Positive Externalities — You didn’t build that!

18 November 2012 by Graham Morehead, posted in economics, social systems

Positive Externality: a benefit to one party at the cost of another party
Example: paved roads

Many (I hope most) corporations in this country have physical offices which employ people. Most of these offices are reachable by driving on paved roads. If you've ever paved a small driveway you might understand how expensive it is to create and pave a flat surface. Once you've added curves, signs, blasting through rock, and multiple safety issues, it becomes obvious that this nation's roadways were built at a huge cost.

Corporations benefit greatly from having access to these roadways. By its manifold design, our tax code allows many corporations to pay very little tax. Some corporations may go multiple years paying zero taxes http://www.ctj.org/pdf/notax2012.pdf. If a company pays no tax in a given year, but benefits from a resource (e.g. roadways), that resource is a positive externality.

Elizabeth Warren brought positive externalities to the forefront of this country's political discussion. Here is a now-famous quote from her:

"There is nobody in this country who got rich on his own – nobody. ... You moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea. God bless – keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along."

Personally, I don't care how things are taxed as long as it's efficient, fair, and benefits this country's economy (even if it's at the expense of other countries). Right now, our tax code is opaque and arcane. Many people have this vague notion that the "rich" are getting away with little-to-no taxes (not true for those in the 35% bracket), while those of us not able to jet-set are stuck here and end up footing the tax bill. I like the idea of a flat tax applied to all income equally, be it salary, tips, or capital gains. Why should hard-sweat income be taxed at a higher rate than passive income?

Positive and negative externalities (e.g. health costs associated with pollution) should be included in our calculations and definitions of what's fair. Thank you, Elizabeth, for bringing this topic to national attention!

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References:
http://en.wikipedia.org/wiki/Externality
http://articles.philly.com/2012-07-30/news/32924415_1_elizabeth-warren-american-crossroads-president-obama


One Response to “Positive Externalities — You didn’t build that!”

  1. Scott Lahteine Reply | Permalink

    The human externality is clear. We are asked to give a major portion of our useful lives, often to the detriment of health and relationships, to serve the machinery of capitalism. Of course the artificial profits at the top, inflated by usury all up and down the line, must be heavily reinvested in the humanist underpinnings of society. It forever amazes me that we allow corporations to function solely on shortsightedness, and not in concert for our collective benefit. It shouldn't surprise us that they work against us, even funding disinformation to keep us down. The time for remediation is long past due, and that's just a first step in putting our resource-exploiting house in order and bringing scientific thinking to prominence in forming solutions to our economic and power equity problems.

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