We Need a Resource Consumption Tax

Most taxes in Canada do not encourage the right activities. Behavior that should be encouraged is taxed, and behavior that should be discouraged has no tax. That was the assertion I made in last week’s column and applied that thinking to property tax. But this thinking is relevant to other taxes as well.

Most taxes in Canada are based on income earned, both for the corporation and for the individual. The more income the person or company earns, the more taxes are due. But why tax income? So many other things could be taxed: consumption, land, the use of resources, energy use, capital gain, inheritance, to name the most obvious. Of course, to a limited extent, all of these items are being taxed, but the heavy tax remains the income tax.

But why tax income. It only makes sense if there are no better options. But there are many better options. To make my point consider just one simplified example. A factory pays a certain amount of tax. Under today’s tax policy, most of that tax would be based on income. As the company becomes more profitable, it pays more tax; less profitable, less tax. It follows then, that there is only one incentive the tax gives to the company and that is to hire more accountants and lawyers. Their skill lies in finding ways to avoid the payment of tax.

But now assume our tax policy changes. The same amount of tax is paid, but the tax now is based on consumption. The tax could be on overall consumption (like our GST), but better would be a tax on a scarce resource, say oil. Note this tax shift would not affect the disposable return of the factory. The same amount of tax is paid. The firm still has the same freedom to invest and procure, but the more oil it consumes, the more tax it pays; the less oil it consumes, the less tax it pays. This tax shift creates a huge incentive for the factory to reduce its oil consumption and become more energy efficient. Conceivably the incentive would result in more jobs as the company re-focuses from energy efficiency to labour efficiency.

The simple tax shift from income focus to oil focus will result in other beneficial changes over time. Nobody forfeits any freedom. Those who wish to continue to consume oil at a high rate, are free to do so, but it will cost them more. Those who find ways to reduce their oil consumption, save. Obviously, factories become more efficient. Nation-wide, less oil is consumed, so more oil is left for future generations. Pollution generally accompanies oil consumption. There is less pollution. Transportation costs increase, so there is less traffic. Everyone walks and cycles more, with concomitant benefits to physical and mental health. The tax shift has redefined efficiency.

A tax shift away from income tax to a tax based on consumption benefits everyone. It is more fair, encourages more efficiency, and encourages conservation.