Earth Rights Institute - Financing Local to Global Public Goods: An Integrated Green Tax Shift Perspective

Financing Local to Global Public Goods: An Integrated Green Tax Shift Perspective

by Alanna Hartzok

Click here for CPA Journal story, "Trends in Taxation"

Presented at the Global Institute for Taxation Conference on Fundamental Tax Reform sponsored by Price Waterhouse Coopers and St. John's University, New York, September 30, 1999 and published in Taxation Alternatives for the 21st Century Proceedings of the 1999 Conference.

This paper details a number of successful practices and work-in-progress on green tax shift policies which harness incentives for efficient, equitable, and sustainable wealth production and distribution. Research is cited which shows the impressive potential of green tax reform to help solve major social, economic and environmental problems facing our global civilization. Additionally, presented is an integrated local-to-global public finance framework based on green taxation principles and policies.

World stability and human security require that we re-think the logic of globalization, including the best ways to finance public goods such as health, education, infrastructure, environmental sustainability and efforts for peace and conflict resolution. The challenge is to evolve a coherent, integrated and ethically based local-to-global tax system out of the current public finance hodge-podge of the world's more than 180 nation states.

Green tax shift policy is a rapidly emerging new perspective on tax reform which emphasizes the incentive capacity inherent in public finance policy. From this vantage point, taxation not only raises money necessary to fund governmental services it also reflects the overall value system of a given society, rewarding some activities while punishing others.

The goal of green tax shift policy is the creation of a system of public finance which will strengthen and maximize incentives for:

Fair distribution of wealth
Environmental protection
Wealth production
Provision of adequate government services
Peaceful resolution of territorial conflicts

Green tax reform makes a clear distinction between private wealth and common wealth. Private wealth is that which is created by individual and collective labor. Common wealth is that which is provided by nature.

This public finance approach removes taxes from privately created wealth and increases taxes and user fees on common wealth domains used for human economic production. Captured in brief soundbites, "tax waste, not work," "tax bads, not goods," "pay for what you take, not what you make," and "polluter pays" become tax shift principles readily translated into voter friendly policy recommendations with broadbased political support.

Reducing or eliminating taxes on private wealth means slashing taxes on:

Income, especially from wages, payroll
Capital, especially of sustainable quality
Sales, especially for basic necessities
Homes and other buildings

With careful calculations usually geared to overall revenue neutrality, green tax shifting balances cuts to the above by increasing taxes and fees on common heritage resource use such as:

Emissions into air, water, or soil
Surface land sites according to land value
Public lands for timber, grazing, mining
Electromagnetic spectrum
Geo-orbital zones
Oil and minerals
Fish in the ocean
Water resources

Green tax shifters also aim to eliminate numerous subsidies deemed no longer necessary, environmentally or socially harmful, or inequitable and unfair. Slated for drastic reduction or complete removal are subsidies for: ¹

Energy producton
Resource extraction
Waste disposal
Agriculture and forestry
Private transport and the infrastructure it requires
Investments designed to exclude labour from production.

So far these reforms have been proceeding in a patchwork manner, but what matters is that the process has begun and the principles are being clearly articulated. Combining the efficiency and fairness taxation criteria of both Adam Smith and Henry George, green taxes largely comform to what a "good" tax should be: ²

Cheap to collect
Fall as clearly and directly as possible on the ultimate payer
Embody no favoritism or special exceptions
Correspond to the payer's ability to pay
NOT bring about undesirable economic distortions.

Distilled to the essence,taxes should be cheap, direct, equal and benign. It is imperative that the fiscal policy for good democratic governance be guided by these fundamental principles. Unfortunately, most taxes are not based on what a good tax should be, but instead current public finance mechanisms largely exploit both people and the planet.

