell certain food, pharmaceutical, alcohol and tobacco products that can be considered “addictive” and destructive, in most cases they profit handsomely. It is the consumer of the product that winds up with medical problems, and the medical bills are paid by the consumer, their insurance companies or the insurer of last resort – the government. Because the sellers of these products don’t pay for the damages they caused (and especially because they never disclose that their products would knowingly cause these damages), it would be fair to pass on some of these social costs to these companies. Even if the seller makes full disclosure, they should still be held accountable for their share of the true costs.

Consider the example of the insurance business. The insurance company collects its money in the form of premiums. If any policy holder has a loss, the other holders will pay for the loss by having their premiums raised.

The comparison is that the government is like an insurance company, except the taxpayers act as the policy holders. If a business fails to pay its social costs, the government acts as the insurance company, and the policy holders (taxpayers) eventually have to pay in the form of higher taxes. For example, if WorldCom’s bankruptcy means it can’t pay for the Internet backbone, the government will likely pay to keep it running. As a result, American taxpayers will pay some of WorldCom’s bills – while WorldCom management was building mansions with money the company never really had.

“Excise taxes” (sin taxes) are the customary fiscal policy tool used to control and limit sales of tobacco and alcohol products. The problem is that these taxes generally harm the consumer more than the company producing the product. Excise taxes on cigarettes account for more than half the price paid by the consumer. Social tax is a means of reducing excise taxes and pass these “social costs” and “disincentives” onto the sellers of these products.

In America’s war on drugs, the policy is to attack the sources of drugs abroad and in America, and pay less concern to the junkies addicted to those drugs. Why not use this same concept when determining who is responsible for “social costs?” In effect, it is like having an “excise tax” on companies.

What went wrong?
By the close of the 20th century, America’s capitalist system was generally considered the best economic system in the world. This helped cause “creative destruction” to the European “socialist welfare state,” forcing the creation of a European Union whose political ideology was “center-right.” America’s global and individual capitalism accelerated the decline and collapse of Soviet communism, and Chinese communism survives in name only.

At the turn of the millennium, governments, institutions, businesses and investors all aspired to the American business model. Institutions sought to apply American-style fiscal and monetary incentives and law; businesses adopted American-style management compensation and business practices, and acquired American companies; and investors moved their savings into America’s surging and “safe” stock and bond markets.
However, just two years into the 21st century, governments are still moving “right,” but for the wrong reasons (e.g., xenophobia); institutions are dumbfounded and confused; businesses are shocked in the changes to the American model, and investors are dumping their American stocks and bonds.

What happened? The obvious answers are the front page headlines about the American stock market bubble bursting, over-hyped growth in the Internet, high-tech and communication industries, and the growing disclosure of corporate accounting scandals, financial fraud and conflicts of interest on Wall Street.

The results are clear, but a sobering look at the causes exposes the ugly downside of America’s current version of capitalism. The good news is that a new system of “social tax” can fix these problems.

Almost every American industry, when left to its own devices (which is the main dogma of capitalism), has caused havoc, damage and destruction to Americans and the American economy. We are just now waking up to this damage and, as American taxpayers, having to pay the bill to fix it. That is patently unfair, in any economic system. Those who cause the problems should pay to fix them. This is the underlying premise of the social tax, and its time has come.

The current system needs change
Paul O’Neill, the U.S. Secretary of the Treasury, has called the current income tax system an “abomination.” He wants to scrap the existing tax code and starting over from scratch, building a less complicated and fairer tax system. Under the existing “progressive” tax rate system, as income rises, so do the tax rates. The higher income people pay extra taxes to offset the lower taxes paid by the lower income people. Certainly, the progressive tax rate system has an admirable intention for a civilized society.

Unfortunately, the existing system has become a political battle. Democrats have argued for higher taxes for the rich, while Republicans have argued for income tax rate cuts for those who are most contributing to the economy. Both parties have used the tax code for “fiscal policy,” a means to provide a “carrot” to control the behavior of taxpayers. For example, if the government provides tax deductions and credits for companies that invest in alternative energy sources, the upshot should be that more companies will invest in alternative energy sources.

