Faster economic progress is compatible with better environmental quality, as the Clinton-Gore campaign asserted. But achieving both these objectives will require the new administration to resolve the country's economic problems with policies that promote rather than sacrifice environmental goals. The new administration has pledged to raise investment, improve education and health care, reduce the deficit, and ease the economic burden on ordinary people. Doing all of this will require raising additional government revenues, but fairly and in ways that don't depress the economy.
Taxes may be inevitable, but there's nothing inevitable about what we tax. We could reduce the burden of the tax system by making more use of so-called "green fees"--charges on pollution and other kinds of environmentally damaging activities. Because most people don't think about the damages such activities impose on others, environmental damage is excessive. The economy suffers hundreds of billions of dollars of losses each year from illness, natural-resource damage, and higher industrial costs as the result of pollution, congestion, and inefficient resource use. Green fees can address many of these problems more efficiently than command-and-control regulations and simultaneously raise tens of billions in additional government revenues.
Shifting the tax burden in this way promises a double economic benefit. At present, nearly 90 percent of federal revenues comes from taxes on payrolls, incomes, and profits. By weighing so heavily on everyone who works, saves, invests, or runs a successful business, these taxes penalize the very activities that make our economy productive. It would be far preferable to inflict a penalty on those who cost the economy money through their environmentally harmful actions or wasteful use of energy and natural resources.
Taxes on income and profit sap the economy in many ways. By lowering take-home pay, income taxes discourage some workers, who either put in fewer hours or stop working entirely. Payroll taxes depress job creation by prompting employers to find cheaper alternatives to hiring new workers, such as automating or moving operations overseas. Taxes on income from investments induce people to seek tax shelters or to save less. Tax shelters divert capital from more productive investments, and lower savings rates diminish capital formation. For these reasons, each additional dollar in government revenue raised through higher income-tax rates lowers private income by $1.40 to $1.60.
The logic of environmental charges is powerful for state and local governments as well. The recession has forced them to cut spending and raise taxes, but tax increases spell double trouble for their economies. Besides discouraging work and investment, as federal taxes do, state and local tax hikes trigger the flight of labor and capital to areas with lower taxes. Raising revenues through measures that improve local environmental quality--while reducing the government's expenses for environmental cleanup and enforcement of regulations--makes more sense than raising taxes that drive business and workers away. So far, although 43 states use environmental charges to some extent, their potential has barely been tapped.
What's more, in many cases, such a tax shift can protect the environment better and more cheaply than the current command-and-control system can. Studies have shown that the current bill for environmental protection--over $120 billion per year--could be reduced by one-third to one-half if more effective market-based policies were used. Regulations don't work if too many people are contributing to a problem or if conditions are changing so fast that regulation can't keep up. Traffic, trash, and carbon dioxide emissions are three such problems, and environmental charges can help solve them.
Our analysis of green fees for these and other environmental problems shows that the U.S. …