How Taxes Can Save the World

We have entered an era of rapid change and great social and environmental challenges. Current tax systems are simply not structured to cope with these challenges.
10/08/2014 01:12 pm ET Updated Dec 08, 2014

Our tax system is in desperate need of an update. The use of natural resources (such as water, fuels, metals and minerals) is now almost tax-free and therefore unrestrained. Labor, on the other hand, is being taxed at high rates. This system was designed for a linear (take-make-waste) economy. But we have entered a new era; one that requires an inclusive, circular economy. Many labor-intensive business models are needed, including repair, urban mining, innovation, and redesign of products and services. Adapting the architecture of our fiscal system is vital for the emergence of a circular economy.

We need more jobs (but we tax labor)

Between 2008 and 2013, 10 million Europeans lost their jobs. More than 24 million men and women are now unemployed, including five million young persons.

Unemployment causes poverty and health problems.It denies people the opportunity to participate in society and to develop their full potential. It undermines human dignity. From an economic perspective, unemployment means that human capital is underutilized.

The Europe 2020 Strategy sets a target of more than 17 million new jobs. This is obviously a massive challenge, and the tax system isn't helping.

The 28 countries of the European Union collect €5.1 trillion in taxes each year. On average, 51 percent of tax revenues are based on income tax and social contributions. These taxes provide incentives to employers to hire as few people as possible, and to outsource activities to low-income countries.

High labor taxes also incentivize technological innovation to focus on making people redundant in production processes by substituting people with robots and computers (that do not need unemployment benefits or even a day off).

The linear economy is long past its sell-by date

Western tax systems emerged at a time when globalisation didn't exist yet. Jobs could not be moved around the globe. Natural resources seemed available indefinitely, and linear (take-make-waste) consumption did not yet show its harmful effects. But times have changed. Some alarming facts:

· 1.2 billion people in more than forty countries live in areas of water scarcity.

· In 2012, seven million people died as a result of air pollution.

· In 2009, some 220,000 tons of electronic waste were shipped from the EU to West Africa. The uncontrolled dumping of this waste is of particular concern as e-waste contains hazardous substances such as heavy metals and endocrine disrupting substances.

· When oil first began to flow, drillers had to invest one barrel of oil to extract a hundred barrels from the ground. Today, it takes about a barrel of oil to produce the equivalent of four barrels of oil from shale and tar sands.

We need to save natural resources (but we leave them tax-free)

Green taxes provide only six percent of tax revenues throughout the European Union. These taxes are mainly on energy use and transportation. A negligible 0.3 percent of revenues are derived from pollution and natural resources such as fish and water. Environmental taxes are considered more growth-friendly than taxes on labor. In the EU, however, environmental taxes are at their lowest level in more than a decade. In the United States they play an even smaller role, accounting for 0.8 percent of GDP, compared to 2.4 percent in the EU.

But there's more. We even subsidize pollution.

Polluters don't pay

Almost all nations apply subsidies, including tax breaks and lower tariffs, for environmentally damaging activities. According to the IEA, fossil fuel subsidies worldwide amounted to € 392 billion in 2012. These Environmentally Harmful Subsidies (EHS) are still on the rise, even though it is perfectly clear that they hinder businesses from investing in green technologies. EHS encourage excessive energy consumption and accelerate the depletion of natural resources.

The full costs of pollution, such as ecological damage, health costs and economic impacts are not included in the price of pollution. These costs are borne by society or individuals, rather than the polluter.

Prosperity that lasts

In short: we apply high rates to employment while leaving the use of natural resources tax-free or even subsidized. Imagine what happened if we could turn this around. Then there would be room for labor-intensive activities such as:

· Urban mining (mining from waste streams), repair and maintenance services, as well as remanufacturing of products. In a circular economy these business models provide major opportunities for businesses.

· Innovation and smart design solutions (both are labor-intensive).

· Education and health care.

Humanity can flourish if we save natural resources and tap into the abundance of human capital instead, by developing the capacities and talents of people. This kind of prosperity would last generation after generation.

In order to get there, we do need to change the 'rules of the game' and give room for an inclusive circular economy. As taxes play such an important role in steering the economy, it's common sense to start there.

Worldwide support

Shifting taxes from labor to natural resources is not a utopian idea. Economists have even called it a no-brainer. The OECD, the ILO, the IMF, the European Commission and the World Business Council for Sustainable Development have called for a tax shift.

Updating the tax system isn't a simple undertaking. One thing is clear, though. We have entered an era of rapid change and great social and environmental challenges. Current tax systems are simply not structured to cope with these challenges.

Recently, the World Bank has issued the statement We Support Putting a Price on Carbon signed by 1,000 businesses, 73 countries. The call to action includes the signature of 340 institutional investors with more than $24 trillion in assets. This 'wave' of support for carbon pricing is a fundamental breakthrough. It is also a clear illustration of how adapting our taxes will be key to saving the world.

The Ex'tax Project is a think-tank on the tax system of the 21st century. Amongst others, The Ex'tax Project works with tax experts from Deloitte, EY, KPMG Meijburg and PwC to explore a tax shift from labor to natural resource use and consumption.

This blog post is part of the Plan B for Business series produced by The Huffington Post and The B Team community to help articulate a Plan B for Business. To see other posts in the series, click here. For more information about The B Team, click here.