Citizens Guide

to Environmental
Tax Shifting
For a:
Cleaner Environment
Stronger Economy
Fairer Tax Code

A Friends of the Earth Publication

June 1998

This report was made possible by the generous support of the Nathan
Cummings Foundation, the W. Alton Jones Foundation, the Rockefeller
Family Fund, the Surdna Foundation and the Energy Foundation.
Written by
Hanno Beck, Brian Dunkiel and Gawain Kripke
With editorial assistance from Lynn Erskine
Introduction by Paul Hawken
Friends of the Earth
ISBN 0-913890-81-2
Printed on 100% recycled paper, 50% post-consumer content.
This report will be made available for free via the internet. Please point
your web browser to: http://www.foe.org.
Additional copies of this report are available for $15 each
(includes shipping charges) from:
Friends of the Earth
1025 Vermont Avenue, N.W. Suite 300 Washington, D.C. 20005
(202) 783-7400 ext. 239

About Friends of the Earth . . .

Founded in 1969, Friends of the Earth is an environmental advocacy
organization with affiliates in 58 countries. Friends of the Earth
focuses on the root causes of environmental degradation and
seeks to help citizens influence the matters that affect
their lives and their environment.
Since 1990, Friends of the Earth has played a leading role in
advocating policy reforms to move tax laws more in line with modern
environmental concerns. As this report illustrates, FoE is committed to
raising public awareness of the choices that exist to promote a more
environmentally sustainable economy and society.
For information on our work and how to become a member of
Friends of the Earth, please call the Membership Office at
(202) 783-7400
or visit our website at: http://www.foe.org.
Or, write us at 1025 Vermont Avenue, N.W. Suite 300
Washington, D.C. 20005

Citizens Guide
to Environmental
Tax Shifting
For a:
Cleaner Environment
Stronger Economy
Fairer Tax Code

A Friends of the Earth Publication

June 1998

Tax Shifting

Introduction
One of the most fundamental policy changes ever undertaken by
national governments is underway, a tax revolution that could
transform economic, social and environmental dynamics in all
nations. It has been called a tax shift, green tax reform and ecological taxing. Whatever you call it, its goal is to revise the fundamental purpose of taxes. Instead of swaths of revenue extracted
at will from people and commerce, tax shifting transforms revenue collection into an exquisite policy tool that can enhance the
environment, reduce governmental demands and expenditures,
improve societal welfare and promote innovation and jobs
and all that happens before the money is spent on government
programs.
As economists have long known, we use less of what is taxed and
more of what is not. This general principle makes setting tax policy an issue of one basic question What do we want more of,
and what do we want less of? Thats a question we can all
answer. We want more well-paying jobs, less government waste,
more environmental protection. We want less pollution. Why
not have it all and banish the onus of April 15th from the calendar at the same time? We can.

In the past twenty years, the United States has demonstrated

brilliant technological leadership in many sectors, from satellite
communications to software, from microprocessors to the
Internet itself. While the world dramatically globalizes and
reconfigures itself, policymakers continue to build upon an
anachronistic tax system that contains an unruly compendium of
loopholes and compromises. This amalgam is the product of a
handful of high-powered lobbyists, special interest groups and

A Citizens Guide

exhausted, late-night Congressional committees. The only reason it works is because American taxpayers must comply with
the rules its the law.
Of course, it doesnt work well, but instead skews and distorts
economic activity away from what is desired and sensible. Its
immediate affect is a large and unnecessary industry comprised
of the Internal Revenue Service and hundreds of thousands of
tax lawyers and accountants, an annual paroxysm of spending
that consumes a minimum of $230 billion in compliance costs
apart from the taxes themselves. Its long-term affect is social
and environmental degradation. Revising the tax system
rearranges the incentives and monetary flows that determine
social, economic, and ecological outcomes.

Tax Shifting

ii

In this booklet, Friends of the Earth outlines with simplicity

and clarity the potential of true tax reform, what issues are at
stake and the paths to reformation. It may seem that tax shifting, unlike flat or value-added taxes, is a special interest
approach to taxation. Not so.
Tax shifting cuts across politics, philosophies and theories, and
benefits many disparate elements of society. Rock-ribbed conservatives will find environmental activists agreeing with them:
a fair tax system gives the taxpayers real choices and incentives.
A tax system that complements and enhances command and
control regulation with market-based incentives that allow business and communities to find the best solutions to common
problems. Whether the taxes are revenue-neutral reduction of
taxes on labor, feebates, pollution contoured levies, or industrial refund systems, tax shifting offers double dividends to society
by changing behavior while providing revenue.

Using time-honored criteria of what comprises a fair tax system,

Friends of the Earth clearly shows that green tax reform benefits the greatest number of people in society with the simplest
and least expensive system, one that is direct, benign and just.

Paul Hawken is the co-founder of several businesses, and the

author of The Ecology of Commerce, The Next Economy, Growing
a Business, and co-author of the forthcoming Natural
Capitalism.

iii

A Citizens Guide

Tax Shifting

Table of Contents
Chapter I
The Current Tax Mess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Chapter II
Windows of Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Chapter III
Ecological Tax Reform at Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Chapter IV
Prospects for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Chapter V
What Makes a Tax Fair? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Chapter VI
Reforming the Tax System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Recommended Reading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

A Citizens Guide

Tax Shifting
2

I. The Current Tax Mess

Taxation Frustration

Federal, state and local governments

combined collect over $2 trillion
from us each year. Yet, the problems
our governments are supposed to
address continue to grow.

$2
trillion
in taxes

deteriorating infrastructure
increased competition
stagnant or declining wages
environmental degradation

mericans are dissatisfied with the tax system currently in

place in the United States. But most of the solutions
being offered today are failures they fail to be realistic and
even fail to satisfy our own common
sense.

As a nation, we face challenges such

as deteriorating infrastructure, increased international competition, stagnant or declining wages and environmental degradation. The federal government has amassed an enormous debt
over the last decade. State and local governments have been
cutting some expenditures and raising new tax revenues, yet
they have brought us no closer to solutions.

And so we focus on taxes. The power to tax, to seize wealth

with or without the owners approval, is a key feature distinguishing a government from a business or an individual. Many
of us feel a natural resentment toward that unique power. All of
us have a great interest in that power being used in ways that
help our nation rather than hurt it.
You should make up your own mind about taxes. For too long,
tax policy has been manipulated by powerful special interests
that do not know you, do not care about you and do not even
respect you or your community.

A Citizens Guide

Taxes have an impact on multiple facets of our lives, not just

economic transactions. The tax laws that we make influence
where we live, what we eat, how we treat wildlife, what crops
we plant and how rapidly we cut down forests. Taxes affect our
lives just as powerfully as safety regulations and environmental
laws do. By consciously weaving a set of tax laws that match our
societys values, we can more consistently uphold those values.1
Lets take a quick look at the current tax landscape. When you
combine federal, state and local revenue, you can see which
taxes are the most prominent:

Tax Revenues for 19922

(United States, all levels of government combined)

Tax Shifting

Payroll 28.1%

Individual Income
30.0%

Property 9.0%
Corporate
Income 6.3%

Other 9.4%
Sales, Gross
Receipts 13.2%

Motor Fuel 2.2%

Customs, Duties 0.9%

3%

Surprised?
You might find a few surprises in there. For example, individual
income taxes dwarf corporate income taxes, and sales taxes take
in more money than the property tax. But perhaps the most
striking thing about the pie chart is whats missing you can
see plenty of tax revenue is taken from people who earn an
income or buy goods, but where is the slice representing taxes
paid by polluters? Earning an income is something we all like,
and pollution is something we all hate, so why do we tax
income heavily and overlook pollution as a target for taxation?
In fact, some tax laws appear designed to give extra assistance,
not punishment, to those who deplete or pollute natural
resources:3
c

The mining of minerals, even toxic materials such as

mercury and asbestos, gets a special income tax
deduction called a percentage depletion allowance.

Investments in oil and gas enjoy a special passive

loss tax shelter that investments in clean, modern
businesses do not receive.

Solid waste incinerators release toxic substances into

the air, yet construction of these incinerators can be
financed through bonds that are exempt from federal
income tax.

These are a few samples. Dirty Little Secrets, a 1995 report

from Friends of the Earth, identifies more than $22 billion in
tax breaks for corporate polluters and environmentally harmful
activities. Thats more than $22 billion that could be spent to
meet critical societal needs or could stay in the pockets of individuals paying other taxes.

