EPIBuilding a Sustainable Future
Lester R. Brown

Chapter 11. Tools for Restructuring the Economy: Tax Shifting

Tax shifting involves changing the composition of taxes but not the level. It means reducing income taxes and offsetting them with taxes on environmentally destructive activities such as carbon emissions, the generation of toxic waste, the use of virgin raw materials, the use of nonrefillable beverage containers, mercury emissions, the generation of garbage, the use of pesticides, and the use of throwaway products. This is by no means a comprehensive list, but it does include the more important activities that should be discouraged by taxing. There is wide agreement among environmental scientists on the kinds of activities that need to be taxed more. The question now is how to generate public support for the wholesale tax shifting that is needed.

In this area, Europe is well ahead of the United States, largely because of the pioneering efforts of Ernst von Weizsäcker, formerly head of the Wuppertal Institute and now a member of the German Bundestag. He not only pioneered this concept, but has provided ongoing intellectual leadership on the issue.3

The way tax shifting works can be seen in the table compiled by Worldwatch researcher David Roodman. (See Table 11-1.) It looks at Europe, where most of the shifting has occurred, and gives a sense of how nine countries have reduced taxes on personal income or wages while increasing them on environmentally destructive activities. Sweden was the first country to begin this process, with a program to lower taxes on personal income while raising them on carbon and sulfur emissions to discourage the burning of fossil fuels, particularly those with high sulfur content. For several years, only the smaller countries of Europe, such as Denmark, the Netherlands, and Sweden, followed this path. But during the late 1990s, France, Germany, Italy, and the United Kingdom joined in.

Tax shifting has appeal in Europe in part because it creates jobs, an issue of concern in a region plagued with high unemployment. Shifting from the use of virgin raw materials to recycled materials, for example, not only reduces environmental disruption, it also increases employment since recycling is more labor-intensive. This was one of the reasons Germany adopted a four-year plan of gradually reducing taxes on incomes while increasing those on energy use in 1999. When completed, this will shift 2.1 percent of total revenue generated; with an annual revenue budget of nearly $1 trillion, it would shift $20 billion a year. Denmark leads the way in the amount of taxes being shifted, with a total of 3 percent moved thus far by measures adopted in 1994 and 1996. The Danish government taxes the use of motor fuels, the burning of coal, the use of electricity, landfilling, and ownership of motor vehicles. The tax on the purchase of a new car in Denmark is typically higher than the price of the vehicle itself.4

The Netherlands, a country with an advanced industrial economy concentrated in a small land area, uses taxes to curb the release of heavy metals, including cadmium, copper, lead, mercury, and zinc. Between 1976 and the mid-1990s, the industrial discharge of these various elements fell 86-97 percent each. The Dutch firms that developed the pollution control equipment used to achieve these reductions gained an edge on firms in other countries, greatly expanding their export sales and earnings.5

The environmentally destructive activities now taxed in Europe include carbon emissions, sulfur emissions, coal mining, landfilling, electricity sales, and vehicle ownership. Countries elsewhere might tax other activities to reflect their particular circumstances. Among these might be taxes on excessive water use, the conversion of cropland to nonfarm uses, tree cutting, pesticide use, and the use of cyanide in gold mining. Over time, taxes on environmentally destructive activities could increase substantially, perhaps one day accounting for the lion's share of tax collection.

Governments typically take care to ensure that environmental taxes are not socially regressive. David Roodman describes how Portugal has avoided this with its tax on water, an increasingly scarce resource in this semiarid country. The town of Setúbal provides households with 25 cubic meters of water per month that is tax-free. It then "terraces" additional water taxes, raising the tax through three successively higher levels of consumption.6

The concept of taxing environmentally destructive activities received a major boost in the United States in November 1998 when the U.S. tobacco industry agreed to reimburse state governments $251 billion for past Medicare costs of treating smoking-related illnesses. This was, in effect, a retroactive tax on the billions of packs of cigarettes sold in the United States during the preceding decades. It was a staggering sum of money
nearly $1,000 for every American. This was a tax on cigarette smoke, a pollutant that is so destructive to human health that it may cause more damage than all other pollutants combined.7

This "tax" that the industry is paying on past damage associated with smoking will be funded by raising the price of cigarettes. Between January 1998 and April 2001, the average U.S. wholesale price of cigarettes climbed from $1.33 per pack to $2.21, a 66-percent increase in two years. It is expected to climb further, helping to discourage cigarette smoking.8

Another value of environmental taxes is that they communicate information. When a government taxes a product because it is environmentally destructive, it tells the consumer that it is concerned about this. And restructuring the tax system has a systemic effect, steering millions of consumer decisions in an environmentally sustainable direction every day—ranging from how to get to work to what to order for lunch.

