Crystal sphere in hand with trees in background

Postcards from Davos: Day 2

Postcards from Davos: Day 2

Postcards from Davos: Day 2

Jane McCormick | Leadership,

Today is a busy day in Davos with Donald Trump in town and meetings in full swing. But the day started with Greta Thunberg walking into town to remind everyone that we need to talk about climate change and the environment. And everyone is talking about it. Both the social impact and, encouragingly about new technology solutions to help.

And there is also some talk about how tax can play a part in this. For example members of the Ex’Tax project team are here (though I haven’t managed to catch up with them yet), who have done a lot of work on this issue. For my part, I think this is an under-explored area and, as usual, I believe a more cross-disciplined approach is needed to design tax systems that are as effective and as sustainable as they can be. Environmentalists, economists, behavioral psychologists (and the occasional tax person) all need to be involved.

I have heard it said that environmental and “sin” taxes, such as those applied in many countries to alcohol or tobacco products, don’t work because they legitimize the behaviors that they tax. In other words, the users think, “I have paid tax on this, so I am allowed to do it”. Whilst I don’t have a book of economic analysis to support the view, it does seem to me that they can indeed work ― we have seen people make different choices because of the tax differential in the cost of those choices. (Here is one report from my colleagues that looks at this issue.) My concern when it comes to the environment, however, is that, without a holistic approach, tax reacts to the latest environmental concern and we end up with a “whack-a-mole” situation where we shift from one problem to another. For example, in the UK, differences in tax between petrol and diesel aimed at reducing CO2 emissions. It had the desired effect of causing people to choose diesel cars, only to find that whilst CO2 emissions might have gone down, particulate pollution increased. Similarly, taxes on landfill have coincided with an increase in the building of incinerators and fly-tipping.

My other concern about these taxes is that they have dual objectives, which aren’t always complementary to one another; these taxes seek to influence behavior AND collect tax revenues. But if the behavioral change is achieved, the tax objective is not. And environmental taxes are not an insignificant proportion of tax revenues. For example, the EU website highlights that environmental taxes in the EU amounted to €368.8 billion as of 2017 and 6.1% of government revenues from tax and social security. The modelling that KPMG tax specialists have done on other geographies shows similarly high numbers. This is just tax. If you add in government levies, etc. the figure gets even higher. In every case, these revenues contribute significantly to government spending. So, we need to hope for environmental change as quickly as possible, whilst planning for the loss of tax and other revenues that currently come with it. This has the potential to hit some economies very hard. Perhaps we need a more dynamic solution that sees transition to net zero carbon as a journey with the tax system adjusting to each step ― moving tax from the worst to the next worst in a journey towards the best.

I have just come from a great discussion on the future of international tax, digital taxes, tax competition and responsible tax behavior here in Davos, and we have another meeting on this tomorrow so more on this topic then. In other news the weather is sunny and quite warm, so limited snow on the pavements and I am not having to risk life and limb getting between meetings (indeed my snow boots are feeling a bit over the top!)