PR from Basque research:
Environmental fiscal reform would improve the environment and reduce the informal economy
The effect that the introduction of environmental fiscal reform would have on an economic system has been the focus of study since the 1990s. However, studies of this type have until now failed to take the informal economy into consideration; this is an activity which in the case of Spain, for example, could account for as much as 20-25% of GDP. The group of researchers of the UPV/EHU and the BC3 have addressed this subject and have concluded that environmental fiscal reform could help to cut the damage caused by the informal economy on the public system apart from the environmental benefit it would bring in its wake. The journal Energy Economics has published the online version of the work and will shortly be issuing a print version.
As different environmental problems have been emerging, many pieces of academic work have been produced to study the possibility of incorporating environmental fiscal reform and the effect this would have on the economy. Environmental fiscal reform is one of the possible channels for addressing environmental problems and basically consists of levying taxes on the activities associated with environmental problems, like CO2 emissions, and cutting other kinds of taxes. “Environmental taxes manage to get consumers and companies to pay for the damage sustained by society as a result of pollution. What is more, they can be very effective in some cases because they can succeed in bringing about changes in our habits or behaviour and thus lower pollution,” explained Mikel Gonzalez-Eguino, one of the researchers responsible for this study.
The raising of taxes by public bodies through the tax system usually finds itself undermined by the so-called informal economy, in other words, the economic activity that does not pay any tax, and which is “a significant, growing proportion in terms of GDP in many developed economies,” pointed out González-Eguino. In Spain and in other countries in the south of Europe it is reckoned to have a volume equivalent to 20-25% of GDP.
In the fiscal reform being proposed by this group of experts, the income produced by “green taxes” would be used to cut the taxes on labour to the same extent, since “in this work we didn’t want to get involved in the argument about what the optimum size of the public sector should be,” as González-Eguino carefully explained. With the reform we are just guaranteeing that the necessary money would be collected to maintain the existing public services but a greater burden would be placed on pollution and a lesser one on labour.”
The researchers used economic models to simulate how a reform of this nature would affect the wider Spanish economy. “We used a methodology known as computable general equilibrium which allows us to take all the economic sectors into consideration and in that way to analyse policies that affect the economy structurally. What is new is that we have included the informal economy, which previously conducted studies had not taken into consideration.”
The tax system would emerge strengthened
In the simulations made the researchers observed a greater benefit for the public system than they had expected. “When an environmental tax is introduced, the groups that do informal work start to pay taxes by the indirect channel of consumption. If tax on labour is reduced at the same time, a reduction in the inefficiency of the tax system and an effective cut in fiscal pressure are achieved. In other words, it produces an increase in economic activity, a cut in unemployment and a cut in the informal economy.”
As regards the possibility that the proposal made by this study could become reality, González-Eguino stressed that “this study reinforces the idea that environmental fiscal reform could be highly beneficial and would allow us to put figures on one of the recommendations that several international bodies have been making to us for a long time.” However, he does not ignore the limitations they have come across in the course of the study: “For example, the associated rise in energy prices could be counteracted by the increase in real wages, but for inactive people, pensioners and unemployed people especially, this effect would not exist. The possible regressive effects of these reforms on the more vulnerable groups, in particular, would have to be analysed, and mechanisms that would correct these effects, should any arise, would need to be included.”
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Markandya, A., González-Eguino, M., Escapa. 2013. (Forthcoming). From shadow to Green: linking environmental fiscal reforms and the informal economy. Energy Economics. 35.2.
http://www.sciencedirect.com/science/article/pii/S0140988313002090
1. Unless specifically allocated and tracked by an authority that has enforcement and penalty powers, no Green tax can ever be expected to produced Green results. Non-allocated taxes go into general revenue, and without allocation, cannot be assessed in light of what has been achieved, if any results can actually be identified as coming from the tax at all.
2. Balanced, not just positive budgets, are not in the global mindset. Germany is lambasted by all nations for its current positive budgets. So introducing a tax that reduces another tax is not part of a plan that any (other than Germany) is in favour of. We are living in a world where manipulation of money supply is more important that the quality of the money supply. We are living in a world where the redistribution of money is more important than the making of it or even the holding on of it: tax reduction, even for the “masses”, is not in governmental interests, whether “communist” or “capitalist”.
We are witnessing a shuffling of the deck chairs on the Titanic.
Almost pure idiocy. Central command decides who is right or wrong, who is moral or immoral, and who is central command? The clowns who populate the UNIPCC, the twenty something fools who gave us the ACA, and all the other politically connected hyper sensitive greenish types. I wouldn’t even mind that they get their way. They took away my light bulbs, my car got lighter, my shower velocity went away, annoyances, but I guess I can live with them. Problem is that people who advocate schemes like this are ALWAYS wrong. It never works out the way they plan. Moreover, I’m starting to think economists are a bunch of crackpots.
