Extract from "Farewell Speech to the World Bank" by Herman E. Daly
1/14/94

Tax  labor and income less, and tax resource throughput more.  In the past it has been customary for governments to subsidize resource throughput to stimulate growth. Thus energy, water, fertilizer, and even deforestation, are even now frequently subsidized. To its credit the World Bank has generally opposed these subsidies. But it is necessary to go beyond removal of explicit financial subsidies to the removal of implicit environmental subsidies as well. By "implicit environmental subsidies" I mean external costs to the community that are not  charged to the commodities whose production generates them.

Economists have long advocated internalizing external costs either by calculating and charging Pigouvian taxes (taxes which when added to marginal private costs make them equal to marginal social costs), or by Coasian redefinition of property rights (such that values that used to be public property and not valued in markets, become private property whose values are protected by their new owners). These solutions are elegant in theory, but often quite  difficult in practice. A blunter, but much more operational instrument would be simply to shift our tax base away from labor and income on to throughput. We have to raise public revenue somehow, and the present system is highly distortionary in that by taxing labor and income in the face of high unemployment in nearly all countries, we are discouraging exactly what we want more of. The present signal to firms is to shed labor, and substitute more capital and resource throughput, to the extent feasible. It would be better to economize on throughput because of the high external costs of its associated depletion and pollution, and at the same time to use more labor because of the high social benefits associated with reducing unemployment. 

Shifting the tax base to throughput induces greater throughput efficiency, and internalizes, in a gross, blunt manner the exernalities from depletion and pollution. True, the exact external costs will not have been precisely calculated and atributed to exactly those activities that caused them, as with a Pigouvian tax that aims to equate marginal social costs and benefits for each activity. But those calculations and attributions are so difficult and uncertain that insisting on them would be equivalent to a full employment act for econometricians and prolonged unemployment and environmental degradation for everyone else.

Politically the  shift toward ecological taxes could be sold under the banner of revenue  neutrality. However, the income tax structure should be maintained so as to keep progressivity in the overall tax structure by taxing very high incomes and subsidizing very low incomes. But the bulk of public revenue would be raised from taxes on throughput either at the depletion or pollution end. The shift could be carried out gradually by a preannounced schedule to minimize disruption.  This shift should be a key part of structural adjustment, but should be pioneered in the North. Indeed, sustainable development itself must be achieved in the North first. It is absurd to expect any sacrifice for sustainability in the South if similar measures have not first been taken in the North.  The major weakness in the World Bank's ability to foster environmentally sustainable development is that it only has leverage over the South, not the North. Some way must be found to push the North also. The Nordic countries and the Netherlands have already begun to do this.