A fascinating article in Time Magazine talks about ways that cities are changing their economic systems. They focus on Amsterdam, but it turns out that there are cities all over the world that are doing this.

This is related to the rise of “B Corporations“. Most corporations are “C Corporations” (although there are also “S Corporations”, and various forms of co-operatives). The rules and laws for each of these are different.

B Corps are a recent innovation, and the reason they were developed is because corporations are completely focused on making money for their shareholders. In particular, it is difficult for corporations to take into account “externalities“. Externalities include the environment (both pollution and the using up of scarce resources).

B Corporations attempt to make the price of a product or service reflect the true costs and benefits of that product or service for society as a whole. For example, a carbon tax increases the cost of a product to reflect its damage to the environment.

The Time Magazine article gives an example about Amsterdam’s “true-price initiative”:

The label by the zucchini said they cost a little more than normal: 6¢ extra per kilo for their carbon footprint, 5¢ for the toll the farming takes on the land, and 4¢ to fairly pay workers.

This example focuses on the costs of this initiative. But taking account of externalities can be done in a revenue-neutral way. For example, I would propose that we reduce many of our other taxes. In particular, I think sales taxes are stupid, and income taxes should be restructured. After all, we obviously want to encourage people to make money and to buy things. Both of those things significantly help our economy.

Taxing something tends to strongly suppress it. In fact, when you read the zucchini example, did you become concerned that people would tend to buy less food if it suddenly became more expensive? This could be compensated for by not charging sales taxes and lowering income taxes.

There are also taxes I would increase, such as inheritance taxes and property taxes. In particular, they should be restructured to make them more progressive. A progressive wealth tax would also be a good idea. And since volatility in the stock market is considered a very bad thing, I would add a transaction tax on securities. We could also add taxes on things that affect health, like we already do with cigarettes.

Bottom line: We should be taxing things that we want to discourage, and lowering taxes on things we want to encourage. I’m glad that cities are taking the lead on this, but I’d like it done at all levels of government.

I also want to point out that taking externalities into account actually strengthens capitalism. In fact, Adam Smith’s Wealth of Nations is about this kind of capitalism, and how it will benefit nations of people. Let’s use the “invisible hand” to make life better for everyone.

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