Energy taxes to protect the poor

The final report of a Finnish proposal for a pilot basic income project will be out in mid-November. The Germans want to combine eco-taxes with basic income. A new proposal in the US also shows how environmental taxation can be used to redistribute wealth. Low-income households pay a larger share of their income on energy, but wealthy households spend more on energy in absolute terms. And what if we take it a step further and pay back this tax revenue as unconditional basic income (UBI)? Craig Morris explains.

"Generation Grundeinkommen" moved for a referendum in Switzerland, which was ultimately rejected

The Swiss “Generation Grundeinkommen” moved for a referendum on a UBI in 2013, which was ultimately rejected (Photo by Stefan Bohrer, edited, public domain)


Over at Vox.com, US journalist David Roberts has an interesting writeup on a ballot initiative in Washington State. It closely resembles Germany’s eco-tax in several respects. Both gradually increase the price of carbon and reduce costs for businesses in order to protect jobs. The incremental increase is important because the impact should not be sudden; people need time to take account of higher energy costs in purchasing, say, a new car. Most importantly, as environmental taxes, both Germany’s eco-tax and the proposal in Washington are/would be revenue-neutral, meaning that the revenue taken in would offset other taxes elsewhere.

Of course, there are a lot of differences in the details. For instance, the revenue from Germany’s eco-tax reduces payroll expenses, thereby making the cost of German labor (relatively high in an international comparison) more competitive. The drawback of this approach is that freelancers pay the higher tax but do not get any direct benefits; only employees with payroll expenses do. In Washington, the tax revenue would partly be paid directly to low-income families, freelance or employed. Similarly, the Berlin-based Mercator Research Institute on Global Commons and Climate Change is proposing a carbon tax in industrialized countries to offset income tax (in German). Ontario also plans a pilot project.

The focus in Germany is now on expanding environmental taxation to cover everyone so that freelancers aren’t left out. As I mentioned in a previous post, the idea is to use the revenue as a source of basic income, meaning that everyone would simply get a check each year or quarter in the same amount regardless of their income level. Because richer households generally consume more energy, the policy would redistribute wealth from top to bottom. UBI is paid to everyone.

What would full-fledged UBI look like?

Germans and Americans only spend a few hundred euros/dollars a month on energy, so any taxation on such an amount would lead to a modest quarterly UBI check indeed. But numerous other countries are discussing much bigger UBI plans. Switzerland rejected one that would have paid each citizen the equivalent of around 2,500 dollars a month, and Finland is launching a pilot project in which 2,000 unemployed people will receive a 560 euros a month. But as Bloomberg argues, the most interesting question is how basic income paid to people with jobs would affect the economy.

There is concern that people would stop going to work. But certain services are needed; if everyone stays home, we will run out of food in a few days. At that point, workers would renegotiate terms.

To understand what that might look like, consider this recently discovered report (PDF) from the New York Times on the oil industry in Alsace, France. It has drawn attention because it proves that this area began producing oil 130 years before the global oil sector began in 1859 in Pennsylvania. But for me, another part of the report was more interesting: the “shaftsmen” (who do the digging) were paid 55 cents a day, whereas “the engineer, firemen, tubman, and carman” (who have more pleasant tasks) were paid 40 cents a day. Today, it’s hard to imagine a ditch digger making 40% more than an engineer, but there you are. These days, menial tasks receive menial pay; compensation rises more in relation to skill level than the unpleasantness of the job. How did we get to the point where unskilled people get paid poorly for doing hard work?

I believe UBI would gradually reverse this situation, and that’s good. From waiters in restaurants to cashiers in stores (and ditch diggers), these folks are often the working poor even though their services are needed. We overly value so-called “skills” when, in fact, the first thing most college graduates realize on their first job is how few skills that job requires (and that the ones needed are not the ones taught at college).

Probably, the Finnish level of UBI is the very minimum to make people even slightly less willing to do boring and/or unpleasant jobs, so energy taxation alone will not get us there. And there may be a point (I’m looking at you, Switzerland) where UBI could be so high as to constitute a disincentive to work. But maybe, just maybe there’s a sweet spot where UBI would make the term “working poor” a thing of the past – and make us all pay more respect to our fellow citizens doing necessary, but unpleasant, unskilled work. And we protect the climate as a nice side effect.

Craig Morris (@PPchef) is the lead author of German Energy Transition. He is co-author of Energy Democracy, the first history of Germany’s Energiewende, and is currently Senior Fellow at the IASS.

by

Craig Morris

Craig Morris (@PPchef) is the lead author of Global Energy Transition. He is co-author of Energy Democracy, the first history of Germany’s Energiewende, and is currently Senior Fellow at the IASS.

Leave a Reply