Saturday, November 12, 2011

Over Subsidy, or Wrong Incentive?

The New York Times had a great article yesterday about the over-subsidization of alternative energy.  But the authors fail to mention the biggest problem with these kinds of direct subsidies for alternative energy.  They are addictive and create long-term corporate dependency on public subsidy. They anticipate and therefor reward failure.  What happens when the subsidies run out, when the government goes broke, budgets get cut, as they did in Spain?  Complete collapse of these kinds of subsidized industries.   They blow away like chaff in the wind.

There is only one sustainable way to support alternative energy, only one way that rewards success, not failure, where the disappearance of the incentive does not spell disaster: supply side tax cuts for green energy.  That means elimination of corporate taxes, capital gains taxes, sales taxes and estate taxes for clean, renewable energy investments.  Investors would be encouraged to invest in such businesses because their profits will be tax free, a huge advantage over other investments.  But that benefit is only realized by successful companies that can make a profit.  Only then does investment becomes keenly focused on finding and developing economically successful, competitive alternative energy business models, not unprofitable subsidy addicts.

We have directly subsidized enough alternative energy start ups in the United States.  It is clear we have already rewarded failures like Solyndra.  Now we need to separate the wheat from the chaff.  It is time to switch the incentive structure to find and reward the winners.  With supply side tax cuts for green energy, the most competitive, profitable alternative energy models will survive and thrive and attract private investment on their own merits, and unsustainable models will disappear.

The problem is not just over-subsidization.  It is the wrong incentive structure entirely.

7 comments:

Roger Kaplan said...

Great post, Rod! But why give them a tax break that others don't get? Are you saying they should get an investment tax break that Big Oil don't get?

R. Randolph Richardson said...

Excellent question, Roger!

There are several good reasons to support supply side tax cuts for clean, renewable energy, and different reasons depending on your political orientation, I might add.

For instance, Milton Friedman once said "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible." There are plenty of other arguments I could make about putting downward pressure on energy prices, etc. But this one should be the clincher for Friedman fans: it is a TAX CUT. As such, the net benefit to the economy from cutting taxes will be positive. Forget global warming, forget foreign oil dependency. If, as many free market scholars argue, cutting taxes is the best thing to do right now for the economy, then cutting some taxes is the next best thing. You do what you can.

However, if you are asking "why promote clean, renewable energy preferentially?", there are a lot of folks, left and right, who have made the point, more knowledgeably than I can, that it is critical to avoid the negative externalities of fossil fuels: global warming, economic and strategic vulnerability (and hard costs) arising from oil dependency, national security considerations, many sorts of pollution, depletion of finite resources, etc. Some of these folks may even be our neo-con friends, like Daniel Pipes and Frank Gaffney (http://www.setamericafree.org/openletter.htm). I am not trying to judge, promote or add to those arguments, other than to say that they are serious, and the consequences of dismissing these concerns, if wrong, could be bad. Prudence dictates that if something can be done to promote alternative energy and lessen the social costs and risks of fossil fuels, if it would do more good than harm, then it would be better to do it.

If you are asking "why specifically supply side tax cuts for green energy?", the answer is that, if it seems something must be done, supply side tax cuts are the least harmful, most beneficial of all possible incentives for green energy. Indeed, per Uncle Milton, it would probably be a net positive for the economy as a whole, by lowering the overall tax burden. Therefor, if the political majority of the US has decided to promote alternative energy for whatever reason (as seems to be the case) this is the best way to do so. For those who wish to promote alternative energy, it is the only way to promote success, not failure. For those who do NOT wish to promote alternative energy, it is the best middle ground compromise that is (a) cheaper and better for the economy that any of the alternatives (carbon taxes, direct subsidies, increased regulation and mandates), and (b) sure to not waste money on failures, sure to only benefit the most successful, profitable alternative energy business models. Further, unlike direct subsidy, it is the only kind of incentive that will not create corporate subsidy addicts, that can be scaled back in a reasonable time frame without killing to the economy or the industry.

(Cotinued...)

R. Randolph Richardson said...

(Continued...)

But there is another, even more important reason: It can help heal the left/right schism in America. It is a win-win solution that both lowers taxes, replaces costly subsidies, taxes and regulations, and combines both environmental and libertarian concerns. And sets the stage for more of same.

For the right, it is a great way to teach the left to love supply side tax cuts. The left and much of the political center believe, erroneously, that supply side tax cuts are a boondoggle. Think of this then as a much needed demonstration project showcasing the power of such tax cuts to foster investment and successful, profitable innovation in an area near and dear to the heart of the left. It could help set the stage for across the board supply side tax cuts. The big win for the right here is a possible thaw in the left's perception of supply side tax cuts as a result of this policy, and a willingness to replace costly, damaging big government approaches with approaches similar to this.

For the left, the promise of supply side tax cuts it is a great way to garner support from the right for environmental and alternative energy concerns. The big win for the left here is that left's abiding humanitarian concerns may become more palatable to the right if presented in a manner that reduces taxes, subsidies and regulations, allowing for further alliances in other areas following this model, such as health care.

For America, the ultimate big win of adopting solutions like this would be the restoration of something similar to the 18th-19th C. Liberal consensus, that combined a passion for freedom and free markets, with a powerful appeal to justice, rights, equality and humanity. That 19th C. consensus has largely fractured into two sets of concerns, claimed respectively by the the right and left of today. Restoring that consensus would mean smaller government, lower taxes, cheaper, more efficient environmental and humanitarian policies, greater prosperity.

I see supply side tax cuts for green energy as leading to (a) competitive alternative energy companies that can stand alone; (b) broad supply side tax cuts for the whole economy. I expect, as profitable alternative energy companies emerge, tax preferences will be reduced. I don't see any great argument for special tax breaks for fossil fuels, do you?

Catharine Macdonald said...

Good post!

Jim Murphy said...

Very well written. I will post this on our website tomorrow if it is ok with you.

Jim Murphy

R. Randolph Richardson said...

Go right ahead, Jim, just please post the link here. This is just a hasty comment, but I was thinking of editing and reposting in a day or two it as its own post.

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