A Citizens Guide

The major taxes currently being used in the United States are
as follows:4

Tax Shifting

Type of
Tax

1992 Approximate What is

Revenue Raised
Taxed

Paid
By

Individual
Income Tax

$591,636,000,000

A percentage of
adjusted income

People who
have an income

Corporate
Income Tax

$123,865,000,000

A percentage of
adjusted profits

Corporations that
make a profit

Sales Tax

$260,394,000,000

A percentage of
certain retail sales

Consumers who
buy things

(Real)
Property Tax

$178,536,000,000

A percentage of
the value of a
property including
land plus
improvements

Owners of land
and/or buildings

Payroll Tax

$554,629,000,000

A percentage of
gross employment income

People who have

wage/salary
income and their
employers

Before we proceed, lets pay special attention to one important

entry on this chart and the pie chart above see that significant chunk called payroll tax? Its the bundle of Social
Security, Medicare and unemployment taxes, along with similar
state and, sometimes, local levies for such government-mandated programs and services as disability insurance. The federal
government prefers to call it all insurance trust revenue5 and
does not list it as a tax, but to you and me it looks, smells and
hurts just like a tax. Indeed, in 1992 the payroll tax raised nearly as much as the individual income tax itself. At the federal
level, the money is placed in a collection of trust funds that are
tapped for Social Security and related payments to individuals.
This is the same fund that you often hear will start to run

out early in the 21st century as the baby boom generation

starts to enter retirement. The social programs supported by
these taxes are certainly valued, but we need to consider how to
refinance them without reducing benefits and increasing the
burden on workers.
Payroll tax revenue is earmarked for social insurance expenditures and not general government spending, so its a somewhat
special case and we wont be discussing it in much detail, but
you should note this: The payroll tax is the fastest-growing of
all major taxes. For example, the maximum possible social
insurance tax payment for a worker jumped from $374 in
1970 to $5,329 in 1992, an increase of 1,325 percent!6 Per
capita personal income grew by only 398 percent during the
same period.7 And remember, employers must match these tax
payments 1992 payroll tax rates were 7.65 percent of earnings for individuals plus an extra 12.85 percent from employers,
for a total of 20.5 percent. Now youre beginning to see why
downsizing is so attractive to business taxes like this can
make employees seem awfully expensive.

We have just expressed some cynical opinions about taxes. You

may have some cynical views, too. Americas history is full of
patriotic tax rebellions, tax reforms and elections won or lost on
the issue of taxes. An outside observer could draw the conclusion that there is something wrong with Americans that we
will never be satisfied with a system of tax laws, no matter how
well constructed they may be. Perhaps we simply live in an era
of frustration over taxes, and were stuck with it.
However, shrugging your shoulders does not make a problem
go away. If we are frustrated about tax laws that seem needlessly complex, insulting and cumbersome, perhaps that is because
those tax laws really are needlessly complex, insulting and
cumbersome!

A Citizens Guide

Mere tax cuts dont bring relief, especially when the government is already in debt. The source of tax relief for America in
the late 1990s is not through simplistic cutting but through
increased tax fairness. By going back to some basic American
principles, we can find fresh, fruitful approaches to the tax
mess.
Proposals have been offered that would impose a flat federal
income tax or a national sales tax. Although supporters of those
ideas see them as panaceas, we will see later that the proposals
will fail to give citizens what they need. Americans deserve far
better than another round of the tax the other guy, dont tax
me game. Or as author Louis Eisenstein put it,

Taxes are a changing product of

8

earnest efforts to have

Tax Shifting

others pay them.

Nevertheless, you ought to be smiling right now as you hold

this booklet in your hands because tax reform that would benefit you, your community and the planet is available.

The Mighty Horse

If you read the next two paragraphs, you will
become very dangerous to the wealthy special
interests that currently enjoy special tax loopholes and favors.

A small tax,
positioned
poorly, can
have a much
more detriImagine a horse capable of carrying a 200mental effect
pound burden without difficulty. Thats when than a large
the burden is placed on the horses back. If
tax, posiyou tie a 200-pound weight to the horses leg, tioned well.
you have crippled it the animal can hardly
walk. Tie the 200-pound burden to the horses
tail, and it cannot move at all.
That horse is our nations economy, and the burden is, of
course, the tax burden. For years, people have focused on ways
to make the burden lighter, so that the horse can move more
freely. What they have failed to realize is that the placement of
the burden is at least as important as its weight. A small tax,
positioned poorly, can have a much more detrimental effect
than a large tax, positioned well.

Those who enjoy enormous private privileges do not want you

to understand this!

200 lbs.

Independent of amounts raised,

fairness in taxation is a goal that we
can and should strive for. No matter
how many dollars the public sector
takes, the burden of taxation should
rest as much as possible on the
horses back, not on its leg or its
tail. We can ensure that critical positioning of our nations tax burden.

A Citizens Guide

II. Windows of
Opportunity
Cutting Costs, Cutting
Externalities
In the United States, economic rewards go to those businesses
that can keep their costs low. This may sound obvious, but it is
such a reliable guide to predicting how many business interests
act that it bears repeating economic rewards go to those
businesses that can keep their costs low.
Of course, this means that certain questions are easy to answer
if you are a business:

Tax Shifting

10

A. If you want to expand your business, and you can get

the same results from either hiring 10 more workers
or using a new production process that happens to
release chemicals into a river, which will you do?
Simple whichever costs less.
B. If you want to expand your business, and you can get
the same results from either a new power supplier
who pollutes a lot or a supplier who pollutes very little, which will you choose?
Simple whichever costs less.
We can all see why many business interests act in the destructive, anti-social ways that they do when we bear in mind their
overriding desire to keep their costs low.
Tax laws are a factor that businesses take into account in making their plans; tax law can therefore be an effective place to
make changes that business will notice.

What are Externalities?

ou might have heard

the word externality
or the term negative
externalities used when
people discuss the economics of pollution. These
words actually have fairly
simple meanings, and a
couple of examples will
make them clear.
A nuclear power plant does
not only produce power
it yields radioactive waste as
a byproduct. As you know,
that byproduct is extremely
dangerous and as a result
puts the region surrounding the plant at risk. To
some extent, risk makes the
region a less desirable place
to live. In this case, wed
say that the nuclear power
plant had imposed an enormous negative externality
on the surrounding region.

nality, and this can be

measured economically as
residents and businesses find
it more desirable to locate
near to the flower garden
higher property values
result from the pleasant aromas, and the values could
fall if the garden closed.
So, an externality is a
byproduct one that
might have economic
importance, yet one for
which you might be able to
evade responsibility. It need
not be material noise is a
negative externality, and
beauty is a positive externality. Most people dont want
to be near noise and do
want to be near beauty.

11

There can be positive externalities, too. Ever walk near

a flower garden? The lovely
smells emanating from the
flowers are a positive exter-

A Citizens Guide

Polluters Pay (And Learn)

Polluters will
either pay
for their own
cleanups, or,
better still,
decide not to
generate as
much pollution in the
first place.

Tax Shifting

12

To keep costs low, a business can be expected

to try to externalize its costs; that is, to
impose its own costs on others rather than
paying them itself. The business will profit if it
can ignore or deny some of its costs of production. If a business succeeds in escaping
some of its costs, then the responsibility to
remedy the situation clean up a polluted
river, for instance falls on the shoulders of
the taxpayers. By contrast, the polluter pays
principle holds that a polluter should bear
the cleanup costs for its actions.

Polluter Pays Principle:

the costs of pollution should
be paid by the polluter,
not the taxpaying public.
It should be clear that the assignment of costs is a critical problem for the free market economy, pitting the interests of some
businesses against the interests of other businesses, people and
the environment.9 The dumping of toxic wastes can ruin an area
that drew tourists, thereby eliminating tourism-related businesses and jobs; agribusiness interests that allow chemical fertilizer
runoff into the Chesapeake Bay harm consumers and producers
who depend on Bay seafood; timber lots and fish farms can be
harmed by acid rain caused by other businesses; and so forth.
So how can we work to protect ourselves against having to pay
the pollution costs of others? The natural solution is to make
the producers of costs pay for those costs; assign costs to polluters in the form of taxes. Polluters will either pay for their
own cleanups, or, better still, decide not to generate as much
pollution in the first place.

The polluter pays idea is as American as

apple pie. Our traditions of responsibility,
individual accountability and caring for others go hand in hand with this principle. You have earned the
results of your hard, productive work. If those results are valuable, you have made a good profit. If those results are negative,
such as pollution, they are still your responsibility and you cannot abandon them.
Tax shifting will build the proper assignment of costs into our system of tax laws and at the same time reduce other tax burdens.
Here are some examples of these ideas at work. Ecological tax
reform has made considerable headway in European nations
and many of the best examples come from there.
Italy is a nation hardly at the forefront of environmental policy. Nevertheless, in 1989, Italy introduced a
tax on plastic bags.10 Abandoned plastic bags were an
eyesore on Italian beaches and on the sea, and posed a danger
to dolphins who could swallow a plastic bag and die.
(Additionally, most plastic bags are not biodegradable, although
this point was disputed by some in Italy.) Thus, there is a cost
associated with plastic bags that was not reflected in their price.
This cost had been imposed, by default, onto society and the
environment, and the new tax sought to remedy that.

