Taxation

Taxation originated as a means to finance the activities of government, and that still remains its primary purpose in most of the world. However, in recent years, taxation also has been used to discourage undesirable behavior or encourage socially desirable activity. In some cases, these policies take the form of a “user fee,” in which the taxpayer is charged for specific activities, such as a charge to dump garbage in a landfill. These fees should serve as a deterrent that would discourage the activity or behavior. In addition, these fees may be designed to pay, at least in part, for the cost of the activity to the government. In other cases, a reduction in taxes is given to encourage desired activities or behavior. An example would be a deduction from income for mortgage interest paid, which serves to encourage home ownership. Elements of all these approaches are found in green taxation.

Green taxation, also known as environmental taxation or ecotaxes, most likely originated in 1920. Economist A. C. Pigou suggested that the problem of externalities could be addressed by imposing a tax equal to the cost of the environmental damage caused by the activity. An externality is an effect imposed on someone who is not a party to the activity in question. Frequently, it is an unintended consequence. For example, the effects of pollution are felt by those who did not cause the pollution, whereas those causing the pollution do not bear the cost of what they caused. Pigou would tax the polluter for the costs caused by the pollution.

The central aim of taxation in a green economy would be to make prices reflect true costs, thus internalizing the externalities. Studies in a number of countries have found that replacing existing taxes on employment, income, and profits (goods) with taxes on energy use (bads) yield at least three advantages: better overall national economic performance, higher levels of employment, and an improved environment. These taxes are seen as enabling society to achieve environmental goals in the most efficient way. Such a tax structure facilitates a move to a more sustainable economy, in addition to encouraging innovation and the development of new technology. Finally, with revenues being realized from the environmental taxes coupled with an improved economy, the level of other taxes can be reduced. In essence, taxing the “bads” has the desired result of moving toward a cleaner environment, with the added benefit of better economic performance. When taxes on employment and income are reduced, the result is an economic boost.

[Page 432]Austria, Denmark, Finland, Germany, the Netherlands, Sweden, and the United Kingdom have taken this environmental tax reform approach, but the United States has followed a different path. The United States has used tax credits and deductions for targeted activities that have positive environmental effects. By and large, the United States has not embraced the approach of taxing environmentally damaging activities. Revenues from environmentally related taxes in the United States have been about 3.5 percent of total tax revenues, compared with 7 percent in Organisation for Economic Co-operation and Development countries, including highs of 10 percent in Denmark and 16 percent in Turkey.

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