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Contemporary Taxation Issue: Green Tax System


The evolution of a green economy (GE) has become the main concern for many countries. It requires significant law reforms at the local, regional, and global levels to assist in realising the fiscal opportunities, emerging from a change to less polluting methods of manufacturing and consumption, including fresh employment opportunities. This means managing associated design changes that comprise, for instance, possibly harmful impacts on conventional fiscal sectors to the so called “brown” economy.

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This paper discusses the objectives of environmental taxes, assesses the arguments for and against a ‘green tax shift’, and examines critically the approach the United Kingdom has adopted in the past two decades.

Objectives of a Green Tax System

A green tax system is among the most significant fiscal tools available for dealing effectively with environmental issues, and as such assists in protecting the surroundings. Green taxes have the capability of transforming the tax system through generating a lot of funds that could be utilised in financing important reductions in other taxes (Ekins 2008).

The fundamental underlying principle for green taxes is obvious. Pollution imposes costs on the public. Forcing a tax ensures that the polluting organisation takes in (or “budgets”) broader costs when deciding on how much to contaminate. On these grounds, a rational aim is that of reducing contamination to a level that assumes full responsibility for not only the costs of the pollution but also the gains of the polluting action. According to Mirrlees et al (2011), a tax is often more efficient than regulation as an approach to achieving full accountability by the polluter.

When a polluter takes account only of the organisational costs of its actions, disregarding the public costs, it will contaminate more than it is publicly acceptable. Levies change the prices encountered by a polluter and the polluter changes its activities in response. Taxes on toxic waste discharged by industries during production allow industries with different enterprise frameworks and regulation costs to respond differently. Importantly, a green tax system facilitates an amendment where it is most simply or inexpensively endorsed. Industries with lesser amendment costs will do more in their effort to reduce pollution than industries where the cost of adjusting is high (Mirrlees et al. 2011).

It is important to note here that the key to attaining the possible benefits from green tax systems does not lie in the arbitrary introduction of environmental taxes with an indistinctly clear environmental explanation. Rather, it lies in the efficient utilisation of enticements to the environmental or other contamination concerns that the law seeks to address. The following section explains the difference between a Pigouvian approach to green taxes and a “standards and pricing” approach.

Pigouvian vs. standards and pricing

The standards and pricing approach utilises standards to change behaviour. On the other hand, the Pigouvian approach is founded on the utilisation of enticements. The latter means that polluters ought to react to fiscal indicators once a market in “contamination” is generated. Perhaps, one of the most broadly utilised techniques of fiscal enticements to adjust how firms carry out their production activities is taxation. The concept of green taxes can, therefore, be interpreted as a way to change polluting industrial activities by enforcing levies that can be evaded or reduced through green activities.

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There are challenges of practical execution as far as the Pigouvian approach is concerned. On the other hand, standards and pricing approach follows specific measures of toxic waste; the system of trial and error determines which type of levies has shown to yield specific results. The following section outlines a discussion for or against some sort of green taxation (Sandmo 1976).

Environmental taxation

Deriving the exact amount of levies is not simple, partly because the taxation system is a deprived proxy for the costs being incurred. For example, the suitable levy on the fossil energy utilised by a driver in urban areas would be more than that for a driver in rural areas. Promoting the acquisition of smaller or more effective motor vehicles, in addition, implies that the impact on fuel utilisation in the future is greater compared to the impact on the number of kilometres driven, emphasising the fact that fossil energy levies are more efficient in minimising carbon dioxide emissions than minimising obstruction (Ekins 2008).

The fact that fossil energy levies are very defectively focused on the externalities generated through their consumption is one opposition to the idea that fossil energy levies ought to be increased. If greater fuel prices minimise congestion, then the maximum fossil energy tax level will be indirectly proportional to price increases. This indicates that there are several fiscal cases for adjusting fuel tax based on prices (Wallace 1995). The same concept indicates that fossil energy levies must increase over time as the level of consumption, and thus the level of traffic increases with revenue.

An additional concern with other pollution levies is that raising fuel tax may bring about adverse impacts. However, such impacts might be not harsh. The next section describes the development of pollution levies in the United Kingdom.

Development of environmental taxes in the UK

Three decades back, the Institute for Economic Studies published a decisive analysis of the United Kingdom taxation structure. Long taxation changes have been approached informally for too long without considering their impacts on the development of the taxation system in total. As an outcome, various components of the system appear to be lacking a realistic foundation. Contradicting goals are pursued randomly, and even specific goals are pursued in a conflicting manner (Wallace 1995).

Regrettably, such an account remains true at present. In some significant components, the taxation structure has developed in the right direction, but it remains the invention of regularly illogical, bit by bit developments rather than systematic plans. The taxation structure has in addition struggled in adapting to reflective adjustments in the social, fiscal, and organisational settings in which it works. In the United Kingdom, the taxation plan has failed to benefit as much as it could from developments in academic and pragmatic appreciation to the same way elements of the design impact people’s behaviour (Mirrlees et al. 2011).

The taxation structure in the United Kingdom, like that of most developed countries, is packed with injustices that are not easy to explain, detrimental, and ready for restructuring. The taxation basis for people remains a blend between a revenue system and a cost system, generating changes in individuals’ choices over income (Ekins 2008). The business tax system both generates changes over how industries increase income – between capital and liability funds – and to what extent these companies invest, and fails to be linked to the individual taxation system, generating uncertainties, regarding the legal organisation that medium enterprises particularly may choose.

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Ekins, P 2008, “Environmental and behavioural taxes in fair tax: Towards a modern tax system”, in C Wales (eds), Environmental and behavioural taxes, Smith Institute, London, pp. 64-73.

Mirrlees, J, Adam, S, Besley, T, Blundell, R, Bond, S, Chote, R, Gammie, M, Johnson, P, Myles, G, & Poterba, J. 2011. Tax by design: the Mirrlees Review, Oxford University Press, London.

Sandmo, A 1976, ‘Direct versus indirect Pigouvian taxation’, European Economic Review, vol. 7, pp. 337–49.

Wallace, E 1995, ‘Green Taxes: can we protect the environment and improve the tax system at the same time’, Southern Economic Journal, vol. 61 no. 4, pp. 915-922.

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