13

By levying a tax of 100 lira (about 6 cents) per plastic bag on

importers or producers, the Italian government created a new
signal to the market economy the cost of plastic bags was
now greater compared to alternatives. The tax was about five
times as great as the manufacturing cost per bag,11 so this signal was large. And from 1989 to 1992, the government took in
over 250 billion lira (around $150 million) through this tax.

A Citizens Guide

The Italian plastic bag tax example is consistent with the principles of fair taxation. It is fairly cheap to collect because it was
levied at the point of production or importation. It removes a
favoritism from the existing tax structure. Until 1989, makers
of bags with fewer environmental costs permanent mesh
bags, for instance were treated no better than the plastic bag
makers who imposed their costs on society. By ending the
implicit subsidy of plastic bags, the tax helped to restore a level
playing field among the businesses producing
competing types of bag.

Tax Shifting

14

The tax falls directly on the ultimate

payer nothing stops merchants from
trying to pass along the full cost of
plastic bags to their customers, but customers, facing alternatives such as paper
or mesh bags, could not be coerced into
paying more. And finally, the tax does
not bring on any undesirable economic
distortion in fact, it removes an anti-environmental distortion from the economy.
This ecotax could be made more effective by making several
changes. For instance, the revenue generated by the Italian
plastic bag tax was not specifically used to offset some burdensome, distortionary tax, nor was it used to fund any particular
environmental restoration or conservation program. This is a
missed opportunity. The enforcement measures for Italys plastic bag tax could also be improved to prevent individuals from
wrongfully avoiding the tax.

A Double Dividend
Can be Twice as Good
Physicist Niels Bohr wrote, there is not much hope if we have
only one difficulty, but when we have two, we can match them
off against each other. Paradoxically, it is often easier to solve
two problems than just one, and this insight is the key to the
double dividend concept. Ecological tax reform offers the
promise of cutting environmental costs currently imposed on
society, and reducing onerous taxes on people, both at the
same time.
Robert Repetto, the senior economist at the World Resources
Institute put it this way:

Switching some of the revenue burden from taxes on

income, employment, and profits to environmental

15

charges on resource waste, collection, and pollution

would yield double economic benefits.
The Double Dividend:
shift taxes to cut environmental
costs currently imposed on society by
polluters, and reduce onerous taxes
on people, both at the same time.
Were overdue for a big step forward in our economic wisdom.
Many U.S. jobs are being lost or exported to low-wage countries with insufficient environmental protections, and environmental degradation is proceeding. We can start to alleviate both
problems, in the way Bohr remarked, by imposing taxes on pollution and shifting tax burdens away from labor and other
taxes. The well-designed ecological tax reform will accomplish
these two goals simultaneously.

A Citizens Guide

The Double
Dividend:
use ecological tax
reform to cut
environmental costs currently
imposed on
society by
polluters,
and reduce
onerous
taxes on
people, both
at the
same time.
16

These ideas need to be implemented now.

Environmental concerns about climate
change and other problems are growing, but
also, many other nations are starting to
supercharge their tax policies and the
United States needs to keep pace. The global
market for environmental goods and services
is projected to be $572 billion by the year
2001. We dont want to find ourselves in a
situation 10 years from now where all the
best anti-pollution devices are labeled
MADE IN SWEDEN the United States
can and should play a leadership role in the
new trend toward tax shifting, but must
move rapidly to do so. Businesses that seize
opportunities now will have more profits and
more job growth, but United States businesses are in danger of missing out.

Tax Shifting

Tax shifts have already been put into practice:

In 1991, Sweden began levying a carbon dioxide tax. Burning
fossil fuels adds carbon dioxide to the atmosphere, and some
fuels have greater carbon content than others. The tax is levied
on the average carbon content of fossil fuels. This applies to
coal, natural gas, fuel oil, etc. For example, the portion of this
CO2 tax that falls on gasoline raised the price at the pump by
about 40 cents per gallon, or 51 cents per gallon after the tax
was expanded in 1993.12
To balance the effects of the CO2 tax, other taxes were cut.
Income tax was decreased in 1991, and a decrease in the valueadded tax (VAT) was made in 1993. In 1992, the CO2 tax
brought in more than $1.1 billion, a significant amount for a

relatively small nation. Other nations are proceeding with tax

shifts that include reducing other taxes, especially those on personal income. Spain raised a gasoline tax to yield an extra $10
billion, while offsetting the new revenue by cutting social security tax rates on employers and employees.13
By opening our eyes to the impacts of taxation and differences
among sources of revenue, we can make economically and environmentally beneficial adjustments without altering total revenues. We truly can move the weight from the horses tail onto
its back.

Green Taxes Up, Other Taxes Down

A tax shift similar to the Swedish CO2 tax could be a powerful
way in the United States of assigning proper costs to placing
carbon in the atmosphere and could allow cuts in other taxes.
In fact, there are several plausible ways to generate revenue
while reducing carbon emissions. The federal government itself
has seen fit to keep track of some of these options, in research
reports issued by the Congressional Budget Office.14

17

Suppose we wanted to knock the wind out of a big federal tax

taxes on labor, say. If we levied a fossil fuel tax of about $80
per ton of carbon, we could raise around $100 billion
annually.15 Now thats real money! If we cut that much out of
the federal payroll income tax, were cutting it by 22 percent.16
There are many possible ways to implement such a cut, but
they all spell a lot of tax relief. A tax shift like that would ease
the burden on workers while making pollution more expensive.

An $80 tax per

ton of carbon

$100 billion
annually

A Citizens Guide

A carbon tax of this sort, as far as consumers are concerned,

would be most directly felt in coal, home heating oil, natural gas
and especially gasoline prices. Gasoline, as a purchase that people
make consciously and frequently, is something that cannot be
taxed in a quiet or hidden fashion.17 Few people favor higher
gasoline prices in this case, approximately 50 cents per gallon
but when the accompanying tax cuts and incentives are put in
perspective, the scenario should be more appealing.
For in addition to higher prices on coal and petroleum products,
you would be receiving a definite tax cut, which could exceed the
extra tax you pay through higher gasoline prices. If you drive a
great deal relative to your income or drive a gas guzzler, you may
pay more overall; but if you drive less or drive a fuel-efficient car,
you save money. Your own choices about driving, not a committee of politicians, will determine your savings or cost.

Tax Shifting

18

A challenge of this sort is the kind Americans respond to positively. And the prospect of saving money is attractive. Moreover,
having the autonomy to make ones own informed choices about
driving, rather than paying a certain amount of tax regardless of
behavior, is respectful of individual freedom.
In the longer run, businesses and people would develop innovative ways to compensate for the higher cost of polluting superefficient vehicles, new technologies, etc. and so would pollute
less. Meanwhile, employment would be stimulated by the tax
cut, which is equivalent to a raise for all employees. The environment and the economy would both enjoy a positive benefit.
In summary, tax shifting does not just nibble around the edges
of the issue of taxation, but can take a big bite out of it! A tax
on carbon content of fossil fuels, or a more broad-based tax on
all energy sources, with associated cuts in other taxes is an

example of how a socially responsible change in tax laws can

have great impacts throughout society.

States are Exploring Environmental

Tax Shifts, Too

Minnesota

Maine

As frustration with taxes that make little sense increases, and the threats to
people and the environment caused by
global warming become better understood, many U.S. states are taking
matters of tax reform into their own
hands. Minnesota, Maine, Vermont
and Oregon are just a few that are
moving to combat greenhouse emissions while they fundamentally reform their
tax systems. What all of the proposals have in
common is that they would reduce taxes on
work and enterprise by raising taxes on pollution and waste.

Vermonts greenhouse gas

reduction action plan, for
example, explores how
over time Vermont can increase taxes on carbon emissions and return these revenues back
to the taxpayer in the form of tax cuts. The
Vermont Department of Public Service
projects that such a policy and the efficiency gains it would encourage could
provide a net economic benefit to the
state while supplying low and moderate
income Vermonters with more disposable income. In fact, this kind of a tax

19

Vermont

Oregon

A Citizens Guide

shift has been introduced in the Vermont and Minnesota

Legislatures.
Twenty states already have developed action plans for controlling greenhouse gases, specifically carbon dioxide (CO2). While
developing these action plans, recommendations for a tax shift
can be made. Has your state developed a plan?

19
11
14

20

Tax Shifting

17
2

States that have completed or are in the process of completing

greenhouse gas reduction strategies include:
1.
2.
3.
4.
5.
6.
7.

Alabama
California
Colorado
Hawaii
Illinois
Iowa
Kentucky

8. Maine
9. Minnesota
10. Missouri
11. Montana
12. New Hampshire
13. New Jersey
14. Oregon

15. Pennsylvania
16. Tennessee
17. Utah
18. Vermont
19. Washington
20. Wisconsin

Italics indicate the states plan is completed.

