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Revisions to the Tax System
For the Benefit of the Environment
Bruce Barbour - 1998
Introduction
There is no doubt that people in the western world are consuming goods, materials and carbon based energy at a rate which is not sustainable. The production of goods for consumption uses materials and energy, and produces pollution, including carbon, and if excessive, environmental degradation is a by product. The simple fact is we need to reduce consumption to a level with which the environment can cope. It is also clear that we need to directly reduce the amount of fossil fuel based energy consumed.
One of the best ways to decrease consumption is to increase the cost of goods and services, including energy. It is proven that if the cost is increased consumption will decrease (the economists call this price elasticity). This is opposite to market forces which tend through competition to force the price of goods down which usually has the impact of increasing the consumption.
One of the significant economic levers that government has is the ability to impose taxes, which it can do however it sees fit (subject of course to its ability to convince the electorate that such taxing is necessary). How it has seen fit has in the past has been dictated by conventional economic theory and political expediency. Conventional economics says private consumption of anything is good and indeed the populous has also been educated (and brainwashed!) into agreeing with this proposition. Consequently the taxing regime has been set so as not to impact excessively on consumption. Consumption taxes have been set relatively low in comparison to other taxes such as income tax and company taxes. As the aim is to decrease consumption the low taxes on goods and fossil fuel based energy consumed need to reversed and a significant proportion of taxes should be collected through sales taxes on all goods and energy sold and consumed in Australia.
In the past sales taxes have been flat i.e. the same rate is applicable to all goods sold. However while increasing all goods by the introduction of a flat percentage tax rate would reduce consumption in order to get the best result for the environment it would be better if the cost increase due to the sales tax would be proportional to the environmental damage the consumption / use of the good, including energy, causes.
The current Goods and Services Tax (GST) does not achieve this and consequently should be removed. It is a flat tax that (largely) does not discriminate on environmental or even social grounds. It is also administratively intensive.
It should be noted that in 2005/06 the GST and other taxes (excise and others) on goods represents 28% of Government income. (GST was 16% of this total. Of the remaining 72%, income tax is 47% and companies tax is 20%.) Consequently there is potential to make taxes on goods and materials a greater percentage of the total tax take.
In the new sales tax system the level of sales tax on each item would be determined by two factors which are very interwoven:
- the environmental impact of a service or good due to its manufacture and distribution; and
- the need to decrease overall carbon production to meet global and environmental targets.
The Environmental Impact of a Good or Service
The environmental impact of a service or good due to its manufacture and distribution is called an "Externality Charge". It is applied to cover the costs to the community of the product that is not included in normal production costs. Proportionality to the environmental impact is important as it will discourage production and consumption of of the most environmentally damaging products to a larger extent than goods that are less environmentally damaging.
The level of environmental damage of a good is related to a number of factors:
- The amount of energy used in manufacture and distribution and the environmental impact of the energy production. Energy production is environmentally damaging when the energy produced is from fossil fuels;
- Other pollution generated in manufacture and distribution;
- The pollution generated from disposal at end of life; and
- The materials used in manufacture and the environmental impact of the materials production and the scarcity of the material.
Of these items the first item on the above list, energy consumption used in production, is the most significant. So most of the sales tax, which would include a carbon tax, would be on the fossil fuel generated energy costs. Additional sales taxes would apply if the manufacture / distribution produces other pollution or it is considered that it is using materials or is a product that is environmentally undesirable, for example using old growth forest hard woods or is a piece of equipment with high phantom power consumption. Most of the environmental impact sales tax, other than energy carbon taxes, would be applied only when the object is sold to the final consumer or exported.
