We want Employment, so Stop Taxing Labour

Environmental and Energy Policy is flawed in many countries. Nothing illustrates this better than Vince Cable’s “Green Investment Bank” or France’s 612.5 million euro attempt to create 10,000 jobs building windmills (that is 61,250 euro a job!).

We want employment, so why do we tax labour? Taxing something means that less of it is used (QED). The surest way to increase employment is by decreasing income tax and other taxes on labour.

The government will still have liabilities and needs to get funds from somewhere. Instead of taxing good inputs such as labour and capital, we should be taxing “bad” externalities such as pollutants.

Harvard Economist N. Gregory Mankiw is in favour of an emissions tax as he suggests a $15 tax per metric ton of CO2 can give an extra tax rebate of $3660 for every worker. Working or creating work will pay more. Prof. Martin Feldstein who emphasizes that taxes on economic inputs, distort incentives and impede economic growth. Yet, he agrees that some taxes on pollution align private incentives with social costs and create better outcomes.

Compared to command and control policies, such as requiring companies to use a certain amount of renewable energy or setting standards for energy efficient light-bulbs, a tax on emissions is far more efficient. A tax on emissions lets entrepreneurs decide how best to reduce emissions. They can do so in a multitude of ways many not yet known to the policy makers. Where an increase in income tax leads to less labour intensive production a tax on emissions would give entrepreneurs an incentive to innovate away from emissions.

Emissions not Energy

As “Sustainability Blogging” rightly points out, a tax on coal or energy is not efficient. A tax on coal assumes that there is a constant proportional relationship between the use of coal (or energy) and emissions. Taxing emissions, not coal, would lead to a better use of coal that minimizes emissions.

Can the tax be implemented unilaterally?

Yes! Some may fear that an emission tax would destroy the competitiveness of the economy. Indeed a emissions tax would be unattractive for polluting industries. However, the lower labour tax would lower the hiring cost of many companies and attract many mobile and highly educated and innovative workers. Therefore, companies with low emissions and relatively high labour cost would have a competitive advantage.  Furthermore there would be an increase in the demand for renewable resources and green innovation, as companies will want to avoid the emissions tax.

The Green Revolution

This real demand will create a green revolution. Green Investment Bank, government subsidy or other non-market environmental policies will fail to achieve this as efficiently. Taxing labour and reducing employment to fund a reduction in emissions is wrong. We should tax emissions to increase: employment, innovation and growth.

I think the picture tells us a lot. Which policy will you choose?

Choose your policy