Taxing billionaires isn't the only way to grow the economy
Beyond Billionaires
Taxing the rich is a mutual campaign refrain. But, Drexel'due south Metro Finance Lab Director says, in that location are innovative other ways to invest in growing jobs and social impact
Mar. 05, 2020
It's difficult to avoid the topic of billionaires in Democratic politics these days.
Senator Sanders has focused on the 400 wealthiest people who together control $2.ix trillion to justify his agenda of broadly expanding the welfare land.
Senator Warren on the other hand, has proposed a wealth tax on households worth more than half-a-billion which would raise $3.25 trillion of federal acquirement over the next decade.
Vice President Biden, the frontrunner after Super Tuesday, shows less outright hostility to billionaires. Nonetheless, his proposal for raising revenue is similarly oriented to those of Warren and Sanders in focusing on taxing wealth rather than work (specially through capital proceeds tax increases and endmost foreign tax havens).
The exclusive focus on taxation diverts attention from another worthy topic in our view: where vast amounts of private uppercase is invested in the United States.
Back in January we wrote almost a number of public and private institutional investors, led past C40 Cities and BlackRock, that were beginning to examine their investment decisions––divesting from fossil fuels and investing in the clean economy.
This prompted u.s.a. to examine state and local public pensions in the U.Southward. more often than not. These are unique pools of capital letter, where public and private aims (and assets) are intertwined.
Public pensions (and all pensions really) should be role of the "good" coin in America'southward financial organization. When their investments practise well, this money supports the long-term economic security of the 137 million Americans with pensions.
These are firefighters, law enforcement officers, public school teachers, manufacturing and structure workers, and white-collar professionals––i.east., the people whose livelihoods progressives seek to support through their policies.
As of the well-nigh recent mensurate in 2019, there are $23.eight trillion of assets in American pensions. Only nether 20 percent of these avails ($iv.57 trillion) are from state and local public pensions.
PQ: Pensions should be part of the "good" money in America's financial system. When their investments do well, this money supports the long term economic security of the 137 1000000 Americans with pensions.
Employees rarely invest their own pensions. They instead rely on governing entities––similar public pension boards or state treasurers in the example of state and local pensions––that are obligated through their fiduciary duties to invest in a way that'due south within the interest of employees (i.e. seek marketplace rate returns).
These entities, in plough, delegate to asset managers where to invest. Considering of this, our hunch is that most country and local pensions––like most pillars of local wealth––are disproportionately invested in blastoff cities, particularly on the coasts.
Our work with Opportunity Zones has made it axiomatic to us that most wealth in smaller cities and the middle of the country is invested exterior its region––even equally many rich economic avails be locally.
This wealth export industry has been facilitated past a like network of players to those which public pensions delegate their investment decisions (many of which have narrow definitions of where and what to invest in).
Nosotros should be abundantly clear that we're not suggesting that public pensions all of a sudden accept lower returns or make politically motivated investments to invest in local projects. Rather, we're suggesting that there may exist investments that meet public pension return profiles that also see social goals (instead of exporting wealth from the community).
Merely given the money at stake, and the potentially salutary politics and economics, why are progressives not focusing more on public pension investment?
Partially it's because understanding the full potential requires understanding where public pensions are currently invested. This, it turns out, is exceedingly difficult.
Although we could hands find the asset classes of public pension investments, without proprietary information information technology's adjacent to impossible to find out what these holdings are. This is astonishingly depression transparency effectually public pension holdings.
Our theory is that this lack of transparency comes from iii different places:
- The serious pension underfunding crunch: When America'southward public pensions are examined, most accent is on the changing nature of their benefit plans, their unfunded liabilities, or politically salacious "pay-to-play" scandals. These are each vital focal points––currently information technology'due south estimated that there'southward a $1 trillion funding gap in state and local pension liabilities. However, the issue of this focus is that less attention is paid to where public pensions are investing.
- A focus on asset classes rather than holdings: Even when public alimony investments are examined, enquiry focuses on asset classes and non the specific holdings within these classes. This research oft traces the rise in pensions' alternative investments (individual equity, hedge funds, and real manor). While important, it doesn't tell us what projects or geographies this money is supporting.
- Delegation & lack of capacity breed ambiguity: The chronic underfunding of public pensions since the Great Recession has fed an increased pressure level to generate higher returns through alternative investments rather than a typical stock and bond portfolio. In response, the direction of public pension assets has increasingly been delegated to private asset managers (like Blackstone, BlackRock, the Carlyle Group, etc.) who, in turn, oftentimes invest in funds-of-funds and indexes.
The cyberspace consequence of these trends ways that taking stock of a specific public pension's holdings at any given time requires request land and local officials to inquire their asset managers where they're invested.
This is, to put it mildly, not especially transparent.
To exist articulate, in that location's a very real pressure driving each factor. Public pensions are caught in a tight bind between fiduciary obligations, low interest rates, and underfunding. This means that making whatever policy alter tin exist politically hard.
That's the bad news.
Emerging models
The good news is that at that place are some promising new models emerging for transparent and targeted investments—that leverage the fiscal arrangement for progressive aims.
PQ: Every bit we develop a broader projection post-obit the adept coin, Norway's model raises a question: Why can't we have a similar level of investment transparency for America's state and local public pensions?
In 2016, the U.S. Department of Labor issued new guidance that allowed pensions
to consider social and environmental impacts inside their fiduciary responsibilities. As of the final measurement in 2017, there are $68.eight billion (or approximately 1 Mike Bloomberg's worth) of pensions agile in these Economically Targeted Investments—although information is partial.
About 80 pct of these investments are partially or completely composed of land and local public alimony money. These assets are targeted across geography (east.grand., state-focused and underserved markets) and sectors like community development, business financing, affordable housing and microfinance.
However even these focus areas tell united states of america lilliputian about what the pensions are actually holding. For this blazon of transparency, nosotros detect Norway's Sovereign wealth fund to exist the gilt standard.
This fund is, uncoincidentally, a leading model of fossil fuel divestment. Just it besides has a tiptop-notch transparency tool that enables the public to see its specific holdings by nugget course, sector and geography.
At present, in that location are obviously differences between a national sovereign wealth fund and local schoolhouse teachers' pensions. For one, the funding source and fiduciary goals slightly differ.
Yet equally we develop a broader projection following the good money, Norway's model raises a question: Why can't we have a like level of investment transparency for America'south state and local public pensions?
If done right, we believe that public pension investments in identify can unlock a virtuous bike that builds community wealth past investing strategically in places. Nosotros see increased transparency on holdings equally one way to start a conversation to answer the question of where, in fact, the good money has gone.
At the very least, we promise it puts trillions of dollars—and even a Scandinavian model—back in the sights of progressive policy discussion.
Bruce Katz is the director of the Nowak Metro Finance Lab at Drexel University, created to aid cities design new institutions and mechanisms that harness public, private and civic upper-case letter for transformative investment. Colin Higgins is a Plan Director at The Governance Project.
Photo courtesy Gage Skidmore / Flickr 
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Source: https://thephiladelphiacitizen.org/taxing-billionaires/
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