Example of an Eco Tax Reform
The following strongly simplifying example is intended to demonstrate how an ecological tax reform could work.
Let us assume a (closed) society having 1000 inhabitants all earning 100$ per year in wages. We disregard capital, interests etc. The GNP of this society will be 100.000$. Let us further assume, that the GNP has the following composition:
Obviously in this society the tax rate must be 40%. Each individual is supposed to spend the annual income of 100$ the following way:
It should be noted, that the "everything else equal" assumption made above implies, that the normal improvements in labour productivity have been ignored. Since it must be assumed, that the resource tax induced focus on resource productivity will reduce efforts with regard to improving labour productivity, total productivity in the manufacturing of material products may not grow faster than under conditions without resource taxes. Thus the resource taxes may not result in a wellfare gain as shown by the above figures. The environmental improvement will be obtained "for free" but there will be no second dividend. The price payed for increased resource productivity will be slower growth in labour productivity.
If on the other hand it proved, that focus on resource productivity would open possibilities for increased overall productivity growth, then taxation of resources would give a second dividend - and a doble dividend would be achieved. If such a double dividend could be demonstrated theoretically it would greatly improve the chances for public and political accept of a tax shift reform. Some economists are trying to do just that.
Government services 40.000
Extraction of resources 15.000
Transformation of resources to products 15.000
Material products 30.000
Private service production 30.000
Total GNP 100.000
For simplification it is assumed assumed, that no material resources are used in gorvernment and private services.
Tax on labour income 40% 40
Material products 30
Private service 30
Total 100
Now the government introduces a 200% tax on resources (gradually). Let us assume, that after some period (a few decades) this tax by competition in the market has forced producers to reduce the quantity of resources used per unit of product to half the original. Since it is further assumed that material consumption will remain unchanged (in units per year) now only half the labour force earlier used for resource extraction is required. Let us assume, that the other half is employed in the private service sector. Everything else equal we now (disregarding inflation) have the following composition of the GNP:
Government services 40.000
Extraction of resources 7.500
Transforming resources to products 15.000
Material products 22.500
Private service production 37.500
Total GNP 100.000
The (unchanged) total tax revenue of 40.000$ is now levied the following way, taxes on labour income having been reduced from 40% to 25%:
Tax on labour income: 25% of 100.000 25.000
Eco taxes: 200% of 7.500 15.000
Total taxes 40.000
Each individual will now spend the 100$ income the following way:
Taxes on labour income 25% 25
Cost of material products 22.5
Eco taxes on these products 15
Material products 37.5
Private service 37.5
Total 100
Prices on material products have increased by 25% - the net effect of a plus from resource taxes and a minus from lower resource use per unit of consumption. Income after labour tax has increased by 25% (from 60 to 75$), which is equal to the percentage increase in the prices of matererial products. Since on the other hand the prices on private service are unchanged one hours income after labour tax can buy 25% more service. The relative price of material products has increased 25% compared to an hours service. This - according to the assumption made above - has induced consumers not to increase consumption of material goods but instead using their increased disposable (after income tax) income on more services.
