Tax Shifting And Environmental Economics

The need for tax shifting - lowering income taxesseveral times as much as the timber, and to
while raising taxes on environmentally destructiveencourage wood and paper recycling.
activities - in order to get the market to tell theSome 2,500 economists, including eight Nobel Prize
truth has been widely endorsed by economists.winners in economics, have endorsed the concept
The basic idea is to establish a tax that reflectsof tax shifts. Former Harvard economics
the indirect costs to society of an economicprofessor N. Gregory Mankiw, who was
activity. For example, a tax on coal wouldnominated to be Chairman of the President's
incorporate the increased health care costsCouncil of Economic Advisors in early 2003, wrote
associated with breathing polluted air, the costs ofin Fortune magazine: "Cutting income taxes while
damage from acid rain, and the costs of climateincreasing gasoline taxes would lead to more rapid
disruption.economic growth, less traffic congestion, safer
Nine countries in Western Europe have alreadyroads, and reduced risk of global warming - all
begun the process of tax shifting, known aswithout jeopardizing long-term fiscal solvency. This
environmental tax reform. The amount ofmay be the closest thing to a free lunch that
revenue shifted thus far is small, just a feweconomics has to offer." Mankiw could also have
percent. But enough experience has been gainedadded that it would reduce the military
to know that it works.expenditures associated with ensuring access to
Among the activities taxed in Europe are carbonMiddle Eastern oil.
emissions, emissions of heavy metals, and theThe Economist has recognized the advantage of
generation of garbage (so-called landfill taxes). Theenvironmental tax shifting and endorses it
Nordic countries, led by Sweden, pioneered taxstrongly: "On environmental grounds, never mind
shifting at the beginning of the 1990s. By 1999 aenergy security, America taxes gasoline too
second wave of tax shifting was under way, thislightly. Better than a one-off increase, a politically
one including the larger economies of Germany,more feasible idea, and desirable in its own terms,
France, Italy, and the United Kingdom. Tax shiftingwould be a long-term plan to shift taxes from
does not change the level of taxes, only theirincomes to emissions of carbon." In Europe and
composition. One of the better known changesthe United States, polls indicate that at least 70
was a four-year plan adopted in Germany in 1999percent of voters support environmental tax
to shift taxes from labor to energy. By 2001, thisreform once it is explained to them.
had lowered fuel use by 5 percent. A tax onSubsidies, which are essentially "negative taxes,"
carbon emissions adopted in Finland in 1990also must be reformed. Each year the world's
lowered emissions there 7 percent by 1998.taxpayers underwrite $700 billion of subsidies for
Environmental tax reform is spreading, with theenvironmentally destructive activities, picture of oil
reform process now under way in Denmark,rig such as burning fossil fuels, over-pumping
Finland, France, Germany, Italy, the Netherlands,aquifers, clear-cutting forests, and overfishing. A
Norway, Sweden, and the United Kingdom. The1997 Earth Council study, Subsidizing Unsustainable
United States imposed a stiff tax onDevelopment, observes that "there is something
chlorofluorocarbons to phase them out inunbelievable about the world spending hundreds of
accordance with the Montreal Protocol of 1987. Atbillions of dollars annually to subsidize its own
the local level, the city of Victoria, British Columbia,destruction."
adopted a trash tax of $1.20 per bag of garbage,Subsidies are not inherently bad. Many
reducing its daily trash flow 18 percent within onetechnologies and industries were born of
year.government subsidies. Jet aircraft were developed
One of the newer taxes gaining in popularity iswith military R&D expenditures, leading to modern
the so-called congestion tax. City governmentscommercial airliners. The Internet was a result of
are turning to a tax on vehicles picture of urbanpublicly funded efforts to establish links between
traffic entering the city, or at least the inner partcomputers in government laboratories and
of the city where traffic congestion is mostresearch institutes. And the combination of the
serious. In London, where the average speed offederal tax incentive and a robust state tax
an automobile was 9 miles per hour - about theincentive in California gave birth to the modern
same as a horse-drawn carriage - a congestionwind power industry.
tax was adopted in early 2003. The $8 charge onBut just as there is a need for tax shifting, there
all motorists driving into the center of the cityis also a need for subsidy shifting. A world facing
between 7am and 6:30pm immediately reducedthe prospect of economically disruptive climate
the number of vehicles by 24 percent, permittingchange, for example, can no longer justify
traffic to flow more freely while cutting pollutionsubsidies to expand the burning of coal and oil.
and noise.Shifting these subsidies to the development of
Environmental tax shifting usually brings a doubleclimate - benign energy sources such as wind
dividend. In reducing taxes on income - in effect,power, solar power, and geothermal power is the
taxes on labor - labor becomes less costly,key to stabilizing the earth's climate. Shifting
creating additional jobs while protecting thesubsidies from road construction to rail
environment. This was the principal motivation inconstruction could increase mobility in many
the German four-year shift of taxes from incomesituations while reducing carbon emissions.
to energy. The shift from fossil fuels to moreIn a troubled world economy facing fiscal deficits
energy-efficient technologies and to renewableat all levels of government, exploiting tax and
sources of energy reduces carbon emissions andsubsidy shifts with their double and triple dividends
represents a shift to more labor-intensivecan help balance the books and save the
industries. By lowering the air pollution fromenvironment. Tax and subsidy shifting promise
smokestacks and tailpipes, it also reducesboth gains in economic efficiency and reductions in
respiratory illnesses, such as asthma andenvironmental destruction, a win-win situation.
emphysema, and health care costs - a tripleHistory judges political leaders by whether they
dividend.respond to the great issues of their time. For
When it comes to reflecting the value of nature'stoday's leaders, that issue is how to deflate the
services, ecologists can, for example, calculate theworld's bubble economy before it bursts. This
values of services that a forest in a given locationbubble threatens the future of everyone, rich and
provides. Once picture of logging operation thesepoor alike. It challenges us to restructure the
are determined, they can be incorporated into theglobal economy, to build an eco-economy.
price of trees as a stumpage tax of the sort thatThe choice is ours - yours and mine. We can stay
Bulgaria and Lithuania have adopted. Anyonewith business as usual and preside over a global
wishing to cut a tree would have to pay a taxbubble economy that keeps expanding until it
equal to the value of the services provided bybursts, leading to economic decline. Or we can
that tree. The market would then be telling theadopt Plan B and be the generation that stabilizes
truth. The effect of this would be to reduce treepopulation, eradicates poverty, and stabilizes
cutting, since forest services may be worthclimate.