In reality, though, the energy industry – which is dominated by oil and natural gas companies (fossil fuel producers and marketers) – has not reacted fast enough to the fiscal policy incentives. Social tax takes fiscal policy to the next step. It not only provides the “carrot,” it also provides the “stick.” In other words, if the energy companies don’t take advantage of these new tax opportunities, then a progressive social tax can be used to provide further incentives. Companies that fail to convert to clean energy will have a higher social tax rate. Social tax is similar to the concept of “fiscal policy” and “fiscal incentives,” but it differs in that it has an aspect of responsibility attached to it.

It makes no sense to tax simply on income. It makes more sense to have a “flat tax” on all income, regardless of the amount, and use a progressive rating system for social tax. Social tax has always been a part of traditional modern day economic theory, but an actual social tax has never seen its rightful day on the political and business landscape. This is radical change, so it makes sense to phase in the progressive “social tax” rates with the existing progressive system. Eventually, the existing progressive rates can be flattened out.

Who should pay a social tax?
When tobacco companies lie for decades about nicotine, and smokers die, the tobacco companies – and not America’s non-smoking taxpayers – should pay for the damage they caused. As mentioned before, excise taxes designed to make cigarettes more expensive only hurt the consumer. It would be better if the “social tax” was directly levied on the tobacco companies.

America is presently fixated on “accounting scandals” in corporate America, but a much bigger story that requires our attention is the “ethical scandals” in American business. It’s time to connect the dots and discover the disturbing trend in American capitalism that can only be corrected with a new social tax.

The New York Times reported on July 7, 2002, about the “fat problem” in America. The story said that Americans were led to believe that “low-fat,” “high-carbohydrate” diets were required to fight obesity and heart disease. As it turns out, we have been led astray since the 1960s and, as a country, become chronically and dangerously obese. Who’s to blame, and who should pay for problems such as health care, diet programs, cholesterol-lowering pills and death? As of now, the American taxpayer is paying.

Earlier in the summer of 2002, The New York Times also reported that meat companies can fatten up cows faster and more effectively than before by feeding them grain rather then natural grass from the range. Fat cows and fat people, all eating grain and other “low-fat” foods, are one in the same. The article pointed out that food companies have greater profit margins on grain and processed sugar products vs. natural meat and vegetable products. Moreover, they can successfully market “differentiated” grain products (e.g., different cereals). Read the stories closely and realize the truth may be that American food companies knew about the dangers of their “low-fat, high-carbohydrate” food products and diets. Connect the dots.

Remember that the cow did not even have to be bombarded with tantalizing advertisements to stuff its face; it grew fat as fast as possible by gorging on carbohydrates. As the article points out, carbohydrates create a vicious cycle that drives the body to gorge on even more food – even if it isn’t required. Doesn’t this sound like the evil planning conducted by tobacco companies in their deadly use of nicotine to create addictive patterns in consumers? Certain ingredients pumped into the body can cause additive re-use of those ingredients, and no amount of education can stop this addictive behavior.

Wow, we just indicted the food industry – the leading packaged goods companies, the fast-food industry, and their collaborators on the farms and elsewhere. Can it be that even America’s breadbasket is as corrupt and guilty as American tobacco?

Oil companies pollute the environment, and not all of them pay to clean it up. Over the past few years, some oil companies have made progress – but only after being forced to do so.

Automobile manufacturers have pushed gas-guzzling, high profit margin SUVs on Americans to win their war against Asian compacts. The government has been complicit, because “as goes Detroit, so goes the American economy.” The tire scandal involving Ford and Firestone has shed some light on the damage the auto industry has done to America, but this story has not fully developed, and it was knocked off the front page and sent to the back of the media’s mind by terrorism and accounting scandals.

Wall Street and big banks have cooperated too closely with big business in creating accounting scandals. American and global investors – not the guilty parties – are paying the price.

Major accounting firms have conspired with big business to perpetrate accounting scandals, and they are not paying the price – investors are.

Managements have paid themselves with stock options, run up stock prices based on a house of cards and phony accounting, and then cashed out for obscene wealth – all at the expense of the investors.

