CFD 2.0: Allocation of Dividends to Families with Children

The Citizens’ Climate Lobby [CCL] advocates a system of Carbon Fee and Dividend [CFD].  It has done, and is doing an excellent job of mobilizing staff and volunteers to lobby members of Congress to enact legislation to implement CFD.  It has done less to improve and refine the design of the CFD system itself.  CFD 2.0 is a collection of proposals that address this need.

This is the first proposal.  It deals with the formula for allocating carbon fee dividends to families with children.

I believe all will agree that some carbon fee dividends should be allocated for children, but that a child should not receive the same allocation as an adult.  The challenge is to find a formula for allocation that is between these two extremes, and at the same time is both fair and perceived to be fair.

The current CCL formula follows James Hansen’s proposal in his 2009 book Storms of My Grandchildren.  A child is defined as a person of 18 years or younger.  One half dividend share is allocated to each of the first two children in a family, and nothing to children after the first two.  Let’s call this Version 1.

I recommend a different formula.  Specifically:

Treat all persons the same, after accounting for age.  Allocate one eighteenth of a share to each child for each year of age up to 18 years.  Allocate one share to each person older than 18.  

Let’s call this Version 2.  A spreadsheet is attached that considers four families that differ by number of children and by age of the children.  It computes the dividends for the children for each family in a typical year using both versions of the allocation formula.  To see this analysis go to spreadsheet.

In the spreadsheet and in the narrative below I assume a dividend share to be worth $1500.  This is the average value over 40 years from a CO2 reduction model made in 2010.  For more on this go to model.

Advantages of Version 2 over Version 1 :  Reasons in Brief  

[1] Dividend amounts are greater for families with 4 children than with 2.  This is reasonable and fair.

[2] Dividend amounts are greater for families with older children than with younger children.  This is reasonable and fair.

[3] No preference is given to families with only one or two children.  This heads off objections from parents with more children and avoids the political minefield of questions concerning proper family size and family planning.

[4] Computation is easy for both versions.  Version 1 requires data on family structures, and these may change every year.  Version 2 requires only birth dates and these never change.

[5] Version 1 must get data from the complicated IRS database.  Work arounds are required for people, who are eligible for dividends and not in that database.  Version 2 can get data from the less complicated Social Security database, and that database can include all persons eligible for dividends.

[6] There is no need to access the IRS database for information on persons, and no need to risk compromise of the privacy of the financial and personal data there.

[7] Version 2 makes it much easier to set up an independent agency to administer CFD.  This produces many more advantages that will be described in another proposal.

Advantages of Version 2 over Version 1:  Reasons Elaborated

Below I elaborate on the reasons listed above and use the same numbers.

[1] The purpose of dividends is to return carbon fee revenue to the private economy in a manner that helps people adjust to the rising costs of fossil fuel energy and learn to use less of this energy.  These rising costs will be greater for families with more children.

It is appropriate to allocate more dividends to larger families.  Version 2 does this.

[2] I helped my wife raise two fine daughters.  I expect that most parents will agree that the costs of raising children, and the energy they consume, increase with age.

It is appropriate to allocate more dividends for older children.  Version 2 does this.

[3] Some people who oppose the implementation of CFD will grasp for any trivial argument, one they may not even believe themselves.  Consider the example of the Affordable Care Act [ACA].  The claim that undocumented immigrants would receive health care under the act was largely bogus and consumed a lot of time.  People acting in good faith could have resolved the issue quickly.

We, who promote CFD, should anticipate and head off as many of these unnecessary arguments as possible.  Some examples follow.

Many thoughtful people believe that rising population aggravates existing problems and produces new ones.  They propose that couples have no more than two children, and they promote family planning to help achieve this goal.  These proposals are controversial in some circles, and arguments over them may become bitter.  They do not belong in discussions of CFD.

Apart from above, the decision to limit dividends to the first two children appears arbitrary.  Some parents with more children will complain that this is unfair.

Someone may propose that all children receive half shares of a dividend.  Because the total dividend amount for a large family will become significant, someone else may argue that this practice will encourage irresponsible parents to have more children.

It is best to avoid all arguments of this kind and treat all children the same, after accounting for age.  Version 2 does this.

[4/5] Administration of dividend payouts will be much easier with Version 2 than with Version 1.

On the CCL website is a report entitled “FAQ:  Paying Dividends from the Carbon Fee to American Residents” and authored by Allen H. Lerman and Danny Richter, PhD.  Mr. Lerman was an economist with the U.S. Treasury for 43 years and worked on tax analysis and policy.  Dr. Richter is CCL’s legislative director.

To review the Lerman/Richter report go to report.

Printed out the report runs over nine pages.  Page 1 is a list of 36 FAQs.  The remaining pages contain the answers to these questions.  There follow some issues raised  by these answers.

[a] Those who administer CFD will require a new database with information on those who are eligible to receive dividends.  The Lerman/Richter report stipulates this in Section 19:  “Even  if handled by the IRS or the SSA, a completely separate staff and completely separate accounting, recordkeeping, and computer systems would be necessary for the Dividend payments.”

A big question for the new CFD database is how to populate it.  Where will the data come from?  The report indicates that most will come from IRS.  I show below that it should come from the Social Security Administration [SSA].

[b] The report lists the information required for a household in Section 11:  “Names, addresses, and social security numbers for the covered adults and dependent children, and bank account information for use in making Dividend  payments.”  These data can be taken from either the IRS or SSA database and put into the CFD database.

I show below that the CFD database should also have birthdates and citizen/immigration status.  IRS does not have these.  SSA does.

