U.S. Carbon Tax Considerations

This fall brought over 300,000 demonstrators to New York City to march together in the largest climate rally in history.  In anticipation of the United Nations’ 2014 Climate Summit, people from all over the world filled midtown Manhattan to demand action from global leaders.

At the summit, President Obama affirmed the United States’ commitment to facing this challenge.  He stated: “We have to cut carbon pollution in our own countries to prevent the worst effects of climate change.  We have to adapt to the impacts that, unfortunately we can no longer avoid.”  The United States, the world’s largest economy and the second largest emitter, is under pressure to lead the world by reducing our domestic carbon pollution through policy reform.

The key question is how to best encourage the reduction of carbon emissions from users.   Two of the most frequently suggested alternatives are cap and trade programs and carbon tax systems, both designed to provide financial incentives to reduce carbon emissions.

Cap and trade programs are already implemented in many countries around the world including the European Union. Under this system, a limit is set on the amount of greenhouse gases that can be emitted by covered companies, who then can buy and sell emission allowances to comply with the cap.  Over time the limit is reduced so that total emissions fall in the aggregate to achieve climate change goals.

Similar to a cap and trade program, a carbon tax system provides a financial incentive to reduce emissions.  A carbon tax requires entities to make tax payments based on measured emissions or emission inputs.  Proposals for prices in previously drafted bills range from $15 to $35 per ton of carbon pollution.  As this rate would be designed to increase annually, The Urban-Brooking Tax Policy Center has stated that the tax has the potential to bring in $1.2 trillion in revenue over 10 years.  This potential for raising revenue could be especially attractive to Congress as they try to fulfill their promise to reform our corporate tax system.

The simplicity and impartiality of the tax has led other countries to adopt a carbon tax system.  Some countries, such as Sweden, have experienced great success with the tax, drastically reducing emissions while raising revenue and maintaining an increasing GDP.  However, other experiences with the tax have not been as successful.  This summer, Australia became the first developed nation to repeal their carbon tax laws after a decade of heated political debate.  With these mixed experiences by other countries, questions remain as to how successful a carbon tax would be in the U.S. to simultaneously raise revenue, combat climate change, and maintain a competitive energy policy.

rupert_194x199Timothy Rupert
Professor and Group Coordinator
of Accounting; 
James Carey Fellow;
Golemme Administrative Chair




Philip Marx
Research Assistant

11th Annual 2014 Social Entrepreneurship Conference

Last week, D’Amore-McKim School of Business, in partnership with NYU Stern School of Business, welcome 110 researchers from more than 20 countries around the world to The Annual Social Entrepreneurship Conference.

During two days and a half, participants presented and discussed their latest research on social enterprise, strategies for creation and exit, innovative business models such as the Benefit Corporation, psychological attitudes of social entrepreneurs, to name a few topics.

Twenty Professors from the D’Amore-McKim School of Business attended the conference in part or in whole. Dean Hugh Courtney gave inspiring opening remarks, followed by Professor Dennis Shaughnessy from our Social Enterprise Institute, whereas Senior Associate Dean of Faculty and Research Emery Trahan granted the best paper award at a very festive reception held at the Top of The Hub.

The 11th instance of the conference, happening for the first time at Northeastern, was marked by high-quality discussions, outstanding keynote speeches, and more than ever, strong community building.

Read the full story here.

Sophie Bacq
Assistant Professor, Entrepreneurship & Innovation

Design: Impact and Challenge

Design has become as pervasive in the language of business as innovation, and rightly so. Deeply understanding the user, the importance of form and function, and expanding the possibilities of business models and service has propelled companies like Apple to blistering growth and profitability. Design is changing, not only because of new technologies like rapid prototyping and a sharing culture, but in the ways in which design is impacting both new and traditional industries. This Thursday, October 16, Northeastern University will explore these trends with an interdisciplinary conference, bridging schools, academia and practice. The day-long conference, DESIGN: Impact and Challenge, will be an eclectic mix of designers, business leaders, and academics. Four panel discussions will take place, discussing the implications of new design practices the impact of design on industries such as healthcare and finance, the challenges and opportunities facing design in the ever iterating world of agile prototyping, and the role of intellectual property. The keynote will be given by Lee Moreau, Principal of Continuum, a leading design and innovation firm. Join the conversation by following the #DAmoreMcKim on our social media channels.