Let us look at an example, the production of a pinewood timber chair. Carbon taxes would apply to the petrol used in planting and tending the wood in a plantation, and to the chainsaws, equipment and trucks use to extract and mill the wood. The milled wood would be transported and then manufactured (tax on fuels, electricity etc.). For retail the retailer would have taxes on electricity use in the shop. So at each stage along the life of the good from raw product to consumption the good is subject to these taxes, predominantly through energy taxes. If the timber used was not pinewood but a hardwood with adverse environmental impact due to its extraction then additional taxes could be levied due to this. If the manufacturer and retailer can decrease the energy consumption they will be subject to less tax and consequently their product would have a significant price advantage over manufacturers that use more energy. There will be a great incentive to manufacturer to decrease the use of energy in the production of the good. Also the price of the good would be higher than under the old system and would therefore encourage less consumption. People may be encouraged to keep their old chairs a bit longer.
If for example the production used water this would also be subject to sales tax as it is desirable to limit the use of water. Could also consider additional tax surcharge on items that could be described as "luxury".
The Need to Decrease Overall Carbon Production
Australia (and indeed the rest of the world) has an obligation to decrease the amount of carbon and other greenhouse gases into the atmosphere. This is at present a moral obligation but in the future will become an international legal obligation as well as a moral obligation. The CO2e emissions target will be set under an international agreement. (This level will probably be too high a level to effectively tackle climate change - but that is another argument.) Australia will then be obliged to put the systems in place to meet that target. I believe the simplest, cheapest and most effective method of achieving this will be a carbon tax system. This could be in conjunction with the environmental taxes and a limited form of carbon trading.
Setting the level of any tax is at present very subject to political processes. Consequently it can be difficult, or more correctly politically risky, for politicians to be seen to be continually raising taxes, even if they are a carbon taxes. (This is seen already with the Australian Liberal opposition playing the increased tax card for the emissions trading system.) Consequently in order to attempt to take some of the politics out of the process I suggest the establishment of an independent panel charged with the responsibility for getting Australia's emissions below the target level. This panel could be thought of as being like the governors of the Reserve Bank. However instead of being charged with the responsibility of keeping inflation below the set limit using interest rates, the Climate Change and Environment Panel (CCEP) would be charged with the responsibility of keeping the CO2e production below the target level and to set other environmental and sales taxes. Their main tool for doing this would be the level of the carbon tax and the other sales taxes.
The way it would work is this:
- Initially there would need to be a phasing in period, so the CCEP would not have much duties in this period. In this period the carbon taxes would rise by a set amount each year. So for example it might announced that the carbon tax would rise by $5 per tonne per year for 5 years, meaning that by the end of the fifth year the tax would be $25 per tonne of carbon released into the atmosphere by the user of fossil fuel based energy or other release into the atmosphere (e.g agricultural industries).
- After that period the CCEP would take over and could raise or lower the carbon taxes depending on how Australia was going in reaching its CO2e targets (so long as it was not more than $5 per year). In order to give more certainty to the industry it would be necessary to announce this at least six months prior to the change, with a report outlining how Australia was going with the CO2e targets and an indication whether there is likely to be further increases in following year as well.
- There would be ability to carbon trade as well. So say if a company came up with a way of long term sequestering carbon in the soil they could generate carbon credits which they could then sell to other companies that are generating carbon as an offset or sold directly to Government through the CCEP. The value of the carbon offset would be very similar to the level of the carbon tax.
- The CCP would also be charged with setting other sale taxes including environmental taxes. The environmental taxes would be based on the cost to the community of environmental degradation or damage.
Distribution of Additional Revenue Collected
Carbon taxes will generate a lot of money. There are four ways this money should be used:
- to pay compensation to people to offset the increased energy costs;
- to pay compensation and to retrain and relocate displaced workers if this is necessary;
- to pay some compensation to the owners of CO2e generating industries; and
- investing directly in research on carbon lowering technology and also investing in the establishment of these industries and other well developed carbon lowering industries.
The proportions of each of these would need to be worked out by advanced modelling however the majority should be spent on compensation to people for increased energy costs. The means of this general compensation to people would be by lowering other sales taxes. This should work well as it will mean that one consumption based tax - the carbon tax - will be used to lower another consumption based tax - the general sales tax. Additional consideration might need to be given to raising pensions levels for further compensation to low income earners.
