Shifting taxation from labour to the environment: a good idea?

14
Apr

Shifting taxation from labour to the environment: a good idea?

Currently, taxes are a destructive nuisance that can penalize workers and distort economic decision-making. Using common sense, many nations are starting to improve their tax structures by reducing taxes on labour and drawing more revenue from activities that damage the environment. This concept, usually referred to as ‘environmental tax shift’, is based on simple economic principles and holds the possibility not only of reducing the tax burden on working people, but also of increasing environmental protection without harming the economy. By raising taxes on things we want to protect – like virgin natural resources – and things we want less of – like waste -, we are able to cut taxes on working men and women. As a consequence, it is getting more attractive for employers to hire new people, thereby boosting economic growth.

Although well-designed environmental taxes can increase resource efficiency in a very cost-effective way, and at the same time promote employment, economic growth and social fairness, environmental taxes are still an under-used tool. This is also the case for Belgium. Although several studies stress the potential contribution of environmental taxes to overall government revenues, Belgian environmental revenues only accounted for 2,2% of GDP in 2012. In addition, pollution and resource taxes are only 4% of all revenues from environmental taxes. In contrast, looking at the overall tax level, we see that Belgium in 2012 had the second highest tax levels in the EU, after Denmark. The tax-to-GDP ratio reached 45,4% in that year, a level significantly above the EU average (39,4%). Moreover, despite notable labour taxation reforms, Belgium still imposes relatively heavy taxes on labour with an implicit tax rate on labour employed of 42,8%, this percentage being the highest in the EU. For these reasons, recent reports of the European Commission, the OECD and the European Environment Agency for example, state that Belgium’s new centre-right government has to do more to achieve a tax shift reducing taxes on labour. In the reports, Belgium is advised to adjust the wage-setting mechanism and implement a tax shift to improve employment and competitiveness.

Within the Centre for Environmental Sciences of Hasselt University, economic and dynamic partial equilibrium optimization models are being developed in order to gain insight into these issues. Such models are known to be powerful tools for understanding and quantifying the complex links between economic activities and the natural environment. Furthermore, they not only make theoretical concepts less abstract but also allow analysis of real-world problems. Economic models developed in the Centre for Environmental Sciences have, for example, been used as a tool to quantify policy scenarios ex ante and to illustrate how a dynamic optimization model can be applied in the context of sustainable materials management. More specifically, the model is being applied to assess the impacts of environmental taxes like landfill taxes and extraction taxes on the evolutions of respectively landfilling and resource extraction in time. This way, the simulations generate a view on the efficiency of landfill and extraction taxes with respect to depletion of remaining extraction reserves and landfill capacities respectively, and overall welfare. In computing societal welfare figures, attention is being paid to the relative benefit of using environmental taxes instead of other, more distorting taxes like for example labour taxes, thereby supporting the double dividend hypothesis.

 

Image source: http://www.itinerainstitute.org/nl/artikel/slimme-tax-shift-een-middel-geen-doel

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