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What countries have no taxes

what countries have no taxes

John Norregaard, Valérie Reppelin-Hill

©2000 International Monetary Fund

December 2000

The Economic Issues series aims to make available to a broad readership of nonspecialists some of the economic research being produced on topical issues by IMF staff. The series draws mainly from IMF Working Papers, which are technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers.

This Economic Issue is based on IMF Working Paper 00/13 "Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice." Citations for the research referred to in this shortened version are provided in the original paper which readers can purchase ($10.00) from the IMF Publication Services, or download from Jackie Irving prepared the text for this pamphlet.

Controlling Pollution

In December 1997, 160 nations meeting in Kyoto, Japan agreed to cut back emissions of carbon dioxide and other greenhouse gases. While ratified by only a very small number of countries so far, the "Kyoto Protocol" calls for industrial countries to reduce their average emissions during 2008-12 to about 5 percent below 1990 levels. Some countries pledged to go further: the European Union set an 8 percent target, while the Unites States and Japan agreed to cut emissions by 7 and 6 percent, respectively. The Protocol allows some industrial countries to modestly increase their emissions in the near term, while special terms apply to members of the former Soviet Union. Since developing countries face potential technical and economic constraints, the Protocol does not oblige them to cut back their emissions.

Because the proposed targets are likely to impose large costs on the global economy, the Kyoto agreement sets the stage for long and complex discussions at the national and international levels. A key issue is how these costs will be shared among countries. While recent public opinion polls show greater concern about climate change and some willingness to share burdens to curb greenhouse gas emissions, recent events in energy markets provide evidence that the public is unwilling to accept significant hikes in energy prices or other costs. If countries prove unwilling to ratify the Kyoto Protocol in its present form, however, the discussions will undoubtedly continue.

Even after questions about the Protocol and its associated costs are resolved, domestic policy choices for meeting targets and timetables will still require further consideration. No international agreement exists yet on this policy menu, but policymakers basically have a choice between two types of economic instruments—environmental taxes and tradable permits—to supplement more traditional policy instruments in the form of direct intervention and regulations (so-called "command and control" measures).

This pamphlet examines the relative merits of these two major economic instruments for reducing pollution—"green" taxes and tradable permits. Country experiences provide a number of lessons on the design and use of both types of instruments. So far, most countries have relied more heavily on taxes than on permits to control pollution. While many—particularly European—countries now have long-term programs involving green taxes in place, a willingness to experiment with tradable permits seems to be growing, especially given the Kyoto Protocol emission


What Are Green Taxes?

This pamphlet provides a practical review of country experiences with the main focus on green taxes broadly defined. There seems to be little consensus on what constitutes an environmental tax, however. Current definitions can include one or more of the following:
  • emissions taxes that set their rates according to the amount of emissions and extent of environmental damage—known as, "Pigouvian taxes";
  • indirect taxes on production inputs or consumer goods whose use can damage the environment (for example, excise taxes on gasoline);

  • environment-related provisions in other taxes; and

  • accelerated depreciation provisions and lower tax rates for equipment and production methods that save energy and reduce pollution.
  • The lack of a generally accepted definition has complicated any consistent classification of such taxes, but the Organization for Economic Cooperation and Development is working with other institutions to try to address this problem. To this end, the OECD has also put together a comprehensive database with information on environmentally-related taxes in its member countries.

    How Are Countries Using Green Taxes?

    The share of revenues from green taxes in gross domestic product was less than 2 percent in 1995 for each of the 19 developed countries covered by the OECD databank. (See Figure 1, which uses a broader definition of green (or eco) taxes to include all environmentally-related taxes on products.) At well above 4 percent, Denmark had the highest ratio of green tax revenue to GDP, with ratios for Greece, the Netherlands, Norway, and Portugal slightly below this level. Mexico and the United States had the lowest ratios for the group, at just about 1 percent.

    For the 19 industrial countries, unleaded petrol raises more revenue by far from green taxes than any other product (see Figure 2). In fact, unleaded petrol accounted for nearly 40 percent of the total revenue raised in 1995, followed by motor vehicles, accounting for more than 20 percent. Taken together, taxes on petroleum, diesel fuel and the sale or use of motor vehicles raised more than 91 percent of all environmentally-related revenue covered by the OECD study. So, in general for developed countries, revenue raised from taxes on pure emissions is relatively modest. But a closer look at trends in individual countries—especially the leading ecotax advocates known as the "ecotax leaders"—reveals that emission taxes can generate significant amounts of revenue. Despite these broad developments, any strong, general move toward comprehensive green tax reforms has been limited to just a handful of countries.

    Developed, reform-oriented countries can be divided into two groups. Countries in the first group—the "ecotax leaders," including Denmark, the Netherlands, Norway, and Sweden— have radically reformed their tax systems to rely increasingly on green taxes. The second group—Austria, Belgium, Finland, France, Germany, and Switzerland—has made important, though more incremental, progress in this area. Below we attempt to draw useful lessons, based on a thorough review of country experiences on how best to implement ecotaxes, along with the associated complications in administering these taxes, and expected revenues.

    Category: Taxes

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