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to Environmental
Tax Shifting
For a:
Cleaner Environment
Stronger Economy
Fairer Tax Code
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
Citizens Guide
to Environmental
Tax Shifting
For a:
Cleaner Environment
Stronger Economy
Fairer Tax Code
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.
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.
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iii
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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
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Tax Shifting
2
$2
trillion
in taxes
deteriorating infrastructure
increased competition
stagnant or declining wages
environmental degradation
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Tax Shifting
Payroll 28.1%
Individual Income
30.0%
Property 9.0%
Corporate
Income 6.3%
Other 9.4%
Sales, Gross
Receipts 13.2%
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
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The major taxes currently being used in the United States are
as follows:4
Tax Shifting
Type of
Tax
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
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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,
Tax Shifting
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.
200 lbs.
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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
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11
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Tax Shifting
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13
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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
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:
15
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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
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17
$100 billion
annually
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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
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.
19
Vermont
Oregon
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19
11
14
20
Tax Shifting
17
2
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
8
9
18
12
20
15
13
21
5
10
7
16
1
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23
Government
Refund
More
Less
Taxes
Power Plant
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25
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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.
27
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
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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.
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29
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Here at Home
Tax Shifting
30
This green
tax policy
gets people
to work for
about a third
of the cost of
building new
highways to
accommodate the
same traffic.
31
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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.
We will tax
waste more
and jobs
less
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.
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Tax Shifting
34
Tax
Shifting
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.
35
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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.
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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
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
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
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
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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
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.
41
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Tax Shifting
42
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.
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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.
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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.
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?
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47
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1.
2.
3.
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
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5.
6.
7.
8.
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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.
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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.
3.
4.
5.
6.
7.
8.
9.
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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.
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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.
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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
59
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Citizens Guide
to Environmental
Tax Shifting
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