TAX SHIFTING
Chapter 11. Tools for Restructuring the Economy
Lester R. Brown, Eco-Economy: Building an Economy for the Earth
(W.W. Norton & Co., NY: 2001).
Tax shifting involves changing the composition
of taxes but not the level. It means reducing income taxes and offsetting
them with taxes on environmentally destructive activities such as
carbon emissions, the generation of toxic waste, the use of virgin
raw materials, the use of nonrefillable beverage containers, mercury
emissions, the generation of garbage, the use of pesticides, and
the use of throwaway products. This is by no means a comprehensive
list, but it does include the more important activities that should
be discouraged by taxing. There is wide agreement among environmental
scientists on the kinds of activities that need to be taxed more.
The question now is how to generate public support for the wholesale
tax shifting that is needed.
In this area, Europe is well ahead of the United States, largely
because of the pioneering efforts of Ernst von Weizs�cker, formerly
head of the Wuppertal Institute and now a member of the German Bundestag.
He not only pioneered this concept, but has provided ongoing intellectual
leadership on the issue.3
The way tax shifting works can be seen in the table compiled by
Worldwatch researcher David Roodman. (See Table 11-1.) It looks
at Europe, where most of the shifting has occurred, and gives a
sense of how nine countries have reduced taxes on personal income
or wages while increasing them on environmentally destructive activities.
Sweden was the first country to begin this process, with a program
to lower taxes on personal income while raising them on carbon and
sulfur emissions to discourage the burning of fossil fuels, particularly
those with high sulfur content. For several years, only the smaller
countries of Europe, such as Denmark, the Netherlands, and Sweden,
followed this path. But during the late 1990s, France, Germany,
Italy, and the United Kingdom joined in.
Tax shifting has appeal in Europe in part because it creates jobs,
an issue of concern in a region plagued with high unemployment.
Shifting from the use of virgin raw materials to recycled materials,
for example, not only reduces environmental disruption, it also
increases employment since recycling is more labor-intensive. This
was one of the reasons Germany adopted a four-year plan of gradually
reducing taxes on incomes while increasing those on energy use in
1999. When completed, this will shift 2.1 percent of total revenue
generated; with an annual revenue budget of nearly $1 trillion,
it would shift $20 billion a year. Denmark leads the way in the
amount of taxes being shifted, with a total of 3 percent moved thus
far by measures adopted in 1994 and 1996. The Danish government
taxes the use of motor fuels, the burning of coal, the use of electricity,
landfilling, and ownership of motor vehicles. The tax on the purchase
of a new car in Denmark is typically higher than the price of the
vehicle itself.4
The Netherlands, a country with an advanced industrial economy concentrated
in a small land area, uses taxes to curb the release of heavy metals,
including cadmium, copper, lead, mercury, and zinc. Between 1976
and the mid-1990s, the industrial discharge of these various elements
fell 86-97 percent each. The Dutch firms that developed the pollution
control equipment used to achieve these reductions gained an edge
on firms in other countries, greatly expanding their export sales
and earnings.5
The environmentally destructive activities now taxed in Europe include
carbon emissions, sulfur emissions, coal mining, landfilling, electricity
sales, and vehicle ownership. Countries elsewhere might tax other
activities to reflect their particular circumstances. Among these
might be taxes on excessive water use, the conversion of cropland
to nonfarm uses, tree cutting, pesticide use, and the use of cyanide
in gold mining. Over time, taxes on environmentally destructive
activities could increase substantially, perhaps one day accounting
for the lion's share of tax collection.
Governments typically take care to ensure that environmental taxes
are not socially regressive. David Roodman describes how Portugal
has avoided this with its tax on water, an increasingly scarce resource
in this semiarid country. The town of Set�bal provides households
with 25 cubic meters of water per month that is tax-free. It then
"terraces" additional water taxes, raising the tax through three
successively higher levels of consumption.6
The concept of taxing environmentally destructive activities received
a major boost in the United States in November 1998 when the U.S.
tobacco industry agreed to reimburse state governments $251 billion
for past Medicare costs of treating smoking-related illnesses. This
was, in effect, a retroactive tax on the billions of packs of cigarettes
sold in the United States during the preceding decades. It was a
staggering sum of moneynearly
$1,000 for every American. This was a tax on cigarette smoke, a
pollutant that is so destructive to human health that it may cause
more damage than all other pollutants combined.7
This "tax" that the industry is paying on past damage associated
with smoking will be funded by raising the price of cigarettes.
Between January 1998 and April 2001, the average U.S. wholesale
price of cigarettes climbed from $1.33 per pack to $2.21, a 66-percent
increase in two years. It is expected to climb further, helping
to discourage cigarette smoking.8
Another value of environmental taxes is that they communicate information.
