Megatrends and tax
Fostering inclusive growth
Cost considerations can also drive the replacement of human roles with automation and artificial intelligence.
The expected effects of new technologies on the labour market are currently the subject of intense debate. The overall agreement among studies, whether predicting a net loss or increase in job opportunities, seems to be that there will be a huge shift in the kind of skills that are demanded.
This trend makes it even more important to foster inclusive economies in which labour demand is sufficient to enable people to find new roles for those whose tasks and jobs are taken over by machines.
Weighing down investments in human capital
Professional education needs to be revolutionised to provide the skills required in the economy of the future.
The growing importance of continuous learning throughout professional life means that universities and learning providers need to recruit people with an appropriate set of expertise to develop new learning models, but extra staff time and resources are also needed from employers - in both the private and public sectors - to enable this continuous learning to take place. In general, a lower tax burden on labour should benefit all sectors that rely heavily on human resources, from innovative businesses undertaking research and development, to hospitals and universities.
Avoiding a high tax burden on labour while boosting social protection will be indispensable to fostering inclusive economies.
Over the years, institutions such as the World Bank, the OECD, the IMF, the European Commission, the Eurogroup and the European Council have called for lower labour taxes to reduce unemployment.
A key option for financing such a strategy is to increase the tax burden on pollution and resource-use, as these tend to be relatively tax-free, or even subsidised.
The polluter doesn't pay
The costs of environmental megatrends such as climate disruption and pollution are becoming more and more clear. The Lancet Commission estimates global welfare losses from pollution at $4.6 trillion a year, or 6.2% of global economic output.
Such costs are 'externalised', meaning that they are passed on to society, individuals and future generations, rather than absorbed by the polluter. Much research has focused on the external costs of carbon emissions.
Green tax options
There are more than a hundred 'green tax' options available to governments for applying the 'polluter pays' principle, including air pollution (such as carbon and other emissions), energy, food production inputs, fossil fuels, metals and minerals, traffic, waste, and water.
‘Green taxes’ in this discussion paper refer to all tax measures that put a price on the use of a natural resource.
Variety of measures – variety of impacts
Considering the wide variety of green tax bases, the goals and impacts of green taxes also vary considerably.
Green taxes can be very effective in changing behaviour and averting environmental damage. The UK Landfill Tax, for example, has been instrumental in reducing the amount of waste dumped in the ground.
When Stockholm began taxing vehicles to reduce traffic in the city centre, traffic pollutants dropped and so did the incidence of childhood asthma. Other green taxes are less effective in changing behaviour but still produce long-term revenues.
Over the years, for example, the Dutch government raised almost €300bn in revenues for the national coffers from the exploitation of oil and gas fields.
Green tax use is limited and declining
Green taxes are generally considered growth-friendly, as they distort economy less than taxes on labour and income. In light of the megatrends it is rational to put a price on pollution and resource use, and international institutions are in support of green taxes. Still, their use is limited.
As mentioned before, in 2014, green taxes raised 5.3% of total tax revenues in OECD countries (generating revenue equal to 1.6% of GDP in the OECD).
Similar modest green tax revenues are found across the globe; 3.8% in China, 4.6% in Japan. South Africa raised 6% of its budget through green taxes, Rwanda 7.4%, and Cameroon 5%. Over the past 15 years, environmental tax as a share of GDP has declined in around two thirds of the countries (52 of 79) in the OECD database.
Support measures for fossil fuels
Besides levying relatively low tax levels on pollution, almost all nations apply direct and indirect subsidies for environmentally damaging activities.
In 2009, Leaders of the G20 economies committed to 'phas[ing] out and rationaliz[ing] over the medium term inefficient fossil fuel subsidies'. The OECD has identified more than 1,000 individual government policies that support fossil fuel production and consumption.
In 2012 all those fossil fuel support measures were worth $617bn. By 2015 they had gone down, but still amounted to $373bn. The majority of these measures are tax expenditures.
Carbon prices are low and inconsistent
At the moment, the vast majority (80%) of all global greenhouse gas emissions and 46% of carbon emissions are free of charge. About half of the emissions covered by carbon pricing mechanisms are priced at less than $10 per tonne.
There is no chemical difference between carbon dioxide emitted from an exhaust pipe, a residential heater or a factory chimney; the impacts and, therefore, the external costs per tonne of carbon are the same.
Still, the effective tax rate ranges from €0 per tonne of carbon emitted by coal combustion to more than €90 per tonne of carbon emitted in diesel used in road transport.
All these differences in the way fossil fuel uses are taxed and subsidised create artificial distortions. Instead of driving down carbon emissions across the board, they push businesses and individuals towards actions that cost less, but may be more polluting (such as taking an aeroplane rather than a train).
What's stopping governments from taking decisive action to solve these problems?
Barriers to implementation
Rebalancing tax systems is not easy for a number of reasons.
First of all, tax policy is driven by politics, and the relatively short cycles in politics make it difficult to develop long-term tax strategies. Secondly, nobody really likes to pay for something that was previously free of charge.
Also, industries with an interest in keeping the status quo often have a stronger voice than other interest groups such as NGOs, healthcare organisations or small and medium-sized enterprises that may have an interest in a transition.
Finally, there is the challenge of how to coordinate tax reform internationally, as shifting financial incentives will change trade patterns.
Use of revenues
A lower tax burden on labour can generally be achieved by using revenues towards a reduction of personal income tax, payroll taxes and social security contributions.
An often-heard worry is that environmental taxes could increase income inequality: they hit low-income households more, as they pay higher proportions of their incomes on energy-intensive goods.
It is, however, possible to prevent taxes from increasing income inequality if the revenues are used to benefit the poorest sections of the population. Plenty of policy options are available for alleviating the impacts on specific households: compensating retired pensioners for the increase in heating costs, for example.
Benefits can take the form of (means-tested) tax credits, exemptions, allowances or deductions. In some countries, cash transfers might ease the transition for the unemployed and those who live in poverty: the right solution will differ from one country to another.
If desirable, green taxes can also be made more progressive by applying block tariffs (higher rates for higher use) or a tax-free threshold (eg leaving a certain amount of water or energy untaxed).
Careful design and implementation can alleviate many, if not all of the concerns about discriminatory effects. Based on the desired outcomes revenues could also be used for increased social protection (including pensions), education and healthcare.