WORLD REVENUE REVIEW

The incentive signals of the world's taxation systems promote waste, not work. Approximating the composition of the world's $7.5 trillion tax pie reveals that 93% of taxes fall on work and investment while only 3% is collected from environmentally damaging activities. A mere 4% of global tax revenues is captured from natural resource use and access fees.³

A global tax shift scenario proposed by David Roodman at Worldwatch would collect 15% from environmental damage, 12% from land use and resource royalties (to total $900 billion each year) and cut environmentally harmful subsidies by 90%. This would free up an additional 8% of current revenues ($600 billion) and permit a nearly one-third reduction on wages and capital to 65% of total global taxes.⁴

Other researchers have calculated the potential for a total shift onto the full collection of resource rents, as will be detailed later in this paper. While being more ambitious in scope, this would also provide increased benefits through even stronger incentives for environmental protection and efficient, equitable wealth creation.

Billions of dollars have been loaned by the World Bank or channeled through the United Nations Development Program (UNDP) since 1965 to strengthen the capabilities of developing countries and to promote higher standards of living, faster and more equitable economic growth and environmentally sound development. While these explicitly stated UNDP goals are laudable, they have fallen far short of the mark.

Between 1994 and 1997 UNDP spent almost $6.5 billion. Of that amount, 26 percent went to eradicating poverty and livelihoods for the poor; 25 percent went for good governance; 24 percent for environmental resources and food security; 23 percent for public resources management for sustainable human development; and 2 percent for "other" which includes gender programs.⁵

But parts of our global economy are becoming weaker, with some 2 billion living below the poverty line,(which is to say they earn less than the equivalent of $300 annually.) In the past 15 years, per capita income has declined in more than 100 countries and individual consumption has dropped by about one percent annually in more than 60 countries.⁶ Clearly, larger detrimental influences have more than offset programs established by national and international aid agencies.

In 1960, the poorest countries, accounting for 20 percent of the world's population, had 5 percent of the world's income; the richest 20 percent had a 63 percent share. By 1990, the corres-ponding share of the poorest had declined to a mere 1.3 percent.⁷

The gap between the world's rich and poor has continued to widen with the richest one fifth now having 85 percent of the world's income. The 20% of the world's population which lives in the richest countries have generated almost three-quarters of the cumulative carbon dioxide emissions which are a primary cause of global warming. A fifth of the world's population is consuming four-fifths of all resources consumed annually, many of which are non-renewable.⁸

The world enjoys a $25 trillion economy. According to the United Nations, it would take just $80 billion to finance an anti-poverty program that could provide access to basic social services for all who are empoverished. "It is an ethical scandal that we do not provide the basics of education and health for everyone in a world with a $25 trillion economy," says Richard Jolly, author of the UN's Human Development Report (1997).⁹

UNDP now defines its major roles as eradicating poverty and providing an "enabling environment for social development."¹⁰ To further these goals UNDP intends to contribute to the sustainable management of environment and resources and establish basic social services for everyone. It is hoped that those working through this and other agencies responsible for global well-being will grasp the potential of green tax reform. If they do,they will have to fully confront the challenges of the world's present inequitable and inefficient tax systems.

UN officials point out that the cost of eradicating poverty is just one percent of the world's income. But since UNDP and other UN programs are funded by governments, and governments rely primarily on the taxation of wages, efforts to stimulate economic development are paid for by the income of workers throughout the world. And because the increase in land values which accompanies development is not recaptured for the common good, these efforts frequently have the unfortunate side effect of enriching the few who own and control land and resource wealth and pay low or no fees, taxes, or royalties for their privileges. The way the current market system is structured, as development proceeds, the rich/poor gap grows. A new philosophy and development approach is needed for the 21st century.¹¹

Green tax principles are an explicit and well-reasoned set of values and goals that can be succinctly stated - tax more heavily the behaviors that use and harm the earth's land and natural resources and untax activities we want to support and promote.

To reach the goals of equitable, sustainable development,closer attention must be given to the question of "Who benefits and who pays the taxes?"

Recommendations contained in UN documents, which advocate taxes on land and resources to ensure equitable access and to recapture land values enhanced from development activities, must be heeded.¹² Activities which damage common heritage resources of air, fresh water, land and sea must be penalized.

