Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Econ-Utopia: Environmental Tax ShiftingAn Econ-Utopia, brought to you by the Center for Popular Economics.Econ-Utopia: Environmental Tax Shifting By Jonathan Teller-Elsberg, CPE Staff Economist June 28, 2006 In the U.S., talk of tax reform usually means debates about taxes on income and wealth. A little less common are discussions of flat taxes and a shift from payroll, income, investment, or property taxes to consumption taxes-that is, a federal sales tax. We've seen the miserable results of lowering taxes on the rich, and we'll be dealing with the massive government debts for decades to come. Flat taxes are simply another way to lower taxes on the rich, under the guise of simplifying the tax system. (To be sure, simplifying taxes is not exactly something to dismiss out of hand-the system is far more intimidating than it should be.) The supposed advantage of a shift to consumption taxes is that the shift away from payroll and/or other taxes should lead to more jobs. This is because a payroll tax makes it "expensive" for a business to have an employee. If the payroll tax is reduced or eliminated, the business will have more money available to hire additional workers. The problem with consumption taxes is that they tend to be regressive-meaning that they fall hardest on lower-income members of society. Another type of tax reform that deserves more attention is the environmental tax shift (ETS), also known as the green or ecological tax shift. The idea here is to increase taxes on activities that result in environmental damage and use the money generated to reduce other taxes by the same amount. As with the consumption tax idea, most proposals center around reducing payroll taxes. Many proponents of ETS believe it can result in a "double dividend" of benefits. The first is a reduction in environmental damage, and the second is a boost in employment. It may seem strange that shifting taxes can lead to much good, if the total amount of taxes remains the same. After all, a business might pay less in payroll taxes, but if it simultaneously pays more for the fossil fuel energy it uses, it doesn't necessarily have any extra money available to hire new workers. The economic theory behind the double dividend is that the relative cost of an employee will become lower, while the relative cost of using energy goes up. If managers can figure out a way to do so, the business will be better off by relying on more human labor and less fossil fuel based energy. The result is more employment and less pollution. ETS is being tried in a number of European countries on a moderately wide scale. While computer modeling of the economic effects of ETS generally predicts desirable outcomes (reduced pollution without a reduction in overall economic activity and with growth in employment), there is not yet enough real-world evidence to say for sure if the double dividend occurs from a full-scale tax shift. Even without a double dividend, many people concerned about the growing crisis of global warming feel that a single dividend of reduced use of fossil fuels is reason enough to make the shift. Because of similarities with a generic consumption tax, environmental taxes could be regressive in their overall effects. If a carbon tax replaces the income tax, poor people who paid little or no income tax will then face higher prices for their transportation and heating needs, while rich people who paid high income taxes will save more from that reduction than they pay in new energy costs. But the specific structure of a green tax system can also lead to fairer results. New environmental taxes can be accompanied by reductions in pre-existing regressive taxes, or by reducing other taxes in a way that enhances their progressive structure. The overall result can be neutral or even a move towards a more progressive tax system. Sources and resources: Jeff Hamond, Hardy Merriman, and Gary Wolff. "Equity and Distributional Issues in the Design of Environmental Tax Reform." Redefining Progress, October 1999. http://www.redefiningprogress.org/publications/pdf/ETR_equity.pdf Alan Sanstad And Gary Wolff. "Tax Shifting and the Likelihood of Double-Dividends: Theoretical and Computational Issues." Redefining Progress, February 2000. http://www.redefiningprogress.org/publications/ets_doublediv/ets_doublediv_execsum.html Erkki Koskela and Ronnie Schöb. "Alleviating Unemployment: The Case for Green Tax Reforms." European Economic Review, No 43 (1999), pp. 1723-1746. http://www-f.uni-magdeburg.de/~vwl1/forschung/forschung_dateien/alleviatingUnemployment.pdf J. Andrew Hoerner and Benoît Bosquet. "Environmental Tax Reform: The European Experience." Center for a Sustainable Economy, February 2001. http://www.rprogress.org/newprograms/sustEcon/eurosurvey.pdf Wikipedia. "Ecotax." A nice overview of environmental tax ideas. http://en.wikipedia.org/wiki/Green_tax_shift. Wikipedia. "Feebate." Explanation of a tax reform similar to ETS that can be implemented towards specific goals, such as increasing automobile fuel efficiency. http://en.wikipedia.org/wiki/Feebate. Ministry of Finance (Sweden). "The Budget for 2005: A Commitment to More Jobs and Increased Welfare." Includes some details of Sweden's ETS. http://www.sweden.gov.se/sb/d/4173/a/30037. World Resources Institute. "Tax Reform and the Environment: Why and How?" http://pdf.wri.org/green_fees_tax_whyhow.pdf © 2006 Center for Popular Economics Econ-Atrocities are the work of their authors and reflect their author's opinions and analyses. 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