What would it mean for society if there were no taxes on income earned through labour, and it cost companies nothing to hire staff? The burden of taxation would be shifted to the use of materials like plastic or metal and the creation of pollution instead.
People would take home more money, and there would be greater incentives for companies to hire people. On the other hand, new products would become more expensive. It would be cheaper to pay for labour to repair products, rather than to buy them new.
This is the radical shift in taxation promoted by Femke Groothuis, founder and president of a Dutch non-profit think tank called Ex’tax. At present, she explains, “the vast majority of the weight of the tax burden is on labour”.
In Ireland, taxes on labour accounted for 44 per cent of all tax revenues collected in 2020, according to the most recent report of Ex’tax, in a combination of personal income taxes, social security charges and payroll taxes.
In contrast, it was almost free to pollute: taxes on resources and pollution accounted for 0.1 per cent of all tax revenues, while green taxes were 6 per cent.
This tax system favours a traditional linear economy in which materials are mined and extracted, made into products, and then become waste.
Flipping the burden of taxation would shift incentives towards a circular economy, Ms Groothuis said. It would be cheaper for products to use fewer resources, to be easy to repair, and to be built so that their materials can be reused.
So what would happen to the economy if the system was upended?
To find out, Ex’tax commissioned complex economic analyses to calculate the effect on each industry in European countries.
In Ireland, there would be a €6.16 billion reduction in taxes on labour, 60 per cent of which would go to households, through reduction in income taxes and increased benefit payments to the lowest-income households, it found. The rest of the savings would be handed back to employers.
The same amount, €6.16 billion, would instead be collected through taxes on the use of natural resources. The single biggest chunk would be taxes on emissions, like industrial air pollution, ammonia and carbon.
The calculations found Ireland’s economy would be 1.7 per cent larger within four years compared with what it would have been otherwise, and there would be an 8.6 per cent reduction in carbon emissions, 11 per cent reduction in fossil fuel used and a 5.9 reduction in water use.
There would be 41,000 more people in employment overall. In all industries studied, increases were forecast in both the amount of people employed and the output – including in highly affected sectors like agriculture and manufacturing.
Perhaps controversially, the calculation also includes a tax on driving, by charging per kilometre driven. Challenged on whether this would have an uneven effect given the reliance of people in rural areas on private transportation, Ms Groothuis said this was a broad-brush calculation that could be adapted to the circumstances of each country. “Any government can make choices,” she said.
These ideas come from the legacy of an unusual Dutch entrepreneur, Eckart Wintzen, who died in 2008. He was ahead of his time in publishing an annual report for his software company in the 1990s that detailed how much carbon dioxide and waste the company had produced and their estimated cost to the environment alongside the usual statements of profit and loss.
This would go on to become known as integrated annual reporting, which reflects the value generated or extracted by a company within its full social and environmental context. It was unheard of at the time, but has become increasingly commonplace.
Ms Groothuis used to be an investment manager at one of Wintzen’s venture capital funds and Ex’tax was founded to carry on his ideas, including the notion of shifting the burden of taxation away from labour.
Once a fringe idea, it has been paid lip service to by everything from the OECD to the World Bank, United Nations and International Monetary Fund.
The European Commission called on EU member states to shift taxation away from labour and income towards consumption and pollution as far back as 2012, and the idea informs policies such as the expansion of the emissions trading system, which puts a price on pollution.
The reality, however, is that such an ambitious shift in taxation remains far away.
This is reflected no more clearly than in the huge public subsidies – amounting to €2.9 billion in Ireland in 2021 – that governments continue to grant to fossil fuel products.