It’s the EU – they’re flat broke, borrowing from Germany, their windmill craze dumped tens of thousands on the unemployment lines, and the EU still doesn’t get the message – you’re flat broke! Period! You can’t raise taxes in any form when you have no employment. People need a job to be taxed in the first place. Guys – you have run out of other people’s money!
Zeke says:
December 27, 2013 at 12:05 pm
“When anyone refers to the informal economy, I believe this is a way of talking about the private wealth in a country”.
No it isn’t. It is the underground economy, the money made with illegal activities and all work.performed without paying taxes. Black money. In this case the informal economy (ending the informal economy) is used as an argument to get this legislation introduced.
Of course the entire plan is utter junk as it will put every citizen in place comparable with the position of the ice breaker currently stuck in the ice of the South Pole.
No way to go.
This tax proposal is a dead end street.
“In the fiscal reform being proposed by this group of experts”
Should we really be listening to a group of economic experts from a country whose economy is, (how do I say this without starting a riot), producing less than desirable outcomes.
” Environmental fiscal reform is one of the possible channels for addressing environmental problems and basically consists of levying taxes on the activities associated with environmental problems, like CO2 emissions, and cutting other kinds of taxes. ”
In a dream world.
In one sense an environmental tax could be useful. Think about taxing imports from polluting countries like China and India. However, whenever a tax is imposed by opinion, it eventually becomes biased. In the long run they all become corrupted.
Yet another glowing triumph from the social modelers! And it was once laughably understood that ‘green’ taxes would supplant taxation from other sources.
What seems clear is that no matter hard progressive academic and policy devising socialists try, no matter what unholy constraints they impose on human freedom, no matter how hard they endeavour to cripple and stymie personal ingenuity, human nature does not respond well to the pressure cooker social and economic control. The ‘informal’ or shadow economy, black market or underground economy, remains the life blood for very many and always will, even if the banksters are successful in their achievement of a cashless society.
The alternative ‘real’ economy (as opposed to the controlled construct) is a vital inconvenience.
F Schneider (2008) http://www.eap-journal.com/archive/v38_i1_8.pdf
‘a government may not have a great interest to reduce the shadow economy
due to the facts that:
(i) tax losses my be moderate, as at least 2/3 of the income earned in the shadow economy
is immediately spent in the official economy,
(ii) income earned in the shadow economy increases the standard of living of at least
1/3 of the working population, and
(iii) between 40 and 50% of the shadow economy activities have a complementary
character, which means that additional value added is created, and this increases the
official GDP.
(iv) people who work in the shadow economy have less time for other things like going
to demonstrations, etc’
Is this referring to the same Spain I read about several times with fiscal issues?
http://globaleconomicanalysis.blogspot.com/2013/05/read-between-lines-imf-admits-spain-is.html
The same Spain that wants to stop protests?
http://globaleconomicanalysis.blogspot.com/2013/12/twenty-three-hurt-in-spain-protest.html
The same Spain that wanted to tax sunlight?
http://globaleconomicanalysis.blogspot.com/2013/07/spain-levies-consumption-tax-on-sunlight.html
Gheeze!
I love the irony of the EPA using Spainish economic models to try and show the efficacy of insane plant-food taxes….
Spain has a 25% unemployment rate, it’s national debt exceeds its GDP, their gigantic wind/solar projects have devastated their competitiveness and helped destroy their industrial sector.
Implementing CO2 taxes will increase energy prices which will have a domino effect by increasing prices on everything, which will cut exports, increase our trade deficit, increase unemployment, decrease tax revenues, increase deficits, devalue the US$, etc.,
Statists will destroy the world economy with their foolishness.
The proposal relies on this assumption- “A lower income tax would thus reduce informality”
In the real world, I think this assumption is BS.
The informal economy would thrive even if income taxes were reduced to zero, because the informal economy exists for many other reasons- to avoid licenses, avoid liability, avoid permits, avoid use of currency, swap services, avoid property taxes, use discarded materials, avoid a plethora of government fees, tariffs and fines, hide assets, bypass IP, etc, etc.
If energy taxes skyrocket, then I predict the informal economy will actually grow as energy resources are added to the list of goods and services that are bartered and traded with or without the use of currency.
‘ …….COULD account for as much as 20-25% of GDP’. There’s that word again.
And the cost to implement this ‘environmental fiscal reform’?
And the reactionary adjustment of the ‘informal economy’?
A fair and equitable ‘across the board’ tax burden should be the general aim, I think most would agree. However, the dynamics of (real) productivity may indicate that any latent tax resource should be applied elsewhere. Or that the optimum overall level of tax has already been reached.
Stop Press: There’s no bottomless pit and there’s no free lunch!
albertalad,i agree with your sentiment,one small point i would highlight is the amount of jobs destroyed by the EUSSR now runs into the millions,not tens of thousands.
its a very funny article though,the notion that ONLY 25% of the spanish economy is in the black market is laughable,40% would be closer to the mark.not many of the other european nations have aircraft engineers for instance,being paid cash in hand in the major international airports.
italy is probably running the 20-25% figure,and if the uk government keeps up its endlessly increasing tax regime ,it will not be long before it is the same here.
