What a Fair (and Socially and Environmentally Responsible) Tax System Might Look Like

Jo’s Laser Products was a typical entrepreneurial business in 2034: It offshored material purchases and labour in order to be ‘competitive’ with global corporations in its industry. It used non-reusable materials and non-renewable energy when it was cheaper. It sold about a million lasers per year at a price of $200 each, and had after-tax income of $27M. Its ten-person management team earned a total of $23M after tax, and the company reinvested $7M in new capital equipment.

But the Global Tax Charter of 2035 replaced personal and corporate income, commodity and payroll taxes with two new taxes designed to reduce the impact of global warming and to redistribute some of the massive inequities of wealth that had led to the international Class Riots of 2034. The first new tax was a 100% tax on the cost of ‘imported’ (transported over a certain number of km from source to consumer) and non-reusable materials, a 200% tax on the cost of ‘imported’ materials that were also non-reusable, a 100% tax on offshored labour, and a 100% tax on non-renewable energy and other polluting production costs. The second new tax was a graduated tax on appraised personal wealth in excess of $2M.

Jo’s management team was delighted at the elimination of income, commodity and payroll taxes, but they began to realize that they weren’t as ‘green’, or as socially responsible, as they thought, when they totalled up the new taxes they would have to pay in 2035. In fact, they calculated that, to be profitable under the new scheme, they would have to increase their prices by 40%. The combination of these price increases and comparable increases of other corporations reduced consumer spending power to the point that Jo’s 2035 sales fell by half, to 500,000 units. Profits were eliminated, and the new Excess Wealth Tax exceeded management’s take-home pay. Even worse, Jo’s total investment in the domestic economy, money that would be spent on other goods and services and keep the economy healthy, fell from nearly $120M to barely half that amount:

Something had to change. Early in 2036, Jo’s management scrambled to ‘inshore’ labour and materials, even though this increased costs somewhat. And they switched to more expensive reusable materials and renewable energy sources.

The strategy worked: The tax saving more than offset the increased cost of more socially and environmentally responsible purchasing and production. Jo’s was able to roll back almost half of the previous year’s price increases, and by getting the jump on competitors, they increased their market share back to 800,000 units. Management was able to reinvest $10M in capital spending in the company and still take home $15M in total after-tax income. They were now doing almost as well as before the new tax regime, and were paying twice as much tax, which was being invested by the government in major renewable energy, anti-pollution and reusable materials projects and research. And their total investment in the domestic economy more than doubled to over $140M.

Over the next two years, Jo’s completed the transition of its purchasing and production processes, getting their facilities upgraded to the new Cradle to Cradle certified standard. Their purchasing and production taxes were eliminated entirely, so that by 2038 they were reinvesting more in the company than ever, taking home more than ever, and investing twice as much as before in the domestic and ‘green’ economy. The tax shift had produced dramatic, fast behaviour change and a win-win for the company, the shareholders, the economy and the environment.

– – – – –

In real life we probably would need to phase this in over several years to allow companies to make the change more gradually. And having a single global tax scheme is nice to dream about, but without it this tax system would be harder to implement — opportunistic corporations would simply move operations to countries with more lax tax regimes.

But it’s still a good idea, and one whose time has come. It makes no sense to tax income rather than wealth, and even less sense to tax payrolls and essential purchases, while leaving socially and environmentallyirresponsible activities untaxed.