Tax systems evolution is vital for future of our planet
THERE is nothing more certain in life than death and taxes. Usually attributed to the American revolutionary Benjamin Franklin, this phrase confirms the two things we can’t avoid.
Certainties are hard to predict, but there is a growing view that tax systems and policies are not fit for purpose or aligned to the challenges ahead.
The foundations of modern tax systems were created during the Industrial Revolution, before globalisation and mass consumption, the emergence of climate disruption and water supply risks, and digitisation and automation.
Challenges lie ahead. The latest Intergovernmental Panel on Climate Change (IPCC) report said that global carbon emissions must start to reduce well within 12 years if we are to prevent large-scale natural and human risks from becoming irreversible reality.
The Welsh Government’s efforts echo this and potential issues are being taken just as seriously here, with the recent drafting of a Climate Change Adaptation Plan, which launched last week, with insights from Met Office Hadley Centre’s UK Climate Projections (UKCP18).
This highlighted the impacts from climate change we should all expect in the coming decades, including warmer summers, wetter winters and further sea-level rise.
We also face equally important social challenges, including a growing global population.
In many countries, unemployment, underemployment and vulnerable employment are placing unprecedented demands on national budgets.
These are huge megatrends which our governments need to prepare for with the creation of coherent strategies to deal with them. And tax must play an important part in this because tax costs have a fundamental impact on investment, employment and consumption decisions.
Given these scenarios, ACCA has published a discussion paper called Tax as a Force for Good, focusing on taxes that are less-publicised than corporate income tax but directly related to today’s socio-economic challenges – labour taxes, which include personal income tax, payroll taxes and social security contributions, and green taxes on pollution and resource-use such as carbon emissions, fossil fuels, water, waste and metals.
The paper argues the merits of the circular economy – a carbon-neutral and regenerative model in which products are made to be made again.
Last year, the Welsh Government pledged £6.5m for small businesses to move towards this new economy. Studies suggest it could save the Welsh economy £2bn and potentially create up to 30,000 jobs.
It’s a timely publication, coming as the COP 24 met in Katowice, Poland – the 24th Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC).
At this meeting, global agreement was sought on actions to mitigate climate change – including taxation and levies.
Currently, public revenue is raised largely on employment. In OECD countries, labour taxes account for 52.1% of total public revenue raised, while green taxes account for only 5.1%.
A big question about tax design is whether specific taxes can help tackle massive issues such as climate change. Green taxes can be effective in changing behaviour and averting environmental damage. For example, according to UK Government information, the UK Landfill Tax has been instrumental in reducing the amount of waste dumped in the ground by 44% since 2000.
So how can governments make the move away from labour to green taxes? While changing fiscal systems is difficult, the basic principle is simple: “tax less what you want more of”. We propose three steps:
■ Put a price on pollution and use of natural resources – such as fossil fuels, waste, water and the extraction of metal ores. Governments have more than 100 green tax bases at their disposal, from carbon emissions to waste streams;
■ Use revenues to lower the tax burden on labour and improve social protection – the revenues of step one are used to lower personal income tax, social contributions (both for employees and employers) and payroll taxes. Careful design is required to make sure that the needs of vulnerable groups are addressed through increased social protection or income support;
■ Monitor and adjust – as in the current system, reforms need to be monitored and adjusted. As a tax base erodes – much as labour tax revenue reduces when employment declines – tax bases and rates can be expanded or increased. In a fastchanging world, fiscal systems will need to adapt much faster than they have before.
A tax evolution needs careful planning and key principles of fairness, stability, consistency and transparency need to be followed.
Communication should be open and transparent so that taxpayers understand what we are paying, why we’re paying it and what the benefits of paying will be.
A great example of this open communication is the work of the Welsh Government, which has consulted broadly on new tax developments from a tourism tax to vacant land tax. And the new tax authority for Wales, the Welsh Revenue Authority (WRA), is very clear about its approach to collecting and managing the two devolved Welsh taxes – the Land Transaction Tax and Landfill Disposals Tax.
It’s clearly time for tax systems to evolve. Just as we see our planet as interconnected, we now need to reconsider our tax systems holistically. To design a tax system that is fit for the 21st century, it is necessary to think more widely about what governments should be taxing and how tax revenues should be used.
■ Lloyd Powell is head of ACCA Cymru Wales