Econation Blog
Taxing times
Tax reform has been in the news recently because of the publication of the Victoria University of Wellington Tax Working Group's report. The changes that the working group recommended could be likened to rearranging the deckchairs on the Titanic. Our tax system promotes unsustainability and it will take a lot more than a few tweaks to change that.
As an example the report recommends a comprehensive capital gains tax as well as a land tax but these are then offset by lowering (or eliminating) progressive income tax rates for high income earners, businesses and trusts. They also propose an increase in GST to cover the reduction in other taxes.
The benefits of tax
Taxes are an enforced way of sharing. Even though most people complain about having to pay taxes most realise that they also share in the benefits – infrastructure, amenities and services – that taxes pay for.
Taxes also have the added benefit of redistributing wealth from where it accumulates to where it is needed.
Taxation is also a very effective way of internalising costs which are caused by economic activity but not factored into prices. These include environmental costs such as climate change and social costs such as the health system.
The problem is that our tax system perpetuates an unsustainable economy because it taxes the wrong things and not the right things.
Taxing resources
Taxing good things, like employment, to subsidise bad things, like environmental degradation, just doesn't make sense. A sustainable tax reform would shift taxes from incomes to environmentally destructive activities.
Across the board consumption taxes (GST) are often favoured by governments because they are easy to administer but they treat good consumption and bad consumption exactly the same. By using ecological taxes at the resource level the non-renewable and polluting resources will be more expensive and uncompetitive compared to recycled, renewable and clean resources.
If we taxed water use, land use, energy use, raw materials and pollution (at the same time as reducing income taxes) resource use and pollution would reduce rapidly. The problem is that labour is taxed as a resource which creates a tendency towards lower employment and higher resource use.
Tax shifting
Tax shifting has broad support by economists around the world and has been adopted in different ways by many governments in Europe and is beginning elsewhere.
In a column in Fortune Magazine, Harvard economics professor N. Gregory Mankiw succinctly sums up the idea of tax shifting: "Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming--all without jeopardizing long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer."
Tax shifting does not decrease the total amount of revenue for the Government. However shifting income taxes to ecological taxes will create jobs, improve resource efficiency and stimulate more sustainable business and consumption practices.
As Lester R. Brown says in his book Eco-economy "If the world is to restructure the economy before environmental destruction leads to economic decline, tax restructuring almost certainly will be at the centre of the effort. No other set of policies can bring about the systemic changes needed quickly enough."
So lets stop fiddling about with those deckchairs and let's turn this Titanic around.
Posted by Michael Lockhart on 8th February, 2010 | Comments | Trackbacks
Tags: General Sustainability
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