8
9

18
12

20
15

13

21

5
10

7
16
1

A Citizens Guide

Tax Shifting
22

III. Tax Shifting At Work

Air
The Swedish Refund System
Sweden began levying a tax on nitrogen oxide and nitrogen
dioxide in 1992.19 These NOx air pollutants worsen the problem of acid rain. Because of monitoring, measurement and
administrative costs, the tax is being applied only to the largest
power and heating plants, although it is being gradually
expanded.
So far, this sounds like a perfectly normal and good application
of the ecological tax reform concept, and certainly taxing nitrogen oxides does discourage their emission. However, the
Swedes ran into a special situation that forced them to be even
more creative. Since the tax was falling only on large Swedish
polluters, smaller Swedish plants and those located in other
nations would be given a competitive advantage. This would
trigger fierce opposition from the large polluters, undermine
the political popularity of the tax, and undermine Swedens
economic goal to
improve efficiency,
Pollution Production:
not ruin power
Low
plants.
High
Swedish

23

Government
Refund
More
Less

Taxes
Power Plant

If the revenue raised

by this NOx tax
were simply used to
decrease the income
tax, say, then
Sweden as a nation
would benefit from

A Citizens Guide

Tax Shifting

24

When businesses are

confronted
with the
choice of
effectively
funding a
competitors
new efficiency programs
versus their
own, they
will be
powerfully
motivated to
upgrade
their own
processes.

this revenue-neutral tax reform but the power

plant sector could be damaged considerably.
And so the Swedes found a way to preserve
revenue-neutrality for the power plants themselves, maintaining their competitive position.
The tax revenue collected is returned to the
payers based on their energy production.
If you produce a small amount of nitrogen
oxides per unit of energy, you receive a
refund greater than your tax. If you emit a
large amount of nitrogen oxides per unit of
energy, your refund will be smaller than
your tax.

This well designed tax keeps the total amount

of money among the polluters, merely redistributing it in accord with their effectiveness
at reducing NOx emissions. Moreover, the
tax scheme was effective. Investment in NOx
abatement technology rose, the cost of abatement fell, and
NOx emissions fell by 35 percent in the first year.
Nevertheless, this type of refund system would not be appropriate in all cases. Some environmental problems apply across
several industries at once, and the technique of making
revenue-neutral adjustments within a single industry might
not work. Additionally, the Swedish tax was focused on a fairly
small number of taxpayers, and expanding the system to
include many more taxpayers could lead to high administrative
costs.

The Swedish Refund System

collect money from a particular
industry, group or sector, and return it
to the payers. During either the
collection or the payout, use an
environmental criterion so that
money moves from heavier polluters
to lighter polluters.
The Swedish Refund System has many advantages it is
revenue-neutral, it rewards or penalizes all the polluters based
on their amount of pollution and it is cheap to administer.
When businesses are confronted with the choice of effectively
funding a competitors new efficiency programs versus their
own, they will be powerfully motivated to upgrade their own
processes. Also, this system is completely neutral as regards
international competitiveness. The particular polluting industry
as a whole neither gains nor loses any money, so its ability to
compete internationally (or domestically against other industries) is not hindered.

25

This charge/refund process can be generalized and used in

many circumstances to target specific environmental goals. To
take just one example, lets look at a noise tax. At the
Zaventem airport in Belgium, airlines are charged for the noise
their planes emit. This landing charge has been in effect since
October 1991.20 If this charge were simply a flat fee per airplane landing at the airport, there would be no incentive to
make less noise. But the tax is higher for noisier aircraft, and
also higher if the landing time is more likely to cause disturbance to the airports neighbors. By contouring the tax in this
way, the Belgians have built in incentives for the airlines to use
less noisy aircraft and to use the airport at times that cause less
disturbance.

A Citizens Guide

Water
Enormous Demand for
Predictability
Want to know something that virtually any business relies on,
needs for its success, is willing to pay for, and cant make by
itself? Its predictability. Companies can plan effectively if they
can predict the economic outlook for their business reliably.
Tax policy can be a very supportive or recklessly destructive
element of the economic mix. If governments raise your
taxes one year, cut them the next, and change tax laws in random fashion, a business will be less likely to invest for the
future.

Tax Shifting

26

If taxes affecting a certain business are solidly predictable, however, a business can make long-term calculations and commitments with much more reliability. Companies need that
reliability and ecological tax reform can provide it.
The most noticeable example of this comes from Germany.
Germany has levied a water-effluent charge since 1981, applied
to the discharge of toxic substances into water. Some pollutants
are taxed more heavily than others, based on their perceived
dangers.21
At first glance, a tax of this type might seem impossible to
achieve effluent discharge must be monitored and analyzed,
making the tax difficult and expensive to enforce and collect.
Too low a tax rate would bring in too little revenue to administer the tax and send too weak a signal to markets; too high a
tax rate would simply encourage illegal dumping of wastes.
Politically, polluters could be expected to fight fiercely against
such a tax.

A Tax That Can Ruin

or Protect the Countryside
Want to help create lots of
ugly urban sprawl? Heres a
simple recipe: levy a heavy
property tax in a big city.
That way, anyone wanting
to build or rehabilitate a
structure will face a big tax
increase. That discourages
urban development.
Meanwhile, anyone who
allows their building to
become run-down, even a
fire hazard or drug nest,
gets their property assessment lowered and enjoys a
tax cut! That doubly
discourages urban
development.
The unfriendly property tax
is a sure way to push economic development away,
out into the countryside,
abandoning the city and
worsening sprawl.23

The solution is available:

modernize the property tax
by making the tax on buildings much smaller or even
zero, and draw more tax in
urban areas and downtowns
revenue from site values
instead. Stop penalizing
redevelopment and rewarding deterioration! A modernized property tax can
draw the same revenue but
without destructive side
effects.

27

You may anger a few out-oftown land speculators or

slum landlords, but many
cities in locations as disparate as Pennsylvania,
Australia, New Zealand,
Denmark, South Africa and
elsewhere have already modernized their property taxes
to favor infill instead of
sprawl.

Yet Germany has been able to move beyond all these drawbacks
and stick with an effluent charge for 17 years. How? The key
was what the tax offered to industry predictability. The tax rate

A Citizens Guide

that took effect in 1981 was not subject to annual review and
change, but rather embodied a six-year schedule of increasing
rates. Six years of rising tax rates may sound pretty bad, but
industry knew what it would be dealing with and could plan
based on that. For instance, they could invest in water pollution
control technology and processes to reduce their tax.
In 1990, the effluent charges were amended and a new schedule of rates put in place. Again, predictability was ensured. This
time, the rates would rise every two years, starting in 1991 and
ending in 1999 with a new tax rate, which by that time will be
more than seven times as high as the original rate in 1981.

Tax Shifting

28

Businesses face many unknowns when deciding what to research,

what to expand and what to sacrifice. The ability to take tax
implications from the unknown column and place it among
the known factors gives a company an unusual advantage.
Think about it if you knew exactly what your own personal
tax rates would be for the next ten years, you could find a lot of
ways to work that knowledge to your economic advantage.

No Shortage of New Ideas

Other ecological tax reform innovations are being tried out as
well. One example with much promise for the future is the
municipal recycling credits system in the United Kingdom. To
alleviate problems of solid waste disposal in the United
Kingdom, a program to stimulate recycling of household and
small business waste was created in the Environmental
Protection Act of 1990.22 In an attempt to curtail waste collection costs, local Waste Collection and Waste Disposal Authorities
pay bounties to collectors (private companies, municipal councils) of material for recycling. We again see a program that sets
out its policy in this case a payment schedule rather than a

Green Taxes Should Complement

Environmental Regulation
Green taxes are an additional tool in the environmental
protection toolbox, not a replacement for all environmental regulation. For some environmental challenges, a regulation would best protect the environment; for other
problems, a tax would work best. In many cases, the most
efficient and effective protection strategy would be a combination of regulation and taxes. Here is a helpful guide
for when to use a tax approach to control an environmental threat:
c When the environmental problem is caused by the activities of numerous parties so that direct regulation would
be difficult.
c When the overall damage resulting from the activity is
not catastrophic.

29

c When the various parties face significantly different

abatement costs because of differences in technology,
age of equipment, size and availability of alternatives.
c When the dynamics of the environmental problem are
changing so much that any regulatory solution would
soon be obsolete.
c When the actual contribution to the environmental
threat by each party is difficult to monitor or determine, but a reasonable proxy for that contribution is
easily identified and monitored.18

A Citizens Guide

tax schedule and then allows market forces to make their

own adjustments to it, rather than dictating what those adjustments must be. By avoiding this micromanaging, government
is able to achieve its goals with a minimum of fuss and individuals are given a maximum of flexibility. The net result is simple:
Those who wish to recycle more get more credits.

