New Bottom Line Volume 4.9 – Ecological Tax Reform: Composting the Gridlock

May 2, 1995

Tax reform is all the rage these days, and proposals abound. Even the flat tax (dismissed as silly when proposed by presidential candidate Jerry Brown in 1992, now taken quite seriously when proferred by Dick Armey) is getting serious scrutiny. Not because they’re the best ideas, not even because taxes are too high (they’re lower in US than any industrialized country) but because the tax system is perceived as out of control, and people want to do “something.”

Overlooked in the traditional liberal vs. conservative debate is a powerful new idea that could break the ideological gridlock. In a recent article entitled “The Tax Shift,” four leading economic thinkers ask a question that could shift the debate: “Why do we tax what we want more of–like income–instead of taxing what we want less of–like pollution, and depletion of finite natural resources?” Why indeed?

Written by economists Robert Costanza and Herman Daly, businessman and author Paul Hawken, and ecologist John Woodwell, the “ecological tax reform” proposal calls for a revenue neutral tax shift. In other words, it would not add to the total tax burden, and would even be compatible with tax reduction. But it would radically shift the target of taxation. Some excerpts:

“In the United States, these economic, ecological, and social “bads” are more often subsidized than taxed. To make matters worse, the primary method of raising tax revenue in the U.S. is to take a bite straight out of income and capital, a practice that discourages both work and investment–the things we want to keep.

“A proposal for a non-partisan ecological tax shift would: (1) reduce or eliminate taxes on income, labor, and capital (especially on middle and lower income taxpayers), and (2) tax pollution and depletion of natural resources instead. The basic idea is to gradually shift much of the tax burden away from “goods” like income and labor, and towards “bads” like the rapid loss of natural capital, i.e. fisheries, forest cover, energy and mineral reserves, topsoil, etc. The tax would be entirely revenue neutral, for individuals and business alike, so that every dollar added to energy costs, for example, would be subtracted from income taxes.

“Shifting the burden of taxes from income and capital to pollution and depletion would help both the economy and the environment by encouraging employment and income, reducing the need for government regulation, and promoting the sustainable use of natural resources and ecosystems…. Because of the revenue neutral aspect of the tax shift, it does not raise costs for business, but rather gives businesses appropriate incentives to develop new technology, improve production efficiency, and improve their environmental performance.

“Since the natural capital depletion tax would be applied mainly at the “front end” of the economy, the tax would be passed through the entire system and affect the prices of all goods and services that consumed natural capital (natural resources and ecosystems), either directly or indirectly. This would encourage the development of products that do not consume natural capital, which would then have a competitive edge in the marketplace and would tend to displace their non-sustainable alternatives. Because the tax reform would be implemented gradually, over a number of years, it would allow businesses and consumers to anticipate and adjust to the new rules and incentives, providing adequate time for normal depreciation of plant and equipment while providing stable and consistent time horizons for new investments and technologies.”

As with any tax reform proposals, there would be both winners and losers. Extractive industries would probably be most directly affected; mining and minerals companies would have to learn to apply their expertise to the collection and extraction of “above-ground ores.” But companies that do learn to adapt will find new opportunities, and profits. Sweden’s largest petroleum company, for example, sees so much opportunity in switching from nonrenewable petroleum to renewable biofuels that it is lobbying the Swedish government to impose energy taxes. Also, because any consumption or value added tax has a regressive character, income transfers or other protections might be necessary to keep the tax burden from falling too heavily on the poor.

But the real strength of the proposal is its attempt to align one of our most powerful economic tools with the physical reality of the world we inhabit.

What you can do to further this proposal to bring common sense to our tax system? Get a a complete copy of the “Tax Shift” proposal (Send stamped, self-addressed envelope to International Society for Ecological Economics PO Box 1589, Solomons, MD 20688 USA.) Send copies to your local newspaper–and to your elected representatives. And think about its implications for your business if we ran our economy as if the real world mattered.

(c) 1995 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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