The payment for retraining and relocation is necessary for equity reasons. If people are hurt by Government policy then Government has a moral obligation to provide some assistance to get them re-established. This already happens in some industry restructure situations.
I believe it is necessary to pay some compensation to owners. for similar reason to paying compensation to displaced workers. If government policy impacts a sector then some compensation might be necessary. The means of compensation may be payment directly to shareholders
Employment
This system would lead to lesser consumption. As our current system is based on consumption if nothing else was done there could be a lessening of employment.
The displaced people can be (more) gainfully employed on environmental projects or alternatively decreasing working hours therefore spreading the work around.
Environmental projects will be an important source of employment. Systems could be set up to enable companies to decrease their sales tax liability by funding environmental projects. Alternatively the government would directly fund the projects out of taxes collected. I envisage a lot of the environmental projects would be organised through non government organisations (NGOs) developing environmental proposals, including costings and environmental and physical outcomes, and getting government approval. These projects would then be floated (tendered) to industry for funding or if not taken up by industry may be funded by Government. Industry, if they take up the project, would be responsible for ensure outputs are achieved. This should cut down government bureaucracy and harness the organisational ability and focus on efficiency of business for the benefit of the environment.
Other ways of increasing employment would be subsidising some trades or industries that are environmentally beneficial. For example repairs of electrical and other equipment and goods - currently we live in a throw away society due to the costs of repair and the lesser cost of new equipment - this is very wasteful. The subsidy could relate to the level of environmental impact savings from the consumer not having to purchase a new piece of equipment. Recycling and reuse industry could be similarly subsidised.
There could also be tax credits for design and business practices which are environmentally good. So if a business offers a ten or more year warranty on on their product this may qualify for a tax credit.
If despite the employment initiatives listed above there is still less work available I would suggest that people and business should be encouraged (by taxes (incentive and penalties) and targeted advertising) to adopt shorter working hours so that there is a level of work available for everyone. People will learn to live on less. If our recent ancestors could do it and not suffer a drop in happiness there is no reason we cannot be happy with less consumption now. I personally would love a four day working week and I am sure that many others would feel the same. There is very little relationship between happiness and consumption, once consumption levels are to sufficient to meet all basic needs.
Imports
Because these are manufactured overseas they will not have been subject to the same tax in their home countries as the Australian manufactured goods. Therefore sales tax would have to be applied in accordance with a deemed or estimated environmental impact of the product, unless the importer can show that their product has been manufactured in an environmentally sustainable way.
Exports
Because a significant proportion of Australian Tax would be coming from the sales tax the costs of the goods may be so high that they would be priced out of overseas markets. This is undesirable firstly because it would eliminate Australian jobs. Secondly goods manufactured overseas would not be as environmentally sustainable as goods manufactured in Australia, which would (because of the tax system) be at the leading edge of environmental sustainable manufacture. Consequently I would propose some sale tax relief for exporters of manufactured goods.
Green Power
Under this system it would be necessary to change the current green power sales arrangement. Currently green power is sold at a small premium which would be considerably less than the cost of brown power with sales tax. This would be scraped under the system. There will become a profitable market for buying green power. The market value and the price for green power would be set by the market in accordance with the demand. This would lead to large increases in demand and large expansion in its production. Electricity producers and also consumers (residential and companies) themselves would be encouraged to construct green power systems as the power so generated would be sales tax free. To business Green Power will become justifiable on economic and self interest grounds: business will not have to justify to their shareholders the use of Green Power due to social conscience or "triple bottom line" consideration (although companies should still be encouraged to adopt this philosophy in all their operations).
Difference to Carbon Taxes
This system has some similarities to Carbon taxes, however I believe it to be superior in a number of ways. It enables taxing on all environmentally damaging processes, not just those that produce carbon; it would probably result in higher taxing on environmentally damaging processes and therefore more likely to decrease consumption; it will encourage environmentally projects as sales tax trade-offs.
