Tax Waste, Not Work

J. Andrew Hoerner

April 15, 2005

J. Andrew Hoerner is the director of research at Redefining Progress.

Each year, on April 15, we send in our tax return and have to remind ourselves that this payment actually buys us something. We are purchasing what a democratic government does, or is intended to do: “promote the general Welfare, and secure the Blessings of Liberty to ourselves and our posterity.” We are purchasing democracy.

This year, however, we should ask ourselves how well the tax system itself serves these great aims. Think of our major taxes: personal and corporate income tax, payroll, property and sales taxes. Do these promote the general welfare? Absolutely. They finance essential public services that make living in America different from living in someplace without a democratic government. But taxes also discourage the activity taxed, and in doing so, they harm the general welfare by discouraging things we believe are valuable, like investment and job creation.

Is there another way? Can our tax system itself do good, and not just the revenue it raises? We believe that it can. By taxing activities we want to discourage such as waste and pollution, the tax system can be made to do double duty. Not only does the revenue serve the public interest, but the tax does too.

Here at Redefining Progress, America’s pre-eminent sustainability think tank, we have been studying this idea of taxing pollution and natural resource consumption for more than a decade. We’ve concluded that a quarter or more of all public revenues could be replaced if we began to tax waste and natural resource consumption. This means more money for schools and social programs, more jobs in your city and cleaner air to enjoy them all.

Redefining Progress recently performed an analysis of a more modest proposal that would replace part of the payroll tax with taxes on the harmful burning of fossil fuels that create global warming pollution. (Some of the revenue was also used to promote energy efficiency and renewable energy thus helping people and companies find ways to consume less oil and other fuels). We found that this proposal would increase GDP and create 1.4 million new jobs, while cutting global warming pollution by 50 percent relative to business as usual.

Our competitors abroad are already learning this lesson. The share of total tax revenue coming from charges on pollution and natural resources in European nations averages more than three times what it is here in the United States. This may help to explain why, despite the European Union’s heavier overall tax burden, its record of economic growth has been comparable to ours.

Our country boasts about rewarding hard work and ingenuity, but it sometimes seems like our tax system points in another direction. The more you work, the more taxes you pay. The more people you hire, the more taxes you pay. But if you would like to dump chemicals in the water or pump smoke into the air, the IRS is fine with that.

As a society, we hold up the virtue of personal responsibility as a model of personal behavior. Levying taxes on pollution and resource extraction would send a clear, common-sense message: If you make a mess, you have to clean it up. Instead, polluters foul our air and water for free, while the tax code has a tangled web of special subsidies that reward energy companies for digging holes in the ground.

Environmental tax reform helps the economy in other ways. It is truly the tax system of the future, reducing the burden on knowledge-based industries that invest in people or in technology, while gradually steering the economy away from dirty industries that consume scarce resources and pollute the air and water. In doing so, it puts our economy on a sounder footing by making growth more sustainable in the long run.

Like most good ideas, tax shifting is deceptively simple. It rewards people for working and companies for hiring them. That this would increase employment and incomes is economic common sense. Imagine for a moment a tax system that actually relied a little more on common sense. It’s time.

So as you mail in your tax return, ask yourself—wouldn’t I prefer to have less tax on my wages and more tax on pollution?  If the answer is “yes,” remember that you just sent in a payment on our democracy. You bought it. You might as well use it.