Tucker Marion
Professor of Entrepreneurship & Innovation

The Sixth Anniversary of Lehman’s Collapse

Six years ago this month Lehman Brothers, a 158-year-old institution and one of the nation’s five largest investment banks, went bankrupt. Its demise produced the equivalent of a global financial blackout and marked the beginning of the biggest economic crisis since the Great Depression.

It was also completely avoidable.

Six years after Lehman’s collapse, the economy is still reeling.  In July, more than 10 million Americans were unemployed and another 9.8 million were underemployed. The labor participation rate of 62.9 percent is the lowest since 1978.

Lehman Brothers had become increasingly reliant on fixed-income trading and mortgage securities underwriting.  This went hand-in-hand with an increase in its leverage ratio, from 24 to 1 in 2003 to 44 to 1 in 2007.   Since much of this leverage took the form of very short-term debt, Lehman had to continuously sweet talk its lenders about the “solid value” of the assets it had pledged as collateral for these “here-today-gone-tomorrow” loans.

But this sweet talk was undermined by continued erosion of the housing and mortgage markets during the summer of 2007.  After Lehman’s stock price fell 37 percent from June to August, the firm closed its sub-prime mortgage arm, wrote off $3.5 billion in mortgage-related assets and laid off more than 6,000 employees by the end of the year.

Things only got worse in 2008.  In January, Lehman closed its mortgage lending unit and laid off another 1,300 employees in a vain attempt to stem further cash hemorrhages from its sub-prime mortgage operations.

After Bear Stearns collapsed in March, Standard & Poor’s rating arm downgraded its outlook on Lehman from “Stable” to “Negative” on the expectation that its revenues would decline by at least another 20 percent. That caused Lehman’s stock price to plunge by an additional 48 percent.

Lehman attempted to counter this by selling $4 billion in convertible preferred stock. But this fresh cash was quickly soaked up by more write-offs, including Lehman’s $1.8 billion bailout of five of its short-term debt funds.  Ravenous short-sellers (the “Vultures of Capitalism”) began circling and rumors flew that other firms were refusing to trade with Lehman.

With its common stock in virtual free fall, Lehman contemplated taking itself private, but the idea was abandoned when it became clear that the necessary financing wasn’t available. An effort to locate buyers for $30 billion of its commercial mortgages (such as office buildings and shopping malls) met with a similar fate.

The federal government had to step in if Lehman was to be saved. But any such move was complicated by the enormous public outcry that had arisen over the $29 billion “federal bailout” of Bear Stearns that March.  Voices from all sides of the political spectrum screamed about the feds using taxpayer funds to bail out big Wall Street firms that had caused the mess, while refusing to lift a finger to help American families who were losing their homes.

Since a presidential election loomed in a matter of weeks, Treasury and the Federal Reserve felt that nothing short of a Congressional directive to “save Lehman” would allow them to move. But the Bush administration did not approach Congress and the federal government was reduced to trying unsuccessfully to convince other financial giants to bailout Lehman.

On September 15, 2008, Lehman filed the largest Chapter 11 bankruptcy in American history to that point, listing assets of $639 billion and liabilities of $768 billion and leaving its viable businesses to be snapped up at fire-sale prices by sharp-eyed bottom feeders. The federal government’s inaction is generally regarded as its most disastrous financial decision since the early 1930s.

