Ex'Tax Project: How post-pandemic tax reform can create jobs and sustainable growth
Contributed by Eleven Tenths
25 November, 2020
As a public health concern, the world continues to focus its efforts on suppressing Covid-19. At the same time, however, governments must also get to grips with one of the biggest economic shocks in peacetime. A spike in business closures is being pinned on the pandemic - as well as job losses that come with it. For economies to recover and grow in a post-pandemic landscape, action is needed now. And the overhaul of tax structures could be one potential 'silver lining'.
The idea of tax reform is nothing new. But the opportunities to make it a reality perhaps didn't previously exist. The Ex'Tax Project, an independent think-tank, was founded in 2010 with this very aim in mind. Now, in a webinar with professional services firm RSM International, founder and president Femke Groothuis explains how we now have the chance to rethink taxation. And, with it, how we can transform our economies into a more sustainable force for good.
The aims and advantages of the Ex'Tax Project
In Groothuis' words, the Ex'Tax Project is "focused on fiscal innovation". The organisation aims to approach tax in a new light - and how it can be better used to achieve the UN's Sustainable Development Goals. The Ex'Tax Project also believes that taxation has a crucial contribution to make towards the goals of inclusive and circular economies. Not only does this have a potential to make tax much more efficient, but it can also facilitate a global Green Industrial Revolution.
How the Ex'Tax Project sees this happening is through a rebalancing of tax systems that are in place around the world. Looking at the status quo, Groothuis says: "Most government budgets lean heavily on labour taxes, which incentivises businesses to minimise labour input. In Europe, for example, European Union (EU) labour taxes provide 51 per cent of all tax revenues. Green taxes only provide 6 per cent - based on water, waste, fish, metals, minerals and pollution."
It is a familiar scenario played out around the developed world too. In most regions, labour tax revenues significantly outweigh green taxes. As such, it does little to encourage sustainability.
Why do economies need to rethink tax systems?
The challenge, however, is encouraging governments and policy-makers to think differently. In its current set-up, taxation policies may actually disrupt and hinder post-pandemic recovery - let alone growth. By labour taxes, we refer to things such as income tax and social security. Of course, employers must also pay extra for taxes on top of net wages. And you can understand, therefore, why some employers look for ways to avoid these costs.
Groothuis explains how manifests itself: "We shift from custom-made hand-made personalised production to more mass production. We replace manual services with machines. We focus on hiring short-term or informal workers where we don't have to pay all those extra costs. And we try and shift production to lower-income countries to save those costs."
As such, existing tax systems simply aren't designed to encourage job creation. There's simply no incentive for employers to mitigate the heavy toll taken on labour markets. By raising green taxes and reducing labour taxes, however, it creates a much more welcoming environment for businesses. An Ex'Tax Project study forecasts the economic impact on the 27 EU nations if the shift is made towards green taxes - and it found that both GDP and employment would go up.
Inclusive Circular Economy: What does success look like?
It isn't all about job creation, however. This way of thinking is also about a radical overhaul of economic practices - creating a more sustainable way of doing things that benefits people and the wider environment. "We currently live in a linear economy," explains Groothuis. "We call it a take, make, waste economy. [It is] a linear production system that maximises resource use and minimises social impact." As more authorities and governments set ambitious carbon neutral targets, the Ex'Tax Project advocates a circular economic model. Here, the line is looped around into a closed circle - one where businesses should try to add value "over and over again". It promotes the reuse, repair and recycling of products. Instead of sending products to incinerators and landfill, for example, the Ex'Tax Project says tax should be used to help businesses to retain the value of resources.
But the problem we face at the moment, as Groothuis says, is that our tax systems have long been out-of-date. Many countries operate on a basis that pre-dates globalisation, digitalisation and the climate emergency. As such, taxation isn't designed to support the goals of a circular economy - or, in the words of Groothuis, - "it's no longer fit for purpose". Now, however, we may just have a chance to rethink this model. And it could be to the benefit of all concerned.
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