Chapter 11: Ecological Tax Reform: Why and in What Form?
INTRODUCTION Ecological tax reform (ETR) is a policy initiative that has recently been put forward to facilitate the sustainable development process. In almost all prescribed cases, ETR involves a policy mix of reduced taxes on income and labour and the imposition of Pigouvian taxes on resource use and pollution emissions (e.g., see O’Riordan, 1997; Roodman, 1998). The reasons for this course of action are well understood. First, the value-adding encouraged by a reduction in income taxes leads to a qualitative improvement in the stock of human-made capital. Second, the substitution towards labour encouraged by a reduction in labour taxes ensures that any subsequent decline in production does not contribute to growing unemployment. Finally, the reduction in resource throughput encouraged by the imposition of throughput taxes helps to reduce the pressure of economic activity on the natural environment. What isn’t well understood about ETR is that it relies exclusively on the manipulation of market prices – an allocation instrument – when ecological sustainability is, as explained in Chapter 10, a throughput problem that requires an entirely separate policy instrument to be adequately resolved. In addition, market prices (and this includes adjusted prices) are greatly inﬂuenced by the present value maximisation decisions made by currently existing people. If market prices are to assist in facilitating ecological sustainability, it will be necessary to bring forward potential future costs into the present decision making domain. As I will soon explain, typical ETR prescriptions fail in this regard. To assess the expediency of conventional ETR prescriptions,...
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