In retrospect, it was political fallout from the Bear Stearns collapse that proved to be Lehman’s death knell. The feds underestimated the impact Lehman’s demise would have on capital and credit markets.  Only after the true scope of the problem became clear in the subsequent days and weeks did the feds go to Congress to request the controversial $700 billion Troubled Asset Relief Program to protect other troubled banks from insolvency.

gigliojJoseph Giglio
Senior Academic Specialist and Executive Professor of General Management 


U.S. Tax System Reform In An Integrated Global Economy

Pfizer recently offered $100 billion to acquire its rival AstraZeneca, headquartered in the United Kingdom. Currently operating out of New York, Pfizer is a biopharmaceutical giant with 2013 net earnings of approximately $22 billion, taxed at a rate of 27.4 percent. However, as evidenced by the exorbitant offer of acquisition, the U.S. firm is willing to go to great lengths to move its headquarters to the U.K. and minimize its tax liability, especially when the takeover would provide an estimated $1 billion in annual tax savings. If accepted, the Pfizer deal would serve as a quintessential example of a tax “inversion,” whereby a company and its substantial profits are moved offshore.

Such inversions have been commonplace with former U.S. corporations that preferred to increase shareholder wealth by pursuing lower tax rates offshore. As a result, the international Organization for Economic Cooperation and Development (OECD) has recognized that there are significantly less incentives for entrepreneurs and businesses to continue operating within the boundaries of the U.S. The OECD has even suggested numerous reforms to the U.S. tax system in order to alleviate the growing problem that serves as a widespread inhibitor within the integrated global economy.

The OECD has proposed that the U.S. marginal corporate income tax rate be significantly reduced to promote higher profit margins, and thereby produce incentives for corporations to maintain U.S. operations. U.S.-based firms would be less inclined to employ strategic inversions because the tax rate would be comparable to or lower than that of other nations. Because approximately 10 percent of federal tax revenue is derived from corporate income taxes, it is important that corporations do not transfer that significant burden to other U.S. taxpayers. Therefore, the OECD has also recommended that the U.S. broaden the tax base by phasing out the tax allowances currently available. By expanding the tax base, more individual tax revenue would counterbalance the slightly diminished corporate tax revenue.

As a result of such reforms, the OECD believes the U.S. would have a more attractive environment for entrepreneurial and corporate growth. This would ensure that the profits from large firms are redistributed throughout the U.S. economy rather than transferred offshore. Also, corporate inversions could impact domestic unemployment, serving as another detriment to U.S. households. Of the greatest concern to the OECD, such transferring of profits and tax revenues from the U.S. economy could unsettle domestic economic recovery and the associated international economic development.

Unfortunately, the current political standstill between Republicans and Democrats does not bode well for the reforms recommended by the OECD. The parties currently are having difficulty reaching agreements on less critical issues, so the possibility for agreement on a contentious, significant issue like tax reform seems unlikely, especially with the November elections approaching. As evidence of this, House Ways and Means Committee Chair Dave Camp’s (R-MI) broad-reaching tax reform proposal (released February 21, 2014) has yet to be considered seriously on Capitol Hill.

Given the stalemate in Washington, external pressure to act, like the OECD’s call for reform, may help to lead to some action. In fact, the OECD is not the only external party being encouraged to call for reform. Recently, Treasury Secretary Jacob Lew told business executives at the Economic Club of New York that their support was imperative to bring about tax reform.

Until it becomes either less difficult to pass new legislation or tax reform is treated with the utmost importance on the political agenda, a simple timeline can explain what is to come: 1) the U.S. tax base will continue to erode (meaning more tax inversions), which (2) will impair the U.S. economy and hinder global economic growth, and 3) then maybe eventually result in reactionary U.S. tax reform. Could U.S. government officials skip the second point in the aforementioned timeline through timely tax reform? In effect, the OECD simply proposes to the U.S. that the shortest distance between two points is a straight line.



Timothy Rupert
Professor of Accounting




Daily,-F---GSPA-studentFrankie Daily
MSA/MBA, Research Assistant


Can technology get in the way of customer service?

