Renewable Matter # 21 / May-June

A Fiscal Update: The Winning Strategy

by Femke Groothuis

Western tax systems put a heavy burden on labour whilst hardly taxing pollution and the use of natural resources. Our tax codes are a major barrier for entrepreneurs that wish to create more jobs and shift to sustainable and circular business models. The Ex’tax Project Foundation, with the help of knowledge partners such as Cambridge Econometrics, Trucost, Deloitte, EY, KPMG Meijburg and PwC, studies the potential of a shift in taxation from labour to natural resources.

The latest study by The Ex’tax Project, New era. New Plan. Europe., shows that by implementing the tax shift, the European Union and EU member states would benefit from higher economic growth, more jobs and a cleaner environment. A tax shift would result in a 2% increase in GDP, additional employment for 6.6 million people, and reduce carbon emissions by 8.2%, all of which by 2020 and saving € 27.7 billion on energy import bills over a five-year period.

 

Growing support for a tax shift

According to the European Commission, a tax shift from labour to less distortive tax bases such as environmental taxes is “a winning strategy.” “One of the biggest tax policy challenges in Europe is that governments tend to rely on labour taxes far too much. However, overdependence on labour taxes can be a disadvantage when they make it too expensive to employ people. Passing some of the tax burden onto other things, such as pollution, could help accelerate employment and economic growth. Smart taxation is a winning strategy.”

The proposal to shift taxes from labour to natural resource use has been around for years. Many institutions have called for such a tax shift. Finally, this proposal is also gaining momentum thanks to the work of the Ex’tax Project Foundation.

 

The polluter doesn’t pay

Considering current global challenges, such as climate change, water scarcity and geopolitical tensions over fuels and materials, it makes sense to use natural capital prudently. However, the reality is that the use of natural resources is almost entirely tax-free.

Meanwhile, governments worldwide even subsidise fossil fuel consumption (and thus, pollution) through tax expenditure and budget transfers. The IEA estimates (2015) fossil-fuel subsidies at € 278 billion per year; double the value of renewable energy subsidies. 

The polluter doesn’t pay. This is why we are now living in a situation where pollution kills 9 million people per year,1.2 billion people live in areas of water scarcity, and by 2050 oceans are expected to contain more plastics than fish.

 

Talent is the biggest cost

For many companies, the biggest cost is talent. In order to reduce costs, entrepreneurs have become very skilled in lowering their head count, using methods like automation, standardisation (as opposed to custom-made production), understaffing, outsourcing and lowering customer service standards. The way we have structured our tax system actually encourages businesses to make people redundant, causing more unemployment.

 

Circular economy on the rise

Recently, the concept of the circular economy has gained traction. However, circular business models tend to be more labour and knowledge intensive than ‘linear’ models that are focused on simply selling products; which then end up in landfills. When polluters roam free and labour costs are high, it’s an uphill battle to upscale circular activities. 

Shifting taxes away from labour is a good recipe for inclusive growth based on the qualities of people (manpower, craftsmanship and creativity), instead of the extraction of natural resources.

Our broken tax system needs a fundamental update to match the challenges of the 21st century. 

Is this going to be easy? No. But as Henry Ford once said: “If you do what you’ve always done, you’ll get what you’ve always got.” If we are serious about the Sustainable Development Goals and inclusive, circular growth, we have to start aligning fiscal policies with these objectives. 

 

 

Ex’Tax Project, www.ex-tax.com

New era. New plan. Europe.www.neweranewplan.com

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