Here at Home

Tax Shifting

30

In the United States as well, government units sometimes try

to cut the costs of fulfilling public obligations by offering
incentives for private sector actions that reduce the need for
such work. Washington state, for example, sought to reduce its
roadbuilding costs by offering credits to employers, to partially
offset payments the employers would make to workers for participating in ride-sharing programs.24 After a successful trial,
the program was expanded in 1996 and includes credits applicable to other modes of transportation in addition to ride-sharing. Nearly $1 million in credits were claimed, and the program
drew the participation of some 55,000 employees. This program gets people to work for about a third of the cost of building new highways to accommodate the same traffic.
The benefits were clear: the government saved more money by
curbing the need for building additional road capacity than it
spent in the form of credits; at the same time, fewer vehicles
traveling the roadways meant less pollution. The program, by
demonstrating the viability of ride-sharing and alternative
modes of transportation versus the blind construction of more
roads, teaches an important lesson that creativity in a complex situation can find a win-win approach in which even the
oft-ignored environment can benefit.
In the United States, other tax shifts have been made taxes
on certain chemical substances help fund the cleanup of haz-

ardous waste sites; tax incentives reward the

permanent protection of agricultural land,
timberland, and habitat. An energy tax proposed by the Clinton administration came
within two votes of passing in Congress.
Thats pretty impressive considering few
major new taxes pass on their first try.
However, as any activist knows, democracy is
most alive at the local level. Federal-level
change will be slow and will follow the lead
of states and localities that more fully
embrace tax shifting. Tax shiftings compatibility with local and regional-level government is yet another advantage.

This green
tax policy
gets people
to work for
about a third
of the cost of
building new
highways to
accommodate the
same traffic.

Some of the most important tax shifts can be pursued at state

and local government levels. Detailed proposals have been
developed for Vermont, New York and Minnesota, and other
states and regions are pursuing their own initiatives. People and
businesses that pollute more can be charged, and people and
businesses that pollute less can receive tax relief in the form of
reduced property, payroll and income taxes. The Swedish
Refund idea can be used to maintain revenues in a community
and to avoid giving other polluters in other localities an economic advantage.

31

Many states have already implemented green tax reforms on a

small scale. One recent study found that more than 450 environmental taxes are being used by U.S. states.25 The state of
Washington levies a surcharge on the sale of products that are
determined to contribute to litter. This litter tax revenue is then
used for cleanup projects.26 In Iowa, a fee is charged on soil
fertilizers, according to their nitrogen content.27 Polluters pay
in proportion to their release of nitrogen, a pollutant of surface
water and groundwater.

A Citizens Guide

Massachusetts levies a landfill tax of $1 per ton of solid waste

added. Indiana taxes the storage of petroleum products. In
Washington, a fee of $1 per new tire sold goes to tire recycling
programs. These taxes and others are
making the point that the polluter
pays principle can and should be
embedded in our tax laws. We need
not wait for federal-level reforms.
We can act at every level to
improve the system.
Taxes such as these
often in small
ways remove tax
distortions by properly assigning the costs that private polluters were formerly able
to push onto the public.

Tax Shifting

32

With tax shifting, creative ideas that can benefit citizens become
feasible. Lighter tax burdens for people, revenue-neutrality for
government, less environmental destruction and a leaner, more
competitive industrial sector can all result from a proper removal
of artificial distortions from the current tax system. Thats what
tax shifting is all about.

IV. Prospects for

the Future
Tax Shifting Gains Momentum
Tax shifting ideas have existed, in one form or
another, for decades. In recent years, however, ecological tax reform proposals have
received much greater attention and implementation. This trend is continuing.

We will tax
waste more
and jobs
less

The European Union has been working with ecological tax

reform ideas for many years, sponsoring studies and conferences
on the subject.
Political opponents are finding it easy to agree on tax shifting
principles. For example, in the United Kingdom, Conservative
British Chancellor of the Exchequer Kenneth Clarke said simply
we will tax waste more and jobs less, summing up in eight
words the core concept of tax shifting.

33

While the Conservative Party leader said that, the new Labour
government in the United Kingdom is promoting similar concepts. A number of new tax measures are being taken aimed
principally at improving the quality of air, particularly in urban
areas. The Labour governments 1998 goals include a sliding
scale for automobile taxes, with low fees for the least polluting
cars and higher fees for those that pollute more.28
Yet another political party, the Liberal Democrats, released a
paper calling explicitly for a gradual shift in the burden of taxation from income and labor to energy and pollution.29 The
Green Party has long advocated ecological tax reform.

A Citizens Guide

In Germany, ecological tax reform has been accepted by all five

major political parties. They differ in terms of specific proposals,
but agree on the soundness of, and need for fundamental
restructuring of tax laws to stop sending false economic signals.
Many corporations are tired of being mistrusted by large numbers of people and welcome a chance to do something positive
for the environment, if it is consistent with their overall corporate goals. With tax shifting, it appears that corporations and
environmentalists could finally find a common language.

Tax Shifting

34

While newer, cleaner industries are especially ready for tax

shifts, even older, resource-intensive firms are realizing that
their long-term prosperity hinges on prudent resource policy.
Governments and businesses have a common interest, says
British Petroleum, the fourth-largest oil company in the world,
in ensuring that proper environmental standards are met in
the most efficient way possible.30 In a detailed report, BP
asserts that Where markets can create incentives which reward
efficiency and encourage innovation, environmental goals are
likely to be achieved at a lower cost to both firms and the economy as a whole.
Trade unions,
including the
European Trade
Federation, have
Lab
also endorsed ecoor
logical tax
Pol
luti
reforms.31
on

Tax
Shifting

International agencies, often motivated by concerns

over global climate
change and other

environmental problems, are increasingly supportive of ecological tax reform initiatives.

For example, the World Energy Council stated It is necessary to phase out energy subsidies so that rational decisions are taken on the
basis of the proper costs.32 United Nations
commissions, agencies and studies have often
endorsed the ecological tax reform approach.

Where
markets can
create incentives which
reward efficiency and
encourage
innovation,
environmental goals are
likely to be
achieved at
a lower cost
to both firms
and the
economy as
a whole.

In the United States, even the Presidents

Council on Sustainable Development recommends that the country shift to tax policies
thatencourage employment and economic
opportunity while discouraging
environmentally damaging production and
consumption. The council also recommends
that a commission to study tax shifting be
established. No action has been taken yet on
this 1996 recommendation approved by a
diverse group of council members including the leaders of Dow
Chemical Company, Chevron, Enron, General Motors, AFLCIO and the Sierra Club.

35

A Citizens Guide

Tax Shifting
36

V. What Makes a
Tax Fair?
Key Principles
Tax shifting is an increasingly accepted idea not just because it
makes sense, but because it offers something that few other tax
ideas can match, or even pay attention to basic fairness.
Adam Smith, the Scottish founder of modern economics, listed
four criteria that represented principles of fair taxation; on this
side of the Atlantic, the American economist Henry George
gave a similar list.33
Of course, economists have always debated the precise meaning
of fairness in taxation, and do not even agree on what Smith
and George themselves meant by their principles. Nevertheless,
there is substantial agreement that these principles provide a
sound criteria against which we can measure a taxs fairness.

37

If you combine Adam Smiths and Henry Georges lists to

make a single list of criteria to which a good tax must conform,
you will wind up with something like this:

PRINCIPLES FOR FAIR TAXATION:

(a) taxes should be cheap to collect
(b) taxes should fall as clearly and directly as possible on
the ultimate payer
(c) taxes should embody no favoritism, no special
exceptions, and should correspond to the payers
ability to pay
(d) taxes should not bring about undesirable
economic distortions
Even more briefly, we could say taxes ought to be CHEAP,
DIRECT, EQUAL and BENIGN.

A Citizens Guide

If you are like most people, these principles match what your
common sense would tell you. Nobody likes taxes, but a tax
that conforms to these principles would at least be reasonable;
you could pay it knowing that you were contributing your fair
share and no one was avoiding his or her fair share.
Lets take a brief look at each item in the Principles for Fair
Taxation list as it applies to actual taxes.

CHEAP
This principle recommends that the cost associated with collecting a tax should be minimized, since collection costs help neither the taxpayers nor the government.
The federal income tax, for example, costs a lot for every dollar
it brings in. The Internal Revenue Service spent $28.4 billion
in fiscal year 1996, according to government estimates.34
38

Tax Shifting

Thats about $189 for each of the approximately 150.4 million

tax returns filed (e.g., individual, corporate, partnerships).
And running the Internal Revenue Service is by no means the
only cost associated with the federal income tax. Considerable
costs are borne directly by the taxpayers themselves keeping
records, filling in forms, hiring helpers, paying for tax accountants and tax attorneys, etc.

DIRECT
This principle seeks tax simplicity; no pointless redirecting,
recalculating or revising.
For an example of failure, consider a value-added tax (VAT)
that is widely used in Europe. (Some members of Congress
have proposed a VAT for the United States.) Suppose you buy

a product that just happens to have been produced in eight

stages, with each stage performed by a different company. Each
of the eight times the partly-finished product changes hands or
has value added to it, a VAT tax would be levied. That is not
simplicity!
v al

Step 3

Gizmo
x

v al

-a d d e d
ta

x
Step 2

ue

v al

-a d d e d
ta

ue

Step 1

-a d d e d
x

v al

ue

ta

-a d d e d
ta

ue

Step 4

$100 + 4 VATs

A VAT can be made more manageable via systems of credits

and accumulations so that the actual writing of a tax payment
check could be done only occasionally. Still, it should be clear
that businesses, many of which deal with large arrays of inputs
and outputs with varying amounts of added value, would not
benefit from complex compliance activities that contribute
nothing to their efficiency, cost-cutting or competitiveness.