[c] The report indicates that most information regarding households and eligible dividend recipients will come from IRS tax filings.  Section 14 states that there were 147 million filings in 2013 that covered about 290 million people.  It estimates that about 25 million other people were not included in the IRS filings and “would have had to be covered on forms with their identifying information in order to begin receiving Dividend payments in that year.”

In other words, about 8% of potentially eligible dividend recipients were not in the IRS database in 2013.  To receive dividends they would have had to file some kind of form.

[d] The CCL recommendation is that carbon fee dividends be subject to federal income tax.  It follows that all dividend recipients should be registered in the SSA system and have numbers that will serve as tax IDs.  When this is done, and the Version 2 formula is used, there will be no need to use IRS data and to supplement this data with filings on a new form.

CFD administrators will not have to get any data from IRS, but they will send 1099 forms to IRS each year to report payments to dividend recipients.

[e] Experience with the ACA shows that opposition to CFD will not end with adoption of legislation to implement the system.  In fact, it may grow as carbon fees grow, prices of things that depend on fossil fuel rise significantly, and people and businesses that have done little to reduce their dependence feel the bite.

The transition from fossil fuel will take decades.  My own goal is to be completely off fossil fuel in the U.S. in forty years [OFF in 40].  It is essential that the program earn and retain broad public support.  Program administration must be seen as efficient and fair.    There follow two examples where policing to assure fairness will be necessary.

I assume here that only those immigrants who have permanent visas will be eligible for dividends.  It follows that CFD administrators must have some means to verify this.

SSA routinely verifies the legal status of persons who apply to be in the system.  IRS does not have an equivalent operation, and will have to set one up to handle the new people who file to get carbon dividends.  This is a reason to use SSA data and not IRS data.

Most people are honest, but not all.   With Version 1, a couple with children of ages 13, 15, and 17 are entitled to two full and two half shares.  I am assuming here that a dividend in a typical year will be worth $1500, so the two full and two half shares  will be worth $45oo.  The parents may lie and declare the older child to be 19.  Then they will get another full dividend worth $1500.

To catch these frauds, CFD administrators will need birthdates for dependent children.  They can get this information from SSA, but not from IRS.

The second policing challenge above will go away with Version 2 dividend allocation and birthdates from SSA.

[f] The most frequent objection to CFD that I hear is that we can’t trust government to return all net fee revenue [gross revenue minus administrative expenses] to the public.  This is a major argument for setting up an independent agency that can be audited easily, and I will return to this in another post.

A similar concern will develop as people understand better the formula for allocating dividends for children.  They will want to be sure that the formula is applied exactly as the law directs.

Administration of the allocation process will be much easier, and less error prone, with Version 2 than with Version 1.  And it will be much easier for an inspector general to audit and report the results.

[g] Version 2 proposes that dividends be sent to individuals, not to households, roughly doubling the number of payments.  Section 8 of the report talks about “the extremely low cost of making payments by electronic transfers to bank accounts…”  Section 21 states that “automated payment costs are very low…”

The total cost of using Version 2, even with the additional payments, will probably be much less than using Version 1 with the IRS database, that must be supplemented with additional filings.

[h] The Lerman/Richter report describes a complicated process for allocating and distributing dividends, and it prompts more questions than I have addressed above.  This post is already long and I will leave those questions for another day.

[6] The IRS has tons of private financial and personal data, and there is a strong tradition that this data should not be disclosed and used for other purposes. The Lerman/Richter report notes this in Section 36:  “Yes, section 6103 of the Internal Revenue Code generally imposes strict nondisclosure requirement on IRS’ taxpayer information including information IRS receives from other government agencies.”

The report further states:  “Thus, the enabling legislation for the Dividend program would need to include the appropriate amendments to section 6103 … to permit the relevant government agencies and contractors to have access to the IRS data that they will need to implement the Carbon Fee and the Dividend.”

There is a similar statement for SSA data.

I propose that the CFD database be populated initially by a one-time transfer of all the necessary SSA data.  Limit future data transfers to persons that are added to the SSA database.  Hold dividend recipients responsible for notifying CFD administrators directly of address or bank account changes, and provide convenient ways for them to do this.

Some persons may be in the initial SSA data transfer, who have SS numbers because they have temporary work permits, but who are not permanent residents and not eligible for dividends.  If their visa status changes to permanent, hold them responsible for notifying CFD administrators directly and providing appropriate proof.

With this system there will never be any reason for CFD administrators to use or access IRS data.  And no reason for tax filers to worry that the privacy of their data will be compromised.  And no reason for those, who are not tax filers now, to start filing.

Of course, anyone who wants a dividend will have to register in the SSA database.

Limit transfer of SSA data to that for new people after the initial large data transfer.

[7] Because CFD administrators will need nothing from IRS, and they will need little from SSA after the CFD database is populated the first time, it will be very easy to put them in a new independent agency.  This is something I strongly advocate and will address again in another post.

Wrapup

There are many reasons for CCL to replace the Version 1 dividend allocation formula with Version 2.  They fall into three categories:

• The change will distribute dividends to families with children in a manner that better reflects the needs of the families.
• It will open a path for a simpler and lower cost method for allocating and distributing dividends.
• It will remove many potential sources of argument that can undermine support for a system of Carbon Fee and Dividend, both before and after its implementation.

I see no downsides to a change from Version 1 to Version 2, apart from making and reporting it.  The longer we wait to make this change, the more difficult it will become.

Bill Allen    08-08-16 new    08-24-16 revised