Tax in today's world
This discussion paper explores how shifting tax from labour to natural resource use, pollution and consumption could help meet the goals of the Paris Climate Agreement, the UN Sustainable Development Goals (SDGs) and an inclusive, circular economy.
An interconnected world
Humanity is facing massive challenges. The most daunting tasks are adapting the metabolism of our economies to match the carrying capacity of the earth and stay below an average two degrees Celsius of global warming.
According to the latest IPCC report, global carbon emissions must start to reduce well within 12 years if we are to prevent large-scale natural and human risks from becoming irreversible reality. Our societies face equally important social challenges, including enabling a growing population to develop to their full potential and find decent work.
The UN Sustainable Development Goals (SDGs) connect the social and ecological challenges that will dominate the global agenda for the upcoming decades.
Governments need to develop coherent strategies to deal with these megatrends. Tax has an important role to play, as tax costs have a fundamental impact on investment, employment and consumption decisions.
Tax systems need to adapt
The foundations of modern tax systems were laid down in the era of the industrial revolution: before globalisation and mass consumption, before the emergence of climate disruption and water supply risks, and before digitisation, automation and robotisation. Considering today's fast-changing world, tax systems will need to adapt.
Just as we now see our planet as an interconnected system, we must take a fresh look at our tax systems as a whole. Specific tax measures, such as a carbon tax, landfill levies or taxes on single-use plastic, may help but they are no longer enough.
In order to craft a tax system that is fit for the 21st century, it is necessary to think more widely about what governments should be taxing, and how the tax revenues should be used.
Focus on labour taxes and green taxes
This discussion paper focuses on two types of tax that are less publicised than corporate income tax but directly related to today's socio-economic challenges:
- labour taxes (which include personal income tax, payroll taxes and social security contributions);and
- environmental (or 'green') taxes.
Currently, public revenue is raised largely on employment taxes. In all OECD countries except Chile, they provided the largest share of tax revenue: more than VAT and taxes on capital. Across the OECD, labour taxes account for 52.1% of total public revenue raised on average, while green taxes account for only 5.3%.
Between 2009 and 2016, the labour tax burden has increased further. On average, of every dollar an employer pays in labour costs, only $0.64 ends up in the pocket of the employee.
There is some variation across continents: African, Latin American and Caribbean countries generally rely more on taxes on goods and services. Still, labour tax revenues provide a significant share of revenues in these regions, and substantially more than green taxes.
Considering the challenges societies are facing today, it is time to rebalance our tax systems.