39

EQUAL
This principle would ban special tax rules, or loopholes, that
apply only to one person or to a narrow range of interests.
When we see sensational stories in the media talking about
abuse of tax laws, they are usually relying on our intuitive sense
of this Equal principle to make us indignant. You can probably
remember some specific cases. Philadelphia Inquirer reporters
Donald L. Barlett and James B. Steele give a striking example.
Royal Caribbean is a cruise company with its headquarters and
ships based in Miami. From 1989 through 1992, revenue from
the cruise business totaled more than $3 billion. Its operating
profit or profit before interest expense and taxes was
$395 million. After interest payments of $237 million, the

A Citizens Guide

companys net income came to $158 million. On those profits,

Royal Caribbean paid no U.S. income tax.35 So a luxury leisure
business was able to abuse the tax system and pay nothing,
while the rest of us, with household incomes a good deal less
than $158 million, were writing checks to the IRS.
Or how about this one a tax break for corporate lawbreakers! Friends of the Earth has found that under current law,
polluters who cause environmental harm can fully deduct all
the costs related to illegally released pollution including cleanup
costs, legal costs, court settlements, even the cost of the polluting substance itself.36 This deduction means, for instance, that
while the Exxon Valdez oil tanker spill cost Exxon a lot of
money and public shame, it simultaneously allowed that corporation to cut its taxes by a whopping $300 million.

Tax Shifting

40

Or consider this: a tax law for just one individual. In the Tax
Reform Act of 1986 you remember, the act that was going
to make federal taxes simpler and fairer for everyone there
appears this clause: In the case of any pre-1987 open year, neither the United States nor the Virgin Islands shall impose an
income tax on non-Virgin Island source income derived from
transactions described in clause (ii) by one or more corporations which were formed in Delaware on or about March 6,
1981...
Barlett and Steele, reporting for the Philadelphia Inquirer,
discovered the actual meaning of that clause a man named
William M. Lansdale, a friend of Ronald Reagan and
Californias then-Governor George Deukmejian, wouldnt
have to pay Uncle Sam about $4.5 million on some of his
investments.37
Tax loopholes and preferences are the most anti-American of all
laws, because they create special privileges and, at the same

time, require the rest of us to pay for them.

Every dollar in lost tax revenue is a dollar
added to the tax burden of people who work
hard and play fair.

BENIGN

Every dollar
in lost tax
revenue is a
dollar added
to the tax
burden of
people who
work hard
and play fair.

This principle seeks to avoid economic distortions and must be used with special care.
Heres why. Every tax will, naturally, result in
people making economic choices that are different because of the tax. This cannot be avoided, but if taxes
can be focused on removing or redressing economic distortions
that already exist, they can positively improve the economys
functioning while raising revenue. We want to subtract distortions, not add them.

This Benign principle can also be thought of as the tax bads,

not goods principle. The decisions and new behaviors undertaken by people and businesses as they adjust to a tax will, if the
tax is true to this principle, be beneficial to the broad community and to the economy in general; the best-known examples
of this are sin taxes on liquor or tobacco intended to discourage drinking and smoking.

41

Heres an example of what happens when government ignores

the Benign principle. The window tax, used occasionally in the
Middle Ages and even during the 19th century in various
places in Europe, brought terrible economic distortions. The
tax charged a fee on the number of windows in a building.
Windows were thought to be a good proxy for a building size.
To escape the window tax, peasants boarded up their windows
and consequently lived in less sanitary conditions. Vermin and
disease flourished in the dark, stuffy houses.

A Citizens Guide

Cheap, Direct, Equal, Benign. Do you agree with these four

tax criteria? Talk them over with your friends. Nearly any tax
proposal will satisfy some of these criteria better than others
which one is the most important to you? The least important?
Is there a principle that you think has been left out of this list?

Politicians Have the Final Word

Lets remember that tax laws are not made by teams of fairminded economists. Politicians, acting for many reasons besides
fairness, make the tax laws. Politicians might prefer to repay a
political favor, help a friend, cover up a blunder, or divert attention from a bad decision rather than hold fast to the principles
given above.

Tax Shifting

42

Every democracy needs the participation of informed citizens,

and this is especially true with dollar-and-cents issues such as
taxation. Citizen involvement is the way to achieve more and
better democracy, keeping politicians from losing their way
among competing pressures.
As a result of political deals and political influence-peddling, we
can see plenty of flawed, unfair taxes in America.
Proposals for a flat income tax and for a national sales tax
have recently been made for the United States. Although claiming to be tax reform ideas, it is up to you, as a citizen, to
decide that for yourself. Would the proposals really help more
than they harm? Keep the principles close at hand as we take a
quick tour.

Flat Tax
Politics Trample Economic Wisdom
In 1994, U.S. Congressman Richard Armey (R-TX), House
Majority Leader, proposed a flat-rate income tax. The tax rate
would be 20 percent but was supposed to drop to 17 percent
later.38 The flat tax would, according to its supporters, be simple and eliminate much of the cost of collecting the current
income tax. Many special tax breaks currently embodied in the
federal income tax would end, such as the deductibility of
home mortgage interest and charitable contributions.
If we call the principles Cheap and Direct the housekeeping
tax principles, Equal and Benign the justice tax principles,
then the good and bad points of the flat tax proposal become
clearer. A flat tax would remove many deductions and special
tax treatments that, in terms of the Cheap principle, is a
good thing. In terms of the Direct principle, we can say that a
flat income tax should not differ significantly from the current
federal income tax in terms of the ultimate payers, although the
amounts paid might differ widely.39

43

However, as we have seen, taxes are not only good or bad with
respect to administrative, housekeeping issues. Justice is a
deeper concern. In the past, Americans have had little satisfaction when looking to the tax code for a sign of justice, and the
flat tax doesnt help. The flat tax proposal is poor indeed when
we look at the Equal and Benign principles.
The flat tax proposal plays favorites. As you may know, the federal income tax has often given a special, lower tax rate to capital gains; that policy began back in 1921. Those individuals and
corporations with a considerable portion of their income from
investments enjoy a special advantage over people whose
income derives mainly from wages or pensions.

A Citizens Guide

But Armeys plan goes far beyond a favored tax rate for the
investor. The flat tax plan would eliminate taxes on investment
income entirely only workers and pensioners would have the
pleasure of paying tax. Place in your minds eye the image of a
wealthy, tax-free investor class, and consider whether that
matches your sense of how our American economy ought to
work. It would appear that justice was told to take a back seat
or was thrown out of the car completely.

Tax Shifting

44

Additionally, the flat tax proposal falls flat itself when we consider the Benign principle. Economic decision making is best
when done with minimal government direction or interference
the enormous failure of Communist governments to manage
their economies through bureaucratic directives demonstrated
that. But a flat tax sets up just such a distortion. By narrowing
the entire focus of taxation onto just one sector of our economy wage earners Armeys flat tax would effectively decree
that jobs are a foolish investment. What business would create
new, heavily-taxed jobs when it could aim for tax-free capital
gains through, say, speculating in the stock market?
For over a generation, the continuing automation and computerization of industry has meant more capital investment and
slower job growth, or actual losses of jobs. This is a trend with
no end in sight, and working Americans are challenged to add
to their educations and job skills, to develop themselves to be
effective employees in the future.
But to hasten and exacerbate the trend away from employing
people in the United States is tantamount to asking for an
increase in the unemployment rate. Businesses that might move
part or all of their labor-intensive operations to other countries
and you know many businesses are indeed considering this
would have all the more reason to do so if Armeys plan
were activated.

National Sales Tax Greed Tramples

Economic Freedom
U.S. Congressman Bill Archer (R-TX), who presently chairs the
powerful House Ways & Means Committee, has proposed a
national sales tax plan for the United States. It would work a
lot like the state sales tax youre already familiar with, and may
already dislike. The biggest difference between the national
sales tax and the state sales tax is that the national one would
be much larger. To replace the federal
income tax, payroll tax and estate tax, a
sales tax rate of over 30 percent would
Bobs
likely be necessary.40
Electronics

VCR $100.
In the years since World War II, the high+Tax $ 30.
est annual price inflation we have ever
experienced was 18 percent, and that was
Total $130
back in 1946. Inflation is a bad thing
it robs people of purchasing power and
makes their income effectively lower. It discourages long-range planning by businesses or families. For retirees
and others on fixed incomes, inflation is a particularly dangerous specter. So why would we want to deliberately inflate retail
prices by 30 percent with a new tax? Why inflict a blow on ourselves that we have worked hard to avoid? If inflation is the
answer, maybe the question was stupid.