The footprint of industrial man is now pressed into every bit of the planet. High levels of poisonous industrial chemicals have been found in the Arctic peoples. If the entire world were to have the same patterns of consumption as the industrialised countries, total global industrial output would need to rise by four to tenfold depending on future population levels. Pollution levels would be unimaginable. But because of the poverty of the poorest one fifth of the world's population, there is a need for a new model of sustainable 'eco-industrialism' which is less energy and resource-intensive.¹³

MARKET EFFICIENCY AND ECOLOGICAL EQUITY

The state of the earth now requires that the costs of industrial production and human commercial activity no longer be externalized onto the global commons. But bureaucratic regulations to prevent pollution are often complex, unwieldy and expensive. Sufficiently high user fees and pollution permits which encourage business and industry to find more efficient and cost-effective controls are examples of green tax incentives that limit harmful outputs.

The "Economists' Statement on Climate Change," signed by over 2500 economists including eight Nobel laureates, is the strongest formal recommendation for green tax shifting that has emerged to date. Noting that the Intergovernmental Panel on Climate Change had determined that there was indeed a discernible human influence on global climate, the statement urges market-based policies as the most efficient approach to slowing climate change. "The United States and other nations can most efficiently implement their climate policies through market mechanisms, such as carbon taxes or the auction of emissions permits. The revenues generated from such policies can effectively be used to reduce the deficit or to lower existing taxes."¹⁴

The exact structuring of the proposed taxes or auction permits is crucial in terms of global equity considerations. In 1990 the World Resources Institute (WRI) recommended apportionment of the responsibility for the carbon dioxide and methane emissions which contributed to global warming. However, it was found that the countries which produced the larger quantities of these gases had been given larger shares. In other words, those who had polluted the most would continue to have the right to pollute the most. The Centre for Science and Environment (CSE) launched a critique of the model, claiming that global environmental space should be equitably shared amongst all human beings on earth.

CSE's "Statement on Global Environmental Democracy"¹⁵ points out that the South needs ecological space to grow but that this space has already been colonised by the North. Recognizing the complexity of existing local-to-global property rights, two different economic approaches are recommended. For pollution from products originating within nations, market pricing mechanisms should be modified through public policy so that ecological costs of production and consumption are internalised. For global resources, "the sustainable use of global common property should be encouraged through equitable entitlements."

CSE sets forth a precise policy approach for the equitable apportionment of global common property. "Within a globalized economy, those who consume more than their fair share of the world's environmental space must be asked to buy the extra space from those who do not consume their share. And those who consume beyond their own share should pay economic penalties to a global fund which would compensate those affected by the resulting environmental damage, and underwrite a prevention programme."¹⁶

Equity is a moral, ecological, and political requirement for a sustainable future. Green tax shifting is based upon the principle of equity of access to resources for all nations and peoples. Calculations determine the amount of resources which can be consumed relative to population size and what amount of pollution will be permitted to be discharged into the environment. "The equity principle is fundamental to a modern, humane capitalism, and its proponents should support free and fair access to resources as the crux to providing quality of life for all" is how Michael Carley and Philippe Spapens express it in their book Sharing the World.¹⁷

Viewed from the ethic of equal rights to the creation, the undertaxation of land and natural resources is a form of theft from the common heritage. Governments charge much less than they could and should for the extraction and use of resources. Unfortunately, it is the case that much collusion between government and vested interests factor into this unequal equation. Fortunately, an organized and focused citizenry can remedy the situation. All can join in on one of the most revealing games on earth - who owns the planet and what is it worth?