The list goes on and on.

Heartache
Tax systems strike at the heart of society. When humankind was “hunters and gatherers,” it was pure capitalism without the need for a wide social system of taxation. Each small group of hunters and gatherers fended for themselves. No one small group had enough loot for others to pilfer.

When humankind evolved into an agrarian society of farming, society evolved with different functions, and a tax system evolved with it to transfer payments between the functions. Farms produced large quantities of food, and it became profitable for pirates to steal that food. Society needed armies to protect the food. To pay the armies, they needed accountants to count each individual’s food units and tax them accordingly.

Society has obviously evolved significantly from those ancient times, although some sort of taxing system has always been needed to determine who should pay money on their possessions and how much they should pay. The arbiter of tax is the government, and the agent of tax is the accountant and assessor. However, the system is flawed.

Why should a doctor work 80 hours a week saving lives and build up a nice nest egg for his family, only to have the government take half his money upon his death? It’s shameful to make the doctor who saved lives pay a “death tax” while tobacco companies who killed the people the doctor tried to save pay no tax because they re-incorporated in Switzerland and evade domestic taxes. That is patently unfair, and it cannot be allowed to continue. In this case, the tobacco companies should pay the tax, and the doctor should be able to avoid it.

Why should millions of Americans who have lost tens of thousands of dollars in the stock market be denied tax deductions because they exceed their “capital loss limitation” of $3,000 per year? The corporations, brokerage firms and banks that perpetrated the financial crimes that caused these stock market losses are allowed to evade taxes on their ill-gotten gains using phony tax deductions, “tax products” and offshore schemes. That is outrageous and cannot be allowed to continue. These corporations, brokerage firms and banks should pay a social tax and pay into a social tax fund which can be used to reimburse investors for a portion of their losses.

Banks are known for parking profits offshore and paying only a minimal amount of taxes. Additionally, banks have become less useful in the age of the Internet? Every time you mail a check, it is incredibly unproductive. You waste time preparing it and the envelope, and you spend 37 cents to mail it. The person you sent the check to then must wait for it, then go to a bank or mail the check again to a bank, and wait for it to clear. This is outrageous, since the bank makes the money on this float, and the consumer is inconvenienced and damaged. The bank should pay additional social taxes until they deploy e-banking, which has been used in Europe for decades.

Social tax, not socialism
Socialism, a popular political system in Europe, caters overwhelmingly to the worker and the welfare state. It also limits suppliers and restricts supply. It assesses an onerous “value-added tax”, which penalizes value. The social tax does the opposite – it penalizes the decline of value, which is much more fair.

Socialistic companies do what the state thinks is best for consumers, but these companies don’t innovate or use “creative destruction,” two important forces in a modern economy.

Capitalism is better then socialism and communism, because you give maximum incentive to the suppliers to access, create and fulfill demand, for their own profit. Take away any part of this freedom to innovate, create and deliver for profit, and supply will not be there to fill new demand. The “unencumbered” profit motive is what makes capitalism work. However, the simple problem that needs fixing is the supplier needs to be responsible for his product from cradle to grave, and not just to the point it dumps the products and services onto consumers.

The supplier is responsible to the consumer until the supplier’s product has concluded its reasonable life. This is similar to a product “warranty.”

Currently, the American capitalist system allows suppliers to walk away from their responsibilities when their product or service is purchased by the consumer. In many cases, if a consumer has a problem, their only recourse is the “tort” legal system. That works fine for the lucky few who engage attorneys and win. However, the American taxpayer is again left paying for most of the damage.

Social tax works best with "deregulation" rather than "over-regulation"
As a consequence of "corporate malfeasance" at companies such as Enron (in the energy industry), WorldCom (in the telecommunications industry), and Citigroup and JP Morgan Chase (in the banking industry), Congress is rushing to "re-regulate" these industries which had previously been "deregulated."