45

All you need to do is use your common sense, and you can
arrive at a more sophisticated conclusion than many of the pundits. If a sales tax is good for us, why is it necessary to grant tax
exemptions to the items most necessary for life itself? And will a
30 percent price hike attract more foreign tourists to the
United States, or will they go spend their money elsewhere?

A Citizens Guide

Balancing the Three Factors of Production

Tax Shifting

46

Heres another angle on the

whole question of tax fairness. Consider the three
factors of production: natural resources, human
effort, and capital, which
are, with certain exceptions,
the sources of all economic
production. If our nations
overall tax code has the
effect of taxing one of the
three factors disproportionately more than the others,
that factor will be inefficiently underused in production. If one factor is
taxed disproportionately less
than the others, or is
untaxed entirely, that factor
may be inefficiently
overused.
Remember the pie chart
from page 4 and the table
on page 6? Labor and work
currently carry the largest
tax burdens.
The use of labor in production is thus penalized, punished by the tax code.
Simultaneously, pollution,
natural resource use,

depletion and destruction

are taxed very lightly or not
at all.41 In all too many
cases, the U.S. government
has actually been persuaded
to subsidize and abet environmental depletion.42
How to restore a sound
economy and sustainable
ecology? Start moving tax
burdens away from human
effort and onto natural
resource depletion.
Proponents of tax shifting
look at the biases in the
current tax code, and take
the optimistic view if the
current system is so bad, it
should be possible to make
some improvements that
bring immediate gains for
our economy, for fairness,
and for the environment.
One thing is certainly clear
we, the people, need to
play a more aggressive role
in deciding our nations tax
policy, because politicians
simply have too many other
competing considerations to
do a good job of it.

Look at how the four principles of fair taxation apply to a

national sales tax. The national sales tax is not Cheap to enforce
or collect; it is not levied Directly on its ultimate payers and
therefore is passed along through the economy; it does not
apply Equally across all goods and services; and the national
sales tax is not Benign because it would distort economic decision making in ways that favor some businesses and individuals
over others.
Cynics would add one more caution in a few short years, the
many special exceptions that Congress is bound to hand out
will wind up making the tax base too narrow to yield sufficient
revenue, or else the tax rate will have to rise higher still.
There is one good thing that can be said about the flat tax and
sales tax proposals. They focus attention on the fact that our
current federal tax system is flawed. If it were being proposed
for the first time, our current system would also fail when
examined against the four principles of fair taxation.

47

A Citizens Guide

Tax Shifting
48

VI. Reforming the

Tax System
Actions You Can Take

1.

Dont leave the field of taxes and economics to the

experts. The experts have brought us the federal debt,
allowed incalculable environmental destruction and continued special tax deductions and loopholes. Only experts
and pundits think that experts and pundits have all the
answers. Share your opinions with your friends, relatives
and elected representatives.

2.

Hold the moral and economic high ground. You have a

right to a healthy, flourishing environment with no
human-made toxic dangers to your health and safety. Tax
shifting is a key mechanism for recognizing your rights
and enabling a sane, sustainable society to emerge that
does more than lurch from one environmental crisis to
the next.

3.

Acquire the habit of looking at long-term impacts of any

tax. How will people respond to a certain tax? Who will
try to evade the tax, what will it mean to disadvantaged
persons and how will it affect the environment?
Anticipate likely long-term reactions to tax shifts and prepare for those.

4.

Never succumb to a jobs versus the environment picture. Fairness, economic incentive and the environment
all benefit from tax shifting. Forces of privilege, shortterm profit-seeking and government-subsidized corporate
interests are the likely opponents.

49

A Citizens Guide

5.

Support activist efforts to expand and develop ecological

tax reform options in the United States, such as joining
Friends of the Earth.

6.

Look for opportunities to help the environment. All levels

of government and all economic interactions can be modified to improve their environmental impact. States can do
this. Cities can do this. Even your local health club could
offer discounted rates for people who jog to the club
rather than drive.

7.

Help support tax shift proposals that:

c Encourage and support a competitive economy
c Promote sustainable, well-paying jobs
c Ensure overall fairness of the tax system
c Protect the environment by encouraging energy
efficiency and discouraging pollution

8.

Inform yourself further; consult the bibliography for

suggested materials.

Tax Shifting

50

Recommended Reading
Barlett, Donald L., & Steele, James B. America: Who Really
Pays the Taxes? New York: Simon and Schuster, 1994.
Durning, Alan Thein; Bauman, Yoram. Tax Shift: How to Help
the Economy, Improve the Environment, and Get the Tax Man
Off Our Backs. Seattle, WA: Northwest Environment Watch,
1988.
Gale, Robert; Barg, Stephan; and Gillies, Alexander. Green
Budget Reform: An International Casebook of Leading Practices.
London: Earthscan Publications, 1995.
Hammond, Jeff M.; Decanio, Stephan J.; Duxbury, Peggy;
Sanstad, Alan H.; Stinson, Christopher H. Tax Waste, Not
Work: How Changing What We Tax Can Lead to a Stronger
Economy and a Cleaner Environment. San Francisco, CA:
Redefining Progress, 1997.

51

Hoerner, Andrew J. Harnessing the Tax Code for

Environmental Protection: A Survey of State Initiatives. State
Tax Notes, V. 14, no16, Special Supp. (20 April 1998).
Jenkins, Glenn; Lamech, Ranjit. Green Taxes & Incentive
Policies: An International Perspective. San Francisco: ICS Press,
1994.
Panayotou, Theodore. Green Markets: The Economics of
Sustainable Development. San Francisco: ICS Press, 1993.
Repetto, Robert; Dower, Roger C.; Jenkins, Robin;
Geoghegan, Jacqueline. Green Fees: How a Tax Shift Can Work
for the Environment and the Economy. Washington, DC: World
Resources Institute, 1992.

A Citizens Guide

Roodman, David Malin. Getting the Signal Right: Tax Reform

to Protect the Environment and the Economy. Worldwatch Paper
134 Washington, DC: Worldwatch Institute, 1997.
Weizscker, Ernst U.; Jesinghaus, Jochen. Ecological Tax
Reform: A Policy Proposal for Sustainable Development. London
and New Jersey: Zed Books, 1992.

Tax Shifting

52

Endnotes
1.

For a wide-ranging view of how simple reforms in tax policy can enhance all aspects of life in the United States and
the world, see Natural Capitalism by Paul Hawken,
Mother Jones March/April 1997, pp. 4062.

2.

U.S. Bureau of the Census, Statistical Abstract of the

United States: 1995 (115th edition). Washington, DC,
1995. Table 474, p. 299.

3.

The following examples are taken from Dirty Little Secrets.

Washington, DC: Friends of the Earth, 1995.

4.

Statistical Abstract of the United States: 1995, Table 475,

p. 300.

5.

Statistical Abstract of the United States: 1995, Table 475,

p. 300.
53

6.

Statistical Abstract of the United States: 1995, Table 592,

p. 379.

7.

Statistical Abstract of the United States: 1995, Table 706,

p. 456.

8.

Eisenstein, Louis. The Ideologies of Taxation. New York:

The Ronald Press Company, 1961, p. 11.

9.

In addition, some negative externalities, such as unsafe

conditions that lead to cancer in people or the extinction
of a species, cannot simply be remedied by a payout of
money they need to be prevented entirely. Polluter
pays is the right principle, but we must understand this as
including the idea that in some cases the costs to the
potential polluter must be great enough to prevent them
from acting destructively in the first place.

A Citizens Guide

10. Environmental Taxes and Charges. Proceedings of an

International Fiscal Association seminar. The Hague:
Kluwer Law International, 1995, p. 165.
11. Environmental Taxes and Charges, p. 132.
12. Environmental Taxes and Charges, p. 173; Gale, Robert;
Barg, Stephan; and Gillies, Alexander. Green Budget
Reform: An International Casebook of Leading Practices.
London: Earthscan Publications, 1995, p. 176.
13. Spain: Improve Competitiveness through an ETR,
Wuppertal Bulletin on Ecological Tax Reform, vol. I, no. 2,
p. 8. Wuppertal Institute for Climate, Environment and
Energy, Wuppertal, Germany.

Tax Shifting

54

14. Reducing the Deficit. Annual publication of the

Congressional Budget Office, Washington, DC. See, for
instance, pp. 395397 of the 1996 issue, citing research
conducted for the Joint Committee on Taxation.
15. Reducing the Deficit, 1996 issue, p. 395. These figures are
straight multiples of those presented by the Congressional
Budget Office and are not intended as anything more than
approximations. Additionally, it is not certain precisely how
much less energy would be consumed if it were taxed.
16. Based on 1994 figures; Statistical Abstract of the United
States: 1997, table 478, p. 300.
17. At current consumption levels, a gasoline tax (gasoline
only, not a general carbon tax) would yield revenue of
slightly over $1.3 billion per penny of tax. U.S. Statistical
Abstract 1995, table 1042, p. 642. See also Dunn, Robert
M., Jr. Turning Sin Into Fiscal Virtue, remarks to the
National Economists Club, June 27, 1990.
18. Adapted from a November 10, 1996 presentation at the
Center for Strategic and International Studies by Dr.

