Door: Maayke Aimée Damen, 15 June 2014

Ex’tax, an economic ‘no-brainer’

Economists across the entire political spectrum have called it a no-brainer: Ex’tax, or Value Extracted Tax. This concept proposes to increase taxes on resources and consumption and use that to decrease the charges on labor income.

Taxes direct the economy

We become more and more aware that megatrends such as unemployment, climate change, resource scarcity and aging may pose a threat to our quality of life and prosperity. Precisely our tax system can play an important role in addressing these megatrends. Taxes represent a powerful means to control the economy.

In our current tax system, labor is heavily taxed. In Europe, more than half of the total tax revenue comes from labor. Energy and transport taxes account for 6 % and expenses on raw materials constitute only 0.3 % of total tax revenues. But we will avoid that what we charge. Consider the tax of 5 cents on plastic bags that the State of Washington introduced in 2010. Within a month, the use of 22.5 million bags fell to 3 million…

More jobs

In the coming decades we need 600 million additional jobs. Numerous studies show that an increase in the costs for raw materials, combined with a reduction in charges on labor encourages proper employment. Lower labor costs allow us to make more use of human talents and abilities. Services, education and innovation can be encouraged, for example, with more hands to a hospitalbed and personal education. If commodities are taxed higher this provides an incentive to start using them smarter, bring in a closed cycle and thus stimulate the circular economy

The polluter pays

International organizations such as the OECD , IMF and World Bank , and the European Commission and Parliament are in favor of Ex’tax. Megatrends can not be addressed without changing the system drastically. But governments around the world are struggling with the internalisation of external costs ( polluter pays) , eg for the emissions of CO2. Governments are generally reluctant to modify regulations that may affect businesses.

For some time however, in anticipation of the entry of the principle of ‘the polluter pays ‘ businesses everywhere in the world initiate the pricing of CO2. In addition, data from the CDP state that 29 multinationals including Shell , BP, Exxon Mobil, General Electric and Microsoft already count with an internal fictional CO2 price, in anticipation of a future CO2-tax. These companies charge with prices between $ 6 and $ 60 per ton of CO2 and include this when making long-term decisions. In addition, the World Bank has recently identified 40 national and 20 sub-national entities that have or are planning to implement a CO2 pricing mechanism.

Start with taxing CO2 emissions

Taxing CO2 is only a part of the Ex’tax idea, which cannot be separated of lowering taxes on labor. Nevertheless, it can provide a starting point for its implementation which makes a reduction on taxes on labor possible. Now the consequences of the mega trends are becoming apparent, the need for a vision as Ex’tax becomes increasingly clear: a ‘ no-brainer ‘.