Earlier this year, Chili’s installed over 800 tableside computers throughout their restaurants in an effort to streamline guests’ dining experience. The computers are positioned as a supplement tool to enable a smooth transaction between servers and guests. Not surprisingly, the high tech approach to customer service is gaining momentum. Recently, competitor Applebee’s followed suit, installing nearly 2,000 similar tableside machines in their chain of restaurants. Thus far, the advantages of this inventive technology strategy are clear…the touchscreen devices expedite service, allowing customers to self-order drink refills and desserts, as well as pay tabs at their own pace.

It appears that the blending of high touch and high tech strategies might be the optimal way to engage modern consumers, with employees working alongside self-service technology devices. But what happens when technology gets in the way of customer service? Can customer-facing computers disrupt the social flow of service transactions, and if so, might this have a negative effect on consumers? A recent article in the Journal of Marketing investigates this phenomenon, taking a closer look at the benefits and pitfalls of technology-infused service encounters.


Nancy Sirianni
Associate Professor of Marketing


Natural Gas Boon

By 2030, the U.S. power sector must cut carbon dioxide emissions 30 percent from 2005 levels, according to federal regulations announced on June 2. The proposed rule, served up by the Environmental Protection Administration with a generous helping of gravity, is the cornerstone of President Obama’s pledge to combat climate change. The trick will be implementing it without further burdening an already battered middle class with fewer jobs and even slower economic growth.

This is arguably the most significant American environmental rule ever proposed and could transform the power sector. It is largely targeted at cutting pollution from coal-fired plants, which are the nation’s largest source of greenhouse gas emissions.

Coal has had a good run in the United States because it is abundant and therefore cheap. America has far larger reserves than any other country and has been called the “Saudi Arabia of coal.”

The new rule has come under attack from business groups and by Republicans and Democratic lawmakers from coal states. For example, the U.S. Chamber of Commerce claims it would cost the economy $50 billion a year and result in the loss of hundreds of thousands of jobs.

While largely welcomed by environmentalists, not all in the environmental community are on board. Some say the cuts are not aggressive enough; others are concerned that moving to natural gas will slow the transition to renewable power sources such as wind and solar.

Despite concerns about the environmental consequences of natural gas, the President supports development of this resource as a means to combat global warming. In his 2012 State of the Union address he said, “We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy.”

The President sees natural gas as a useful replacement for coal and a step in the transition to zero carbon-emitting fuels. As he remarked in a speech at Georgetown University last year, “The bottom line is natural gas is creating jobs. It’s lowering many families’ heat and power bills. And it is the transition fuel that can power our economy with less carbon pollution.” The President has promoted increased domestic natural gas production, most prominently through hydraulic fracturing (fracking) with improved federal safety standards.

The fossil fuel natural gas is most frequently compared to is coal. The comparison much favors natural gas. It is the cleanest burning of all fossil fuels and produces the smallest amount of carbon dioxide per unit of energy. Burning natural gas for electricity produces roughly half the carbon dioxide that burning coal does.

Natural gas has been the fastest-growing energy source for electric power generation since the 1980s. Natural gas from shale has grown more than five-fold in the past five years. The domestic boom in shale drilling has led to a glut of cleaner natural gas, lower prices, ease of use and low levels of pollution. By 2012, the amount of natural gas used in electrical generation had grown to 28 percent from 11 percent in 1990.

Low natural gas prices also give a significant boost to the competitiveness of United States manufacturing by driving down electricity generation costs. The abundant supply of natural gas has kept prices so low that it is attracting manufacturing industries from overseas and positioning the United States to become a major player in the emerging globalized natural gas market. It may someday make the United States an important source for countries now dependent on supplies from Putin’s Russia.

As the United States attempts to achieve ambitious greenhouse gas reductions, Americans would be wise to heed the advice all heard countless times from their parents: “Be careful!” In the midst of a still-fragile economic recovery, America cannot afford to make life further hell for the diminishing middle class.

gigliojJoseph Giglio
Senior Academic Specialist and Executive Professor of General Management