Social tax can provide a means to exert influence over "deregulated" industries. It was recently reported that many of America's most prestigious economists predict Congress will err and “over-regulate” where "deregulation" should be allowed to take its course. These economists advocate fixing the system of corporate abuses, but they do not want to see Congress rush into new regulation. They point out that regulation can stifle innovation and the free market system. As one economist pointed out, when an industry becomes deregulated, it may act like a "child out of a crib." That child will make mistakes and take advantage of this newfound freedom – in positive and negative ways.

Social tax can accomplish some of the same things that regulation seeks to accomplish, but it may be less of a harness on innovation.

Here’s one idea: When an industry is "deregulated," it is automatically assessed a higher social tax. Depending on the circumstances, the social tax can be paid into government coffers or into the social tax fund.

The system can work
Social taxes are not additional taxes to be burdened on American industry across the board. The social tax system is merely a new way of setting “progressive” tax rates. However, instead of these tax rates being based on income levels, they can be based on “social damage” levels. For example, tobacco and food companies with assessed social tax “damages” will pay the highest corporate tax rate of 34 percent on all income. Doctors who save lives and cause no harm will pay the lowest corporate tax rate of 15 percent.

If the social tax assessor cannot find that a company has done any harm – but believes that social damage will occur in the future – then the “social tax premium” – the difference between the highest and lowest corporate rates – is paid into a social tax “fund.” Monies in this fund will be returned to the company if in fact the foreseen damages do not arise. In the meantime, fund proceeds can be used by the managers of the fund to invest in alternative solutions.

A monopoly such as Microsoft may not cause clear damage to the economy, like obesity or smoking addiction, but it should pay into a social tax fund that can be used to invest in companies that compete with Microsoft, such as Linux. As a result, Microsoft and others will dread these social taxes, and they will modify their capitalist behavior to avoid these taxes.

For example, the food companies will conduct proper studies (which they may have already secretly done) and start selling Americans a proper diet. Fewer Americans will die from obesity-like causes, and these companies will have their social tax rate reduced. The companies will end up with the same bottom line, but it will be easier to get there, and their image will be much better.

Social tax “assessors”
A real estate tax assessor comes to your home and uses “absolute measurements” for your dwelling and land data, such as square footage, acres, and number of fixtures and other units. The assessor then uses “subjective reasoning” to consider the town’s overall real estate market value and home-by-home values, looking at recent sales and what buyers were looking for. After establishing a tax base, the assessor goes about allocating assessments to each home based on a “grading factor.”

In the case of the social tax assessor, the same concept applies. The assessor would allocate a higher social tax “grade” to those industries and companies causing more social tax costs.

People might think that an “assessor” responsible for establishing social tax rates smacks of the government acting as a “Big Brother.” To prevent this, the system being used must utilize objective, scientific technologies, and must meet the approval of taxpayers.

If the people think the assessor’s findings are merely a case of “sour grapes,” or if the assessor is excessively negative, that will not help the concept of the social tax. Breaking things down into the “bad guys” paying more taxes and the “good guys” paying less tax may be catchy, but this will not be the underlying theme of the tax.

How the social tax would work
Consider existing corporate tax rates. The first $100,000 is taxed at a lower rate (and the rate depends on the corporation), and then the rest at 34 percent. This progression is much less than individual tax rates, which range from 15 percent to 37 percent.

The top corporate tax rates can be cut by a few percentage points and the social tax can be implemented. All corporations can pay – let’s say – 31 percent as a top rate. Depending on a company’s business category (i.e., mining, financial, etc.), it would pay between one and six percent more. After the social tax is implemented, overall tax revenues remain about the same – except the companies responsible for greater social costs pay more.

With today’s technology, databases, and computer hardware and software, it is possible to implement a social tax system based on objective evidence, gathered and administrated in an independent manner, free of political and moral sentiment and persuasion. The challenge is to design new “data mining” systems to review public databases and determine which companies and industries have caused which social costs and to what extent. For example, a software program can search every lawsuit – ongoing and settled – to see the extent of smoker claims, or certain types of cancer tied to certain toxins, or SUV/tire accidents. These searches can be done by region, or nationally. With today’s technological advances, this can be done, and it will assure independent results.

