Simplistic, has problems with growth.., but for editors of a paper in a North
Amer. national capital, I'm impressed.
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"Greening the tax man"
Editorial in "The Ottawa Citizen" Friday, February 19th, 1999.
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 none 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 generic 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 Piqou 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.