Here are a few examples of common wealth rip-offs: ¹⁸

In the 1970's and 80's President Marcos granted cheap timber concessions to his allies which then generated $42 billion in profits for an elite 480 families while impoverishing millions of rural people by ruining their land.
In Indonesia, loggers paid only $500 milllion in 1990 for rainforest logging concessions, worth some $3.1 billion (in 1997 dollars). For every dollar that flowed into the country as aid, another dollar flowed out to timber magnates with ties to President Suharto.
In California's Imperial Valley large scale farm owners hold rights to a quarter of the flow of the Colorado River, water from which is delivered for free via a federally funded 80-mile canal. In the Central Valley, the government charges many farmers only $2.84 for a thousand cubic meters of water, but other farmers pay 28 - 50 times as much for water from a state irrigation project.
Hardrock mining is nearly free on public lands in Canada and the USA. In 1994 a Canadian firm bought 1,950 acres of federal land in Nevada for $5,190; once mined the tract contained gold worth $10 billion - 2 million times as much as the transaction price.
In Alaska's Tongass National Forest, one of the world's largest temperate rainforests, 500-year old trees are turned into cellulose for disposable nylon stocking. Between 1982 and 1988 the government spent $389 on roads and other services for private clearcutting operations yet earned only $32 million.
The US has just given away to private corporations the right to digital portions of the electromagnetic spectrum valued at $70 - $110 billion.

Here are examples of public collection of common wealth revenues:

In 1992 Honduras began public auctioning of timber concessions and succceeded in raising sale prices from $5 to $33 per cubic meter of timber.
The Philippines also began reforming timber pricing policies in the 1990s, and now captures about 25 percent of the value of its timber, up from 11 percent.
In contrast to the timber private windfalls, Indonesia now captures 85 percent of the in situ value of its petroleum deposits, enough to generate a quarter of its tax revenues.
Norway is also collecting substantial royalties from its oil reserves and is putting much of it into a pension fund whose value is expected to climb to $25,000 per Norwegian by 2000.
Developing countries charges to industrial-county governments for fishery access now total $500 million to $1 billion a year.
Costa Rica, home to 1 in 20 of the world's terrestrial species, is charging for access to the genetic secrets of their biological wealth. The Merck drug company has agreed to pay to the country's Instituto Nacional de Biodiversidad $1 million for providing 10,000 biological samples.
A 1996 auction of airwave frequencies brought $10 billion into the US government, more than any other auction in history.

RESOURCE TRUSTS FOR PUBLIC REVENUE

Let us be clear that the strategy of shifting taxes off of work and onto the use of land and other natural resources is contained within a system which gives monetary value to the contributions of both labor and land. The shift depends on institutions of market value land assessments and mineral valuation. Nature is thus ascribed value in its commodified forms.

Privatization of formerly common lands subordinated both people and social institutions to the market economy. But these same market forces, harnessed differently, can be used to provision an environmentally sustainable and socially stable base for the expansion of human potential into limitless realms of mental and spiritual expression.

Levying user charges on natural resources may require fine tuning which takes into account various other values, such as cultural, historical, and generational. Even so, such efforts may arouse the suspicion of those seeing the limitations of market systems. Writers such as Michael Goldman are concerned about new forms of social control that can lead to intensified exploitation of all forms of nature. Goldman states:

"If we are to learn anything from the 1992 Earth Summit in Rio - the Greatest Commons Show on Earth - it is that the objective of the Summit's major power brokers was not to constrain or restructure capitalist economies and practices to help save the rapidly deteriorating ecological commons, but rather to restructure the commons (e.g., privatize, 'develop,' 'make more efficient,'valorize, 'get the price right') to accomodate crisis-ridden capitalism."¹⁹

Al Andersen at the Tom Paine Institute²⁰ acknowledges this concern and recommends that a large part of common heritage wealth be excluded from the monetized economy to be held as trust lands for parks, paths, roads and nature reserves providing habitats for all species.

Land and resources in what is now both the public and private sectors can be used as market commodities yet still be treated as common heritage wealth. This does not require as great a stretch as one might imagine. Zoning practices allow a degree of community control in land use decisions on private land, and current forms of property tax do collect a portion of land revenues to fund local government. User fees for grazing and timber and mineral extraction on public lands are usually much too low, but they are being collected.

These kinds of current land use rules can be viewed as covenants which condition land access. Local-to-global trusts, administered by demo