Tax shifting to achieve environmental goals has broad support. Polls taken in the late 1990s in both the United States and Europe show overwhelming support for the concept once it is explained. On both sides of the Atlantic, support of the electorate is 70 percent or greater. Tax shifting is also an attractive economic tool because it can be used to achieve so many environmental goals. Once it is used in one context, it can easily be applied in others.9

If the world is to restructure the economy before environmental destruction leads to economic decline, tax restructuring almost certainly will be at the center of the effort. No other set of policies can bring about the systemic changes needed quickly enough. In an article in Fortune magazine that argued for a 10-percent reduction in U.S. income taxes and a 50¢-per-gallon hike in the tax on gasoline, Harvard economist N. Gregory Mankiw summarized his thinking as follows: "Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming—all without jeopardizing long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer."10


Table 11-1. Shifting Taxes from Income to Environmentally Destructive Activities
Country, First Year in Effect
Taxes Cut on
Taxes Raised on
Revenue Shifted1
Sweden, 1991 personal income carbon and sulfur emissions
Denmark, 1994 personal income motor fuel, coal, electricity, and water sales; waste incinceration and landfilling; motor vehicle ownership
Spain, 1995 wages motor fuel sales
Denmark, 1996 wages, agricultural property carbon emissions from industry; pesticide, chlorinated solvent, and battery sales
Netherlands, 1996 personal income and wages natural gas and electricity sales
United Kingdom, 1996 wages landfilling
Finland, 1996 personal income and wages energy sales, landfilling
Germany, 1999 wages energy sales
Italy, 1999 wages fossil fuel sales
Netherlands, 1999 personal income energy sales, landfilling, household water sales
France, 2000 wages solid waste; air and water pollution
1Expressed relative to tax revenue raised by all levels of government.
Source: Adapted from David Malin Roodman, "Environmental Tax Shifts Multiplying," in Lester R. Brown et al., Vital Signs 2000 (New York: W.W. Norton & Company, 2000), pp. 138-39.


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3. Ernst U. von Weizsäcker and Jochen Jesinghaus, Ecological Tax Reform (London: Zed Books, 1992).

4. David Malin Roodman, "Environmental Tax Shifts Multiplying," in Lester R. Brown et al., Vital Signs 2000 (New York: W.W. Norton & Company, 2000), pp. 138-39; German annual budget from U.S. Central Intelligence Agency, World Fact Book, www.cia.gov/cia/publications/factbook, viewed 1 August 2001; vehicle tax in Denmark is 180 percent, as reported by Marjorie Miller, "British Car Buyers Taken for a Ride," Los Angeles Times, 23 July 1999.

5. David Malin Roodman, Getting the Signals Right: Tax Reform to Protect the Environment and the Economy, Worldwatch Paper 134 (Washington, DC: Worldwatch Institute, May 1997), p. 11.

6. David Malin Roodman, The Natural Wealth of Nations (New York: W.W. Norton & Company, 1998), p. 189.

7. U.S. Department of Agriculture (USDA), Economic Research Service (ERS), "Cigarette Price Increase Follows Tobacco Pact," Agricultural Outlook, January-February 1999.

8. USDA, ERS, Tobacco Situation and Outlook, September 2000, p. 8; USDA, ERS, Tobacco Situation and Outlook, April 2001, p. 5.

9. Roodman, op. cit. note 6, p. 243.

10. N. Gregory Mankiw, "Gas Tax Now!" Fortune, 24 May 1999, pp. 60-64.


Copyright © 2001 Earth Policy Institute