Environmental Taxes for Green Growth and Fiscal Policy

Environmental Taxes and Taxation Principles

An environmental tax is a tax whose tax base is a physical unit (or a proxy of it) of something that has a proven, specific negative impact on the environment and which is defined in the European System of Accounts (ESA 2010) as a tax.

European statistics distinguish four different categories of environmental taxes relating to energy, transport, pollution and resources; value added tax (VAT) is excluded from the scope of environmental taxes.

Environmental taxes have been increasingly used to influence the behaviour of economic operators, whether producers or consumers. These taxes also generate revenue that can be used by governments to increase expenditure on environmental protection or for the efficient management of natural resources.

Green Growth Challenge: Shifting the Tax Burden

Green growth challenge: Shifting the tax burden in favour of environmentally related taxation.

Principles of Taxation: Five Desirable Characteristics

The principle of taxation: the five desirable characteristics of any tax system are:

1. Economic efficiency
2. Administrative simplicity
3. Flexibility
4. Transparent political responsibility
5. Fairness

Economic efficiency

• Neutrality – The tax system should not interfere with the efficient allocation of resources.
• Effectiveness – Taxes should achieve their intended economic and environmental outcomes.

Administrative simplicity

The tax system ought to be easy and relatively inexpensive to administer. Self-compliance mechanisms help reduce administrative costs.

Flexibility

The tax system should be able to respond easily or even automatically to changed economic circumstances.

Transparent political responsibility

Individuals should know what they are paying and why; transparency links tax measures to political accountability.

Fairness

Fairness is based on the ability-to-pay principle and ensures burdens are distributed equitably across taxpayers.

Types of Taxes

1. Proportional
2. Progressive: (1. Direct progression 2. Indirect progression)
3. Regressive

Classic Tax Structure

1. Direct taxes – cannot be transferred or shifted to another person. The liability as well as the burden to pay it resides on the same individual.

Examples: Personal Income Tax (PIT), Corporate Income Tax (CIT), property taxes, inheritance and gift taxes.

2. Indirect taxes – taxes which can be shifted to another person. The initial tax is levied on the manufacturer or service provider, who then shifts this tax burden to consumers by charging higher prices and including taxes in the final price.

Examples: Value Added Tax (VAT), excise duties, customs duties, service tax.

3. Social security contributions – payments to receive future social benefits. These may be levied on both employees and employers.

They include: unemployment insurance; accident, injury and sickness benefits; old-age, disability and survivors' pensions.

Distribution of the Tax Burden by Type of Tax Base

By economic function/structure:

• Consumption
• Labour
• Capital

Tax Structure in Developed and Developing Countries

Developed countries: 1. CIT 2. PIT 3. Taxes on consumption 4. Taxes on property

Developing countries: 1. PIT 2. CIT 3. Taxes on consumption 4. Taxes on property