Robert Repetto, Vice President and Senior Economist,

World Resources Institute, Washington, DC.
19. Details on the Swedish NOx tax are from Economic
Instruments for Environmental Regulation, BP
Economics Unit, and Olivecrona, Christina, The
Nitrogen Oxide Charge on Energy Production in
Sweden, in Gale, Robert; Barg, Stephan; and Gillies,
Alexander. Green Budget Reform: An International
Casebook of Leading Practices. London: Earthscan
Publications, 1995.
20. Environmental Taxes and Charges, pp. 133, 140.
21. Details concerning the German water effluent charge are
from Environmental Taxes and Charges, pp 160-161.
22. This and other details come from Recycling Credits in the
UK: Economic Incentives for Recycling Household
Waste, in Gale, Rober; Barg, Stephan; and Gillies,
Alexander. Green Budget Reform: An International
Casebook of Leading Practices. London: Earthscan
Publications, 1995.

55

23. Peddle, Francis K. Cities and Greed. Ottawa: Canadian

Research Committee on Taxation, 1994, p. 214.
24. Details of the Washington State initiative come from
Hoerner, J. Andrew. Harnessing the Tax Code for
Environmental Protection: A Survey of State Initiatives.
State Tax Notes, v.14, no.16, Special Supp. (20 April
1998). Hoerner in turn draws on Ulborg, Cy, and
McIntyre, Jim. Transportation Tax Incentives: Four
Options for Employer-Based Transportation Demand
Management in Washington. Washington State Energy
Office, 1995.
25. See Harnessing the Tax Code for Environmental Protection:
A Survey of Initiatives.

A Citizens Guide

26. This example and the others cited in this section, unless
elsewhere noted, are from C. James Judson, State and
Local Environmental Taxes, in Farrah, George R., editor.
Environmental Tax Handbook. Washington, DC: Bureau
of National Affairs, 1993, pp. 309319.
27. Iowa Code Annotated, 200.1200.20.
28. Financial Statement and Budget Report 1998. Initially
released as House of Commons Paper no. HC-620.
29. Liberal Democrats Federal Green Paper 32: Taxing
Pollution, Not People. London: Liberal Democrat
Publication Limited, 1993.
30. Economic Instruments for Environmental Regulation.
London: The British Petroleum Company, 1995.

Tax Shifting

56

31. Wuppertal Bulletin, vol. 1, No. 2, Summer 1995, p. 11.

The unions named are the mining and energy workers
union (IGBE), Union for Public Service, Transport and
Traffic (TV), the IG Metall industrial union and the
German Trade Union Federation (DGB).
32. Conclusions and Recommendations of the 16th World
Energy Council Congress, Tokyo, 1995. London: World
Energy Council, 1995, p. 5.
33. Smith puts it this way:
I. The subjects of every state ought to contribute towards
the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy
under the protection of the state.
II. The tax which each individual is bound to pay ought to
be certain, and not arbitrary. The time of payment, the
manner of payment, the quantity to be paid, ought all
to be clear and plain to the contributor, and to every
other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the
contributor to pay it.
IV. Every tax ought to be so contrived as both to take out
and to keep out of the pockets of the people as little as
possible over and above what it brings into the public
treasury of the state.
Smith, Adam. The Wealth of Nations. Originally published
1776. London: J.M. Dent & Sons, 1981, Book II, pp.
307-8.
Heres what Henry George expects from a fair tax:
1. That it bear as lightly as possible upon production
so as least to check the increase of the general fund
from which taxes must be paid and the community
maintained.
2. That it be easily and cheaply collected, and fall as
directly as may be upon the ultimate payers so as to
take from the people as little as possible in addition to
what it yields the government.

57

3. That it be certain so as to give the least opportunity

for tyranny or corruption on the part of officials, and
the least temptation to lawbreaking and evasion on the
part of the taxpayers.
4. That it bear equally so as to give no citizen an
advantage or put any at a disadvantage, as compared
with others.
George, Henry. Progress and Poverty. Originally published
1879. New York: Robert Schalkenbach Foundation, 1981,
p. 408.
34. Budget of the United States Government, 1997. Federal
Programs by Agency and Account. Office of the President
of the United States, 1996.

A Citizens Guide

35. Barlett, Donald L. and Steele, James B. America: Who

Really Pays the Taxes? New York: Simon and Schuster, 1994.
36. Dirty Little Secrets, p. 22. Washington, DC: Friends of
the Earth, 1995.
37. As reported in Kelly, Brian, Adventures in Porkland: How
Washington Wastes Your Money and Why They Wont Stop.
New York: Villard Books, 1992.

Tax Shifting

58

38. In fact, the 17 percent tax rate was not taken seriously for
very long. Using the year 1992 as an example, to obtain
the same revenue as the federal income tax that year, a flat
income tax would have to be greater than 17 percent even
if it were levied on the entire national income, less interest
and dividends (which Armey exempts from taxation). See
the United States Statistical Abstract 1995, tables 475,
707, 710. Since Armeys flat tax plan also envisions
exempting capital gains and giving sizable standard deductions no less than $10,700 and possible far greater,
depending on your filing status it was obviously completely unable to match the revenue raised by the current
federal income tax. Some number higher than 17 percent
will have to be used; economist David Cohen notes that
some estimates have been as high as 26 percent. The Flat
Tax and Other Proposals. Chicago: Nuveen Research,
1995.
39. Just who ultimately pays the income tax is a topic on
which economists still disagree. Some think that individuals are the ultimate payers of the tax, others believe that tax
burdens are shifted forward or backward, onto employers
or holders of natural resources.
40. Robert S. McIntyre, writing in the New York Times,
January 23, 1998, points out several simple flaws in the
arithmetic used by sales tax proponents, who until then
had claimed that a 23% sales tax rate would suffice. Sales
tax advocates had, for example, calculated their tax rate

based on the cost of a good plus the tax for instance, if

you buy a pen for $1 and pay an additional 30 cents in tax,
they call that a tax rate of 23% (30 divided by 130, rather
than divided by 100). Additionally, the sales tax proponents pretend that federal government units would
themselves be fully liable to pay sales tax, yet they do not
count the resulting drop in government purchasing power
or else the sales tax increase that would be needed to offset
this. Overall, McIntyre found that an objective sales tax
rate to do what the proponents wish could run as high as
56 percent!
41. A study of eight nations conducted for the European
Commission found systematic biases against labor and
favoring resource depletion. For example, in Germany
from 1970 to 1990, the share of taxes attributable to natural resources fell from 12 percent to just 9 percent, while
the much greater tax burden on labor rose. Jarass, Lorenz
and Obermair, Gustav: More Jobs Less Pollution: A Tax
Policy for an Improved Use of Production Sectors.
Wiesbaden, Germany, 1994. Cited in Wuppertal Bulletin,
Vol. 1 no. 1, Spring 1995.

59

42. If you want a bowl full of outrages, refer to the Green

Scissors Report (Washington, DC: Friends of the Earth,
1998), Dirty Little Secrets (Washington, DC: Friends of
the Earth, 1995), and Cool It! (Washington, DC: Friends
of the Earth, 1997).
Friends of the Earth Publications are available on the world
wide web at http://www.foe.org.

A Citizens Guide

Citizens Guide
to Environmental
Tax Shifting

s economists have long known, we use less of what is taxed and

more of what is not. This general principle makes setting tax policy an issue of one basic question What do we want more of,
and what do we want less of? Thats a question we can all answer. We
want more well-paying jobs, less government waste, more environmental
protection. We want less pollution. Why not have it all and banish the
onus of April 15th from the calendar at the same time? We can.

60

In this booklet, Friends of the Earth outlines with simplicity and clarity
the potential of true tax reform, what issues are at stake and the paths to
reformation. Using time-honored criteria of what comprises a fair tax system, Friends of the Earth shows that green tax reform benefits the greatest number of people in society with the simplest and least expensive
system, one that is direct, benign and just.
Paul Hawken
Begin the long-term process of shifting to tax policies that without
increasing the overall tax burdens encourage employment and economic opportunity while discouraging environmentally damaging production and consumption decisions.
Policy Recommendation 4, Presidents Council on Sustainable
Development, February 1996
Conversions to green taxes could be just what the country needs.
Business Week, April 13, 1998
Green taxes are good taxes.
The Economist, November 16, 1996
Earmarking new revenues from environmental levies to the reduction of
current taxes could lead to more jobs, income, investment and profit
and less pollution while bringing our economic incentives back into
line with our values.
Journal of Commerce, December 4, 1997