Tax Reform is Green, “Green” Taxes Aren’t

Pieler Issue Analysis on Green Taxes

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“Tax Reform” has become an empty catch-phrase used to describe virtually every tax-policy proposal. The reform moniker is used to support everything from eliminating tax preferences and lowering rates to greater wealth redistribution. Many so-called “reform” proposals seek to tap new revenue sources. Examples include tobacco taxes, internet taxes, and (most prominently in the environmental field) taxes on energy use and environmental emissions. The call for “green” taxes is an unfortunate turn of events for both tax and environmental policy. Green tax proposals confuse means with ends and blur the objectives of both “true” tax reformers and sincere environmentalists. The imposition of special tax penalties or incentives designed to reduce pollution is not an efficient environmental strategy. Even if efficient environmental taxes could be designed in theory, they would create huge inefficiencies and be highly prone to political manipulation. The failings of green tax-reform proposals obscure a larger truth: True tax reform itself, defined in terms of flattening rates and eliminating special tax favors, is a much sounder environmental policy than the highly-touted “tax reforms” environmental activists promote. Real tax reform, whether it takes the form of a flat-rate income tax, a simplified sales tax, or a cash-flow tax that rewards investment over consumption, would have a profound ecological impact. Real tax reform would: ** eliminate economic friction and waste caused by government interference in market decisions, resulting in greater efficiency and less pollution; ** accelerate the turnover of capital stock by reducing the tax burden on new investment and savings, thereby bringing new energy-saving and less-polluting technologies to market much faster; ** boost economic growth overall, helping businesses and individuals generate new wealth, which is the sine qua non of dealing effectively with environmental problems either in the public or the private sector. So-called green tax reforms promoted by much of the environmental movement assume that government micromanagement of economic decisions is the only way to go; that public officials can accurately predict what kinds of private-sector actions and investments will pollute less, or pollute more; and that financial incentives (and penalties) built into tax policy will have a predictable effect on the environment, and no unanticipated side-effects. Common sense, not to mention the environmental degradation witnessed in nations with planned economies, tells us otherwise. The greenest tax reform is that which does the most to reduce economic waste, encourage innovation and efficiency, and spur economic growth. From this standpoint, it is clear that the only green tax reform is one which lowers and flattens tax rates on economic activity.