Tax Policy Affects Behaviour

by Eric Rempel

Regular readers of this column will know that we, at South Eastman Transition Initiative, believe one of the most fundamental policy changes needed to achieve a sustainable economy is a tax shift. Our country needs to move away from taxing primarily income, whether at the personal or corporate level, to a place where we are primarily taxing the extraction of non- renewable resources, resources the planet we call home has a limited amount of. Appropriately, the resource tax most talked about today is a carbon tax, although carbon consumption is not the only resource consumption that needs to be taxed.

I want to emphasize again that the purpose of a resource tax is not to increase government revenue. Whether government can justifiably increase its revenue is a completely separate question. The purpose of a resource tax is to encourage desirable behaviour..

Surely the status quo is ironical. Think of a company considering bringing a widget onto the market, let's say a disposable plastic spoon.. Suppose the raw material for the manufacture of this spoon could be either petroleum-derived plastic, or a cellulose product made from stuff that has been going into the landfill. Typically the company will make its decision based on the relative costs of these two raw materials. Significantly and sadly, our tax system will not encourage one technology over the other, this despite the fact that the use of one raw material will create problems in the future and the use of the other will reduce future problems. Our current tax system does not encourage the responsible use of manufacturing inputs.

But our current tax system also discourages this company from using human energy. Instead it creates an incentive to use more oil based energy. We create this incentive by under-pricing oil. The price of oil only includes the cost of extracting and delivering it. The price includes no recognition that using it now will create scarcity for future generations, nor does it include the cost of pollution caused by burning oil.

Furthermore our tax system also discourages the creation of jobs by increasing the cost of labour. Suppose a workman is getting $20.00 per hour. Under the current system, suppose he takes home $16.00. $4.00 is deducted for income tax. Were we to shift to a resource tax, that $4.00 (or a portion thereof) would no longer be deducted, so the workman will likely be willing to work for less than the $20.00.

We tend to regard our tax structure as progressive. When we say that, we usually mean that the people earning more money pay tax at a higher rate than folks earning less. In my opinion, a truly progressive tax system would encourage desirable behaviour and discourage undesirable behaviour.

Politicians are reluctant to talk about a resource or carbon tax, probably because they think this would be unpopular; that it would not get them votes. It's up to us voters then, to convince them otherwise.