Green Tax Shift Gaining Popularity
"Greening the tax man"
If there's one thing everyone should know about economics it is that incentives matter. The more you reward an activity the more people will do it, and the more you punish it, the less they will.
It seems simple. Yet in all the analysis of the federal budget, few are asking the basic questions: Why do we tax things we want more of, like income, employment, and purchases, but not things we want less of, like the emission of air and water pollution?
For years, environmentalists have been trying to get government to notice this bizarre state of affairs, with catchy slogans like "tax bads, not goods." They've had mild success in Europe and less in North America. That's unfortunate because a major shift of the tax burden away from good economic activity to environmentally harmful practices would spark a green revolution good for the environment and the economy.
Under the current tax regime, governments net the billions of dollars they need almost exclusively by taking a cut of economic activity (personal income taxes, payroll taxes, sales taxes, and so on) for no better reason than that governments needed the money and these sources are the easiest to collect from.
But these taxes lessen the desire to see one's income rise since, at a certain point, the effort required isn't worth the fractional increase left over after the tax bite. They give people reasons to not purchase the goods and services that keep the economy humming. They give companies reason not to hire more employees.
At the same time, our taxes do nothing to discourage all sorts of environmentally destructive activities. Imagine a factory belching pollutants up a smokestack. As long as the factory stay within the limits set by regulations, it's free to spew out filth. That filth inflicts costs on others ("externalities") such as poisoned waterways or health care costs from respiratory problems. But the government lets the plant inflict these costs on others while benefitting from the production that causes them.
If the plant makes $1,000 worth of its product at a cost of $2,000 in environmental damage, it nets $1,000, meaning the pollution's victims are subsidizing the polluter. Even more perversely, a conscientious factory owner who wanted to buy equipment to cut the pollution couldn't, since the cost would put him at an economic disadvantage to his competitors. It's a bizarre, unfair situation. British economist Arthur Cecil Pigou recognized this inequality in the 1920's and advocated environmental taxes that would make polluters pay the real costs of their activities. He's as right today as 80 years ago.
But green taxes do more than just punish polluters. They create a new incentive - this time a positive one. The factory owner who figures out how to emit less pollution cuts his tax bill. If he figures out how to eliminate the pollution entirely, he avoids the tax entirely and puts himself ahead of his competitors. The green thing to do also becomes the profitable one.
When the dynamism of the free market is put in the service of environmental innovation, we can be sure to achieve greening that no regulatory scheme could manage. That's not just theory, either. A German tax on the creation of toxic waste resulted in a 15 percent drop in three years. A Dutch tax on the emissions of heavy metals like lead, mercury, and cadmium produced a 90 percent cut in emissions within two decades. When the ill-effects of leaded gasoline became clear, Malaysia simply taxed it, creating an immediate, nation-wide shift to unleaded gas.
Ah, but politics intrudes. No matter how justified green taxes may be, if they're presented as tax increases, they're bound to encounter the sort of stiff opposition that sank the Chretien government's proposed carbon tax. The solution is tax swapping: A dollar in new green taxes should be matched by a dollar cut from, say, income taxes. That's good economics as well as good politics.
Scandinavian countries in particular have accepted these lessons. Sweden, Denmark, and Holland have each shifted some of their income and payroll taxes onto carbon emissions, electricity sales, waste incineration and pesticide use. In 1996, the United Kingdom took a slice off payroll taxes and put it on landfilling. In 1995, Spain also cut payroll taxes but raised gas taxes.
Whether Canada would wish to make these particular swaps or others depends on the particulars of each case. But the broad theory of a green tax shift is sound and should be explored by Canadians parties and governments. Taxes like death, may be inevitable, but perverse incentives are not.
This article appeared as an editorial in "The Ottawa Citizen" Friday, February 19th, 1999.
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