Living Economics

Green Tax
Taxing nonrenewable resources instead of labor income would create more jobs and encourage conservation while reducing pollution.

Most American consumers probably don't know that there is a 20 - 25% excise tax on gasoline. But a lot of high-income taxpayers are keenly aware that their income is subject to 36% marginal income tax rate. High tax on labor and low tax on non-renewable resources may seem strange in view of the fact that income tax discourages work efforts and consumption of material resources generates negative externality in the form of pollution. So shouldn't the tax rate be higher for these resources and lower for labor income? What would be the effect of shifting from income and payroll taxes to a resource-based tax?

First, reducing income tax for most of the middle class in America would cut labor costs for employers without reducing take-home wages for employees. This would generate employment and stimulate growth for the economy.

Second, a tax shift to resources would encourage the development and use of more energy-efficient technologies. Energy conservation and better energy utilization is the key to solving most of our environmental problems like global warming and climate change due to greenhouse gas emissions. Experiences in other countries suggest that once these green taxes are imposed, environmental protection becomes not just a cost, but also a profit opportunity. Businesses leap at such opportunities, creating technologies that conserve resources and slash pollution rates, often at surprisingly low costs. Take the example of the new car from Toyota that uses a hybrid engine - one that runs on gas as well as electricity. This allows it to deliver 52 miles to the gallon in the city. And all this for a mere $20k. If not for the constant pressure of increasing gasoline taxes (as high as 80%) and high cost of gasoline imports in Japan, this technology probably wouldn't have come up at all.

How much revenue can green taxes raise? It is now estimated that a carbon tax on coal, oil and natural gas alone can raise as much as $221.5 billion in 2002. A resource tax proposal for the state of California shows that a shift could help eliminate federal income tax entirely for families making up to $75,000 a year, and for individuals earning up to $40,000.

Of course, successful conservation may eventually decrease the revenues from the same level of eco-taxes, and the tax shift would have to be partly reversed. But in the case of big resource taxes, like those on carbon emissions, the decline might not start for decades, unless, some miracle technology can drastically reduce carbon emissions. Five European countries that started on this eco-friendly growth path way back in 1991 are still trying to achieve their pollution targets!

There might be short-term adjustment problems involved, however. For example, Non-location-specific industries would migrate to countries where the resource tax is lower. And exports from countries with higher resource tax would be less competitive, other things being equal.

Note:
  1. Halstead, T. and Rowe, J. "The Green Revenue Path," The Washington Post, 9/10/1995.
  2. Halstead, T. and Rowe, J. "The Green Revenue Path," The Washington Post, 9/10/1995.
  3. Hamond, M. et al 1997. Tax Waste, Not Work. Redefining Progress, San Franciso, CA.
  4. Hamond, M. et al 1997. Tax Waste, Not Work. Redefining Progress, San Franciso, CA.
  5. Koretz, G. "Some folks ante up $4.30 a gallon," Business Week, 4/24/2000.
  6. Koretz, G. "Some folks ante up $4.30 a gallon," Business Week, 4/24/2000.
  7. Roodman, D. "In Praise of the eco-tax," Accounting Today 7/28/1997.
  8. Roodman, D. "In Praise of the eco-tax," Accounting Today 7/28/1997.
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