**Fiscal systems have a powerful impact on societies. To help solve global challenges we need a fundamental rethink on how taxes are raised. High taxes on labor are preventing healthy, sustainable economies and labor markets. Placing taxes on pollution and consumption of natural resources creates systems that are pro-growth, pro-jobs and pro-equality – aligning them with the UN Global Goals. **
Tax and the UN Global Goals
Adopted by 193 countries of the UN General Assembly, the Sustainable Development Goals (the SDGs or UN Global Goals) set out today’s main challenges and priorities. These range from fighting poverty and combating climate change, to improving global health and biodiversity. However, if these 17 goals and 169 targets represent a clear ‘to-do list’ for humanity, our fiscal systems are alarmingly out of sync. Currently the way taxes are raised prevents – or at least disincentivizes – people and businesses from acting on these priorities.
Public revenue is largely raised on employment, while pollution and resource-use remain relatively untaxed, or even subsidized. In the 28 EU countries, on average, 50.5% tax revenues come from labor (namely payroll taxes, personal income taxes and social-security contributions). Just 6.3% of tax revenues are ‘green’ taxes (mainly on energy and mobility)i. In the United States, the ratio is 80% laborii, 3% green tax.iii In Brazil it’s 36% versus 2%.iv Asian economies also show modest green-tax revenues: just 13% in India; 9% in Korea, 7% in China, 5% in Japan and 1.3% in the Philippines.v
Meanwhile governments around the globe actually subsidize fossil fuel consumption (and thus, pollution) through tax expenditures and budgetary transfers. The IEA estimates 2014 fossil-fuel subsidies at $493 billion, four times the value of renewable energy subsidies – thus hindering the achievement of Affordable and Clean Energy, among other SDGs.vi
Putting taxes on labor incentivizes businesses to minimize the number of employees (again with direct negative implications for SDGs – Decent Work and Economic Growth to name one).
Introducing sustainable products is harder still when competing with products derived from ‘tax-free’ resources and subsidized fossil fuels. High labor costs hold back labor-intensive R&D efforts and ‘circular’ business models such as take-back systems, repair and maintenance services.
Bringing about a shift
While national governments hesitate about implementing fiscal reforms, the movement is gathering momentum. The OECD, IMF, World Bank, European Commission and ILO have all called for a change from labor-based taxation towards tax on natural resource use and consumption. Business groups like the World Business Council for Sustainable Development (WBCSD) and the Business & Sustainable Development Commission (BSDC) also support such fiscal reform.
Against this backdrop Dutch think tank The Ex’tax Project recently brought together fiscal policy experts from the world’s largest tax firms (Deloitte, EY, KPMG Meijburg and PwC) to create a fiscal strategy for inclusive, circular economies in the European Union.vii The group’s budget-neutral scenario decreased the tax burden on labor (for consumers and employers), instead increasing VAT-rates and excise duties on fossil fuels, as well as taxation of electricity, water and carbon emissions. The new model was found to have substantial financial and societal gains.
Macro-economic modelling by Cambridge Econometrics showed positive GDP and employment results in each of the 27 countries reviewed. By 2020, GDP levels were 2.0% higher, with employment levels 2.9% higher than business as usual. In real terms, an extra 6.6 million people were employed.
UK-based company Trucost assessed the scenario’s impact on economic metrics (financial capital) as well as the external benefits to society in terms of social and natural capital (including the health impacts of employment, reduced carbon emissions and pollution). The estimated total value added for the EU-27 was more than €1,100 billion over five years.
Leading the change – business and government
While changing fiscal systems is difficult, the basic principle is very simple – ‘tax less what you want more of’. Specifically on carbon pricing, business leaders are playing an important role in building critical mass. 675 Companies and 175 investors with over $11 trillion in assets signed the Paris Pledge for Action and many are acting in anticipation of the policy that they believe is inevitable.viii As the BSDC states:
“Progressive leaders are not waiting for governments to act on price before doing anything. Some have already started to “shadow price” social and environmental costs in internal accounting, in effect preparing for the future in which markets are sustainable.”ix
Of 500+ corporations applying shadow pricing, the commission gives the example of America’s fourth largest craft brewery, the New Belgium Brewing Company, which charges itself 2.4 cents for every kilowatt-hour of power generated from fossil fuels. The self-imposed ‘tax’ creates a powerful incentive to use clean energy and provides a source of capital for sustainable investments.
New business models are emerging everywhere: from deploying electric vehicles (Deutsche Post/DHL); to offering solar panel purchase and installation services (IKEA), and collecting e-waste metals for recycling (Teck). But as Paul Polman (CEO of Unilever) states:
“Companies cannot do this alone. (…) when it comes to pricing carbon, companies’ internal carbon prices can only be sustained if that price materializes in the real economy, through policies that create a level playing field for all.”x
Responsible tax is about shifting financial incentives to enable growth based on human capital (capacities and talents) rather than the extraction of natural resources – a model that fits the Global Goals like a glove.
It’s time government, business and civil society worked together to bring about a ‘tax shift’ to further catalyse adoption of this more positive model of growth.
Femke Groothuis is Founder and President of The Ex’tax Project, a think tank focused on the transformation of fiscal systems to create jobs and sustainable growth. The foundation creates practical tools that enhance understanding of the dynamics of a tax shift from labour to natural resource use and pollution.Her latest study in cooperation with Deloitte, EY, KPMG Meijburg, PwC, Cambridge...