Whenever I hear of a new tax or tax scheme, I have to ask: Where do these people think they have any right to the fruits of my labor, for purposes which always wind up as personal and beneficial to them?
Richard Tol (@RichardTol) says:
The logic is impeccable.
Hardly. The ‘logic’ also contains this bit:
“What is more, they can be very effective in some cases because they can succeed in bringing about changes in our habits or behaviour and thus lower pollution,” explained Mikel Gonzalez-Eguino, …”
So you cut taxes on labour, and raise taxes on “pollution”. Hey presto! Constant tax revenue.
But you expect that taxing “pollution” will change behavior, in order to avoid the tax. Revenues from the “pollution” tax decline. Oops! Gotta make up the shortfall! Time to raise taxes on labor, back to where they were before. Or, preferably, higher than they were before. You don’t engineer an opportunity to raise taxes, without RAISING taxes.
Basically, it is a scheme to raise taxes on everyone and capture a larger portion of the economy for the public sector over the long term, while social engineering over the mid term, and appearing to cut taxes for “the good people” over the short term to lower the initiation threshhold. Typical BS liberal ratchet mechanism.
The informal economy??
Trade between people who know and trust each other will grow as the attempted extortion, regulation and imposition by government grows.
Why would any sane individual pay 3 times as much for an inferior product, merely to avoid government threat of sanction?
I sense a real “ID Ten T” moment here (ID10T). I always have to wonder how many superfund sites could have been cleaned up and fully reclaimed for the amount wasted on the Solyndra and other frauds spawned by this bogus “CO2 is bad” nonsense. Once they declared CO2 a pollutant I knew all sanity had been abandoned.
The fiat Achilles heel of the whole scheme is the difficulty of deciding what is a pollutant and to what extent it should be internalized ie taxed. That’s where bureaucratic tyranny rears its ugly head.
Correction:”fiat” was supposed to have been erased.
SAMURAI says (December 27, 2013 at 1:05 pm):
“Spain has a 25% unemployment rate…” Well, 25 percent of unemployment is an official number, probably half of them are precisely on the informal economy, and you must take into account unfortunately we’ve about 8% of structural unemployment.
“…it’s national debt exceeds its GDP…”, actually not yet, and not the worst between west countries.
“their gigantic wind/solar projects have devastated their competitiveness and helped destroy their industrial sector.” Not exactly, the Spanish industry was destroyed during the 80s and 90s of last century. However, the energy problem is indeed critical in Spain with an accumulated deficit over electricity price of about 50 billion dollars, most of it coming from subsidized photovoltaic plants.
Just for the record. Otherwise I totally agree: statists policies, in any subjet but very specially on Energy, may lead to the bankruptcy of a country… or of many at a time.
Cheers!
A tapeworm can help you lose weight, which might induce some to argue that parasites are good for you. But once you lose your excess weight, the tapeworm does not stop growing or go away. Government, once it goes beyond its main purpose of protecting the public, is similar to a tapeworm. It survives on what it takes from you and uses what it takes to regulate and limit your activities. It never shrinks but only grows larger. It never reduces its consumption once its goals are achieved but always finds new excuses to increase its consumption. Giving government power to tax imaginary pollutants like CO2 is like swallowing a tapeworm to cure anorexia.
It might make sense if CAGW was not regarded as “settled science”. Unless and unitl this is no longer the case the whole idea is a crock. .
Louis says: December 27, 2013 at 2:03 pm
The bureacracies and ‘Government’ become irretrievably addicted to their own self importance, relevance and the seemingly endless money spigot. They fail to notice that they are fast becoming saprophytes.
e.c. cowan says: @ur momisugly December 27, 2013 at 10:49 am
… Since when has a government – ANY GOVERNMENT – actually cut a tax? All this will do it pile this tax on top of all the others!
Anybody who falls for this is a bloody IDIOT!!!!
>>>>>>>>>>>>>>>>>>>>>
Took the words right out of my mouth.
Consider: While the USA had its government shutdown this fall, the IMF had their annual meeting by bringing the date forward.
The recommendation: A one time 10% tax on all wealth held by private citizens (Your saving, house cars…) this would reduce US debate back to the level it was in 2008 before the bank bailouts and Obummer. link
Can someone please remind just how vibrant the Spanish economy is at the moment…?
Pat.Swords says:
December 27, 2013 at 11:03 am
http://wattsupwiththat.com/2013/12/27/new-tax-scheme-environmental-fiscal-reform/#comment-1514801
I new that name was familiar.
http://blogs.telegraph.co.uk/news/jamesdelingpole/100232949/wind-farms-are-a-breach-of-human-rights-says-un-no-really/