Making Economic Growth Work Ecologically
Our hearts tell us what we should do. Prices tell us what we will do.
The principle is clear if we want to make economic growth mean ecological improvement, not ecological destruction. More pollution must mean a decrease in the rate of profit. Less pollution must mean increasing profits.
It’s not hard. We need to tax consumption, not income. Pay taxes on whatever we buy or use. More pollution, more tax. Lower pollution, less tax. Ecological consumption taxes can enlist the invisible hand of Adam Smith in the cause of ecological sustainability.
An average 18 percent ecological value added tax, or E-VAT, can replace all U.S. government taxes on income, fund the federal budget, and get the prices right by raising taxes on more polluting goods and services. The more polluting, the higher the E-VAT tax rate, and the lower the rate of profit.
Helping save the planet and our kids’ futures is to phase out income taxes and the IRS. How painful is that? Just make the E-VAT rate on all goods and services increase with the amount of pollution, depletion, or ecological damage. That is the path to ecological sustainability and peace, instead of climate change and resource wars for oil, water, and fertile high ground.
We can phase in the E-VAT over 10 years as we phase out income taxes. The E-VAT is simple for consumers. You pay a sales tax at the point of purchase. You file no tax forms. You avoid taxes by buying less polluting goods or services with lower tax rates indicated by color codes.
And the E-VAT is simple and largely self-enforcing for businesses. Businesses file only a simple form reporting the tax you collected from your sales and taking credit for the tax you paid your suppliers. You send the difference between what you collected and what you paid to the government. This credit for invoices system means that the value sellers add to their product is only taxed once. The E-VAT could be based, first, on average amounts of pollution, depletion, and ecological damage by S.I.C. code (Standard Industrial Classification) with less polluting items applying for reductions.
The E-VAT is consistent with WTO rules that permit taxes on imports with exemptions for exports. If the U.S. adopted an E-VAT, it would make exporters from China to Germany change their practices.
The E-Vat tax base is final sales to domestic purchasers, more than $13 trillion a year. An 18 percent average E-VAT, with allowances for collection and non-compliance, could replace all personal , corporate, and payroll taxes.
The E-VAT as a tax on all consumption, not simply on pollution, is positively reinforcing. As the market responds to E-VAT rates, highest polluting items would lose market share. To maintain revenues, the tax on moderate polluting items would rise. Over time, this would mean the E-VAT would tend toward a flat tax on most items that were sustainable in impact with high taxes indeed on the few polluting outliers.
The regressive nature of the E-VAT can easily be remedied by a targeted negative income tax. An additional $64.5 billion for a negative income tax would keep federal tax rates flat for the 40 percent of U.S. households with the lowest income. My forthcoming book, "Markets, Democracy & Survival," discusses the E-VAT in detail.
The simple relationship between less pollution and higher profit will lead in short order to a fundamental transformation in the way we do business and make investment and consumption decisions. If polluting goods and services cost more, we just need to be price conscious shoppers and businesspeople. Our ethics and our pocketbooks will be once more aligned.
Roy Morrison is Director of the Office of Sustainability at Southern New Hampshire University.His latest book, "Markets, Democracy & Survival," is forthcoming in 2007.
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