Smart Taxes

by Hans Eichel and Yannis Palaiokrassas

Project Syndicate
May 31, 2012

Governments throughout the European Union and around the world confront a seeming Catch-22: the millstone of national debt around their necks has required them to reduce deficits through spending cuts and tax increases. But these are impeding the consumer spending needed to boost economic activity and kick-start growth. As the debate shifts from austerity towards measures aimed at stimulating growth, smarter taxation will be essential to getting the balance right.

When governments think about the difficult task of raising taxes, they usually think about income tax, business taxes, and value-added tax (VAT). But there are other taxes that can raise significant amounts of revenue with a much less negative impact on the economy. These are the taxes that governments already levy on electricity and fossil fuels.

Such taxes play a crucial role in cutting the carbon emissions that cause climate change. But recent research shows that they can also play a useful role in raising government revenue at little cost in terms of economic growth.

Euro for euro, dollar for dollar, yen for yen: energy and carbon taxes have a lower negative impact on a nation’s economy, consumption, and jobs than income tax and VAT. For example, an increase in direct taxes, such as income tax, can reduce consumption by twice as much as energy and carbon taxes that raise the same amount of revenue.

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