Every American who receives a credit card offer has already had their credit rating, risk potential, previous damages, etc., analyzed by the card company’s database. This is also true of insurance underwriters and banks/credit lenders.

The social tax system will require the above types of information, and it will also require taxpayers to adhere to the current system of voluntary tax compliance. Income tax forms can be easily modified to list a series of questions that generate a simple calculation of social tax rates – the same type of questions Americans must answer every day, when they apply for a job, a loan or an insurance policy. Questions such as: Have you ever been convicted of a crime? Have you ever declared bankruptcy? Have you ever defaulted on a payment to a credit card company? The foundation of the social tax system is to determine who is responsible for social costs. This is not a witch hunt; rather, it is merely proper accounting and investigation techniques. It is not based on value judgments. The goal is simply to transfer the bills to the parties responsible for causing them.

No new tax system has a chance of passage and/or success unless it curries the favor of the general public, Congress and the IRS. Social tax can be passed because it can be designed to be fair and integrate with the current system. It can be sold to the public because it respects the virtues of progressive taxation and fairness. It can provide a tax cut for higher-income taxpayers because social tax replaces part of their highest progressive income tax rates. It can also provide a tax cut for middle- and lower-income taxpayers in the sense that their excise taxes are reduced and their social cost burden is reduced, freeing up budgets to pay for other programs that benefit them. Congress can use social tax as another effective additional fiscal policy tool, and the IRS can easily administer this system with one simple form without increasing administrative and enforcement costs for the IRS.

Social costs are wide ranging, but with careful analysis, there will be many instances where different types of social costs can be objectively determined and traced back to a certain taxpayer. The social tax assessment system will be challenging and controversial, but it is possible to implement in a fair manner, and it will make the entire tax system more focused and fair.

If you are interested in my idea for a "social tax," please e-mail me, Robert A. Green, CPA, at rgreen@greencompany.com. Or, call me at (212) 658-9502.

Here is an email from someone who appreciates this idea.

-----Original Message-----
From: Exxx Myyyy [mailto:emyyyy@mxxxxxx.com]
Sent: Tuesday, July 08, 2003 12:33 PM
To: socialtax@greencompany.com
Subject: Social Tax is a Great Idea

Robert,
Thank you for proposing and advocating for a social tax. You are doing some great thinking.

I totally agree on the concept of the "social tax." I have thought of this myself for years from the perspective of the environment. Force the polluters to include the cost of pollution in the products produced and they will find a way to reduce the pollution. Makes sense. There is nothing more important than the quality of the air we breathe, the food we eat and the water we drink. Without these we simply will not exist. The increases in diseases are a very large result of the degradation of these elements of life. The health community should be pushing to clean these up but they are only concerned with "after the fact" disease, not preventing disease. This is not right.

You should look up www.mbdc.com - McDonough Braumgart Design Chemistry. Bill McDonough, an architect, and Michael Braumgart, a chemist, are doing the most advanced work in the world helping companies to create zero pollution products and manufacturing processes. They believe the end result of all products - the waste of manufacturing processes and the end of the useful life of the product itself - should be either a "biological nutrient" that can be recycled into the earth or a "technical nutrient" that can be recycled at the same quality level at which the original material was first created. Bill McDonough wrote a book called "Cradle to Cradle" discussing these concepts. This goes beyond "cradle to grave" since all material gets continually recycled. They have worked and are working with some very large companies to create products that fit the criteria above. I think you will find their work extremely interesting.

Back to social tax. I think it would be a monumental task to implement but it is a philosophy that we need to apply. If the motivation exists, then the means to implement will be worked out.

I personally believe that no change of this magnitude or of significant efforts to reduce pollution will occur without the MOST important change that must precede all other changes, that of public financing of political campaigns. If you are not familiar with this - already passed by Maine, Vermont, Arizona, Massachusetts - and already implemented and elections held with public financing in the first 3 states mentioned, then you need to learn about this also - www.publicampaign.org. I feel it is imperative that the money influence MUST be taken out of politics before our society can change in the most positive directions that are so vitally needed.

Thanks for all your efforts for a social tax.
Exxx Myyyy
St. Louis, MO