THE BLOG
12/23/2014 11:49 am ET Updated Feb 22, 2015

Tax Shift Is Key to a Circular Economy and Jobs

Femke Groothuis

The typical Western tax system puts a high price on honest labor, while leaving pollution and the use of natural resources tax-free. This is a major barrier for businesses to create more jobs and shift to sustainable resource use. The Ex'tax Project Foundation, with the help of Deloitte, EY, KPMG Meijburg and PwC, has explored the potential of a tax shift from labor to natural resources.

Labor taxes are high, the polluter doesn't pay

In the 28 countries of the European Union, on average, more than fifty percent of government budget is based on labor taxes (income tax, payroll tax and social contributions). In the United States this percentage is even higher. Only a fraction of all tax revenues is raised on pollution and natural resource use (including water, metals and minerals).

To make matters even worse, pollution is subsidized across the globe. The IMF estimates that global 'Environmentally Harmful Subsidies' (tax breaks and lower tariffs for fossil fuels) amount to $ 1.9 trillion per year. In short: the polluter doesn't pay.

A growing number of businesses are disclosing environmental information in their annual reporting. In practice, however, CFOs are struggling to make the business case for sustainable products and services, as they can hardly compete with options based on tax-free primary resources and subsidized fossil fuels.

Not surprisingly, businesses are more concerned about reducing the number of employees than reducing their ecological footprint. Gaining efficiency generally means making people redundant and outsourcing labor-intensive activities to low-income countries. High labor costs are also holding back labor-intensive R&D efforts.

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

Adapting our tax systems to 21st century needs

Economists across the political spectrum have called the principle of a tax shift from labor to natural resources a 'no-brainer.' In practice, however, a shift poses considerable challenges. Many environmental problems are cross-border issues, and require international coordination, for example. Also, there have been doubts about the stability of green taxes, and there are still a lot of questions about the effects on businesses.

Invited by The Ex'tax Project, tax experts of Deloitte, EY, KPMG Meijburg and PwC have formed a working group to contribute to the challenge of adapting our tax systems to 21st century needs. Their study New era. New plan. Fiscal reforms for an inclusive, circular economy has now been published.

New era. New plan describes some of the global megatrends (such as mass unemployment, climate change and water scarcity) and why our tax system is a barrier for solving these issues. The study also includes an overview of the extensive literature on the topic of a tax shift from labor to natural resources and consumption.

Economic modeling, as well as practical experience, have shown that tax reform creates environmental and economic benefits and likely increases employment. In 2005, a review of 186 model simulations from 61 separate studies showed that on average, all predicted net job creation with significant CO2 reductions.

The working group report contains a practical tool for governments to build a 'new plan', towards a fundamental shift in taxes from labor to natural resource use and consumption, showing the range of policy options available to guarantee stable government income.

The Policy Toolkit is applied to the first case study, reviewing a potential budget-neutral tax shift of $ 42 billion in the Netherlands. If this scenario were to be applied internationally across Europe, it would mean a tax shift of more than $ 900 billion.

Expected impact

Macro-economic modeling is outside the scope of this first report. It is safe to assume, however, that the proposed tax shift will provoke both negative and positive feedback loops. When resource efficiency is achieved, for example, fewer materials and fuels need to be imported, affecting the international trade balance.

Positive feedback loops will include a reduction in pollution, which improves overall health, which in turn reduces mortality rates.

A brief employment impact analysis shows that a tax shift potentially creates hundreds of thousands of jobs, in the Netherlands alone.

More jobs and clever use of resources, that's exactly what this era needs.

Innovation is key

"The world is changing rapidly and businesses need to adapt", Feike Sijbesma, CEO of Royal DSM (a life sciences and material sciences company with more than $ 11 billion in sales) stated at the launching event of the report. "Water scarcity, widespread poverty, hunger and climate change are among the major challenges of the 21st century. Businesses have an important role to play in solving these issues, by contributing to clever solutions and social development."

According to Mr. Sijbesma:"This report describes clearly what steps can be taken to shift tax from labor to resources and thus stimulating the circular economy and a more conscious use of scarce materials whilst stimulating job creation. The depth and number of options in the report are impressive. It is time for serious consideration and taking next steps to drive this initiative further and create a more sustainable world."

Peter Bakker, chairman of the World Business Council for Sustainable Development (WBCSD) has added: "To transform our society to a sustainable society we need to make our economies move in a different direction. Shifting the direction of our economy will only happen if we shift the economic incentives. Shifting the economic incentives, means shifting what we tax. This report shows us it can be done. Tax to save the world."

Prof. Dr. Herman Wijffels, economist and former Dutch representative at the World Bank states it is "a very thorough report that shows in detail the possibilities for a shift in taxation. It would be wise for the legislator to use these insights to enable both job creation and the transition to a circular economy."

The Ex'tax working group calls upon governments and businesses to further explore the role of the tax system in achieving economic growth based on human capital rather than natural resources.

The world has moved on. Tax systems should do the same.

The study is available at the Ex"tax Project website.

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.