When a government taxes a product because it is environmentally
destructive, it tells the consumer that it is concerned about this.
And restructuring the tax system has a systemic effect, steering
millions of consumer decisions in an environmentally sustainable
direction every dayranging
from how to get to work to what to order for lunch.
Tax shifting to achieve environmental goals has broad support. Polls
taken in the late 1990s in both the United States and Europe show
overwhelming support for the concept once it is explained. On both
sides of the Atlantic, support of the electorate is 70 percent or
greater. Tax shifting is also an attractive economic tool because
it can be used to achieve so many environmental goals. Once it is
used in one context, it can easily be applied in others.9
If the world is to restructure the economy before environmental
destruction leads to economic decline, tax restructuring almost
certainly will be at the center of the effort. No other set of policies
can bring about the systemic changes needed quickly enough. In an
article in Fortune magazine that argued for a 10-percent reduction
in U.S. income taxes and a 50�-per-gallon hike in the tax on gasoline,
Harvard economist N. Gregory Mankiw summarized his thinking as follows:
"Cutting income taxes while increasing gasoline taxes would lead
to more rapid economic growth, less traffic congestion, safer roads,
and reduced risk of global warmingall
without jeopardizing long-term fiscal solvency. This may be the
closest thing to a free lunch that economics has to offer."10
Table 11-1. Shifting Taxes from Income
to Environmentally Destructive Activities |
Country,
First Year in Effect
|
Taxes
Cut on
|
Taxes
Raised on
|
Revenue
Shifted1
|
|
|
|
(percent)
|
Sweden, 1991 |
personal income |
carbon and
sulfur emissions |
1.9
|
Denmark, 1994 |
personal income |
motor fuel, coal, electricity,
and water sales; waste incinceration and landfilling;
motor vehicle ownership |
2.5
|
Spain, 1995 |
wages |
motor fuel sales |
0.2
|
Denmark, 1996 |
wages, agricultural property |
carbon emissions from
industry; pesticide, chlorinated solvent, and battery
sales |
0.5
|
Netherlands, 1996 |
personal income and wages |
natural gas and electricity
sales |
0.8
|
United Kingdom, 1996 |
wages |
landfilling |
0.1
|
Finland, 1996 |
personal income and wages |
energy sales, landfilling |
0.5
|
Germany, 1999 |
wages |
energy sales |
2.1
|
Italy, 1999 |
wages |
fossil fuel sales |
0.2
|
Netherlands, 1999 |
personal income |
energy sales, landfilling,
household water sales |
0.9
|
France, 2000 |
wages |
solid waste; air and water
pollution |
0.1
|
|
1Expressed
relative to tax revenue raised by all levels of government.
Source: Adapted from David Malin Roodman, "Environmental
Tax Shifts Multiplying," in Lester R. Brown et al., Vital
Signs 2000 (New York: W.W. Norton & Company, 2000), pp.
138-39. |
ENDNOTES:
3.
Ernst U. von Weizs�cker and Jochen Jesinghaus, Ecological Tax Reform
(London: Zed Books, 1992).
4. David Malin Roodman, "Environmental Tax Shifts Multiplying,"
in Lester R. Brown et al., Vital Signs 2000 (New York: W.W. Norton
& Company, 2000), pp. 138-39; German annual budget from U.S. Central
Intelligence Agency, World Fact Book, www.cia.gov/cia/publications/factbook,
viewed 1 August 2001; vehicle tax in Denmark is 180 percent, as
reported by Marjorie Miller, "British Car Buyers Taken for a Ride,"
Los Angeles Times, 23 July 1999.
5. David Malin Roodman, Getting the Signals Right: Tax Reform to
Protect the Environment and the Economy, Worldwatch Paper 134 (Washington,
DC: Worldwatch Institute, May 1997), p. 11.
6. David Malin Roodman, The Natural Wealth of Nations (New York:
W.W. Norton & Company, 1998), p. 189.
7. U.S. Department of Agriculture (USDA), Economic Research Service
(ERS), "Cigarette Price Increase Follows Tobacco Pact," Agricultural
Outlook, January-February 1999.
8. USDA, ERS, Tobacco Situation and Outlook, September 2000, p.
8; USDA, ERS, Tobacco Situation and Outlook, April 2001, p. 5.
9. Roodman, op. cit. note 6, p. 243.
10. N. Gregory Mankiw, "Gas Tax Now!" Fortune, 24 May 1999, pp.
60-64.
Copyright
© 2001 Earth Policy Institute
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