This week Terry discusses environmental taxes and policy with Marjan van den Belt, environmental economist and member of the Tax Working Group.
It’s Friday, the 17th of May.
Welcome to The Week in Tax!
I am Terry Baucher, tax-pert and director of Baucher Consulting Limited – a tax consultancy whose aim is better tax stories for our clients and a better tax system for all.
This week, I’m joined by a former member of the Tax Working Group, ecologist economist, Marjan van den Belt.
Kia ora, Marjan! Welcome along to The Week in Tax!
Tell me, what was your expectation when you were asked to join the Tax Working Group?
MARJAN VAN DEN BELT:
Kia ora, Terry!
Yes, thanks for having me on. It’s an important topic.
What were my expectations? When I got the phone call from Treasury if I wanted to be a part of the Tax Working Group, I looked at the terms of reference. To my surprise, I found this one task in there which is “How can the taxation system contribute to positive ecological and environmental outcomes?”
Now, I thought that was a very enlightened task to be included along with, of course, the capital gains tax that was clearly on the table. A lot of exclusions were on there already – no wealth tax, no inheritance tax, no owner-occupied housing, if we wanted to talk about capital gains tax. A lot of exclusions.
It was clear it was going to be a tip-toeing type of dance, but you wouldn’t expect anything else if you take a seat on the Tax Working Group.
Yes, I was quite excited about the opportunity.
How did you find the process? This is a very diverse group that we came across. I mean, it was the most diverse Tax Working Group I’ve seen, and so there’s a lot of interesting people on there – very different people such as Hinerangi and Kirk and Bill who are all from outside the tax world.
Previously, it’s basically these Tax Working Groups were tax nerds completely. But, this time, there’s much broader and a much more diverse group involved.
How was that as a work group working? How did you find working as a group and the whole process in being involved in something that’s quite horrendously complex as tax – the whole tax system?
Yes, Michael Cullen used to introduce his team as half of the group knows everything about tax and the other half knows nothing about tax, but they know about everything else.
I really have to commend this government for taking a much broader approach to this. It is a systemic challenge that we have at hand. You cannot resolve that with the same – dare I say – rather narrow perspective at the margin from tax experts, and that’s not the way the change is going to happen. It was quite exciting to have these conversations, and we had some real robust conversations. It was very good.
How much time and work was involved here? Because I know there was massive amounts of paper – reports being passed around on this. It must have been quite daunting to suddenly be confronting all of this paper.
Yes, we met every other week, and the papers were often 700 to 900 pages of preparation. Of course, a lot of in-between work. One to two days is probably a good estimate per week.
Wow! That’s quite a disruption into your normal full-time job, I would have said.
No, not really, because I had resigned from my previous job and was taking a good look at how I could actually make an impact, and this seemed like a good way to give that a go.
What was your impression of the tax system? Were there any big surprises for you at all?
Well, previously, my engagement – like most New Zealanders, I suppose – is you get a salary and you are part of the PAYE system and you don’t have to do a whole lot. Easy as.
The other thing I would say is that tax in my view is love – love for the society that we live in. That’s how we fund all the perks and the rights and responsibilities that we have.
With my background in economics, at least I understood the language that the tax experts were speaking – the language that was spoken in the room. Looking at the system itself, it’s broad-based, low-rate – that is the term that we use here for a system where everybody pays tax fairly broad, although it’s actually kind of narrow because it’s really on income, on business, and on consumption, so it’s not that broad, but that’s the term that we have for it. And then, we use the welfare system to redistribute money that comes in again.
What I discovered was there’s quite a disconnect between the taxation system which people try to keep as simple and straightforward as possible and then the redistribution largely comes through the welfare system. The taxation system is really keen, I would say, on a neoclassical economic perspective that is non-distortive, and I have taken issue with that because taxation is distorting. It is giving signals from the word go, so the idea that it can be non-distortive took me some time to get my head around because, obviously, you give signals through the taxation system.
But I’ve also gained a great respect for what it takes to create a treatment of an actual tax – what it takes to do that and to really take it from idea of let’s have a sugar tax or to something that works that is still fair and doesn’t impact the wrong people and has the outcomes that you want. That’s not easy.
I’ve really learned a lot about that.
I’ve also learned other things. For example, that we’re at the bottom of the OECD countries when it comes to both capital gains tax and environmental taxation. We’re actually at the bottom of the OECD on those.
Those are things off the top of my head that I learned.
I’ll talk a little later about the social interaction team tax and social welfare because that actually was outside your brief. But, since the Tax Working Group report came through, last week we got the Welfare Expert Advisory Group report, so it’d be interesting to hear your take on that a little later.
When the final report was announced and released in February, I was at the lock-up with Sir Michael Cullen talking it through. What really caught my eye about it all was everyone was focused on the capital gains tax side, but what really struck me from the get-go was the emphasis on the ecological and environmental outcomes in there. Also, some of the commentary that Sir Michael made around applying these taxes to help form a transition to a lower greenhouse gas economy – lower carbon economy.
It seems to me that that just got drowned out – all the noise around capital gains tax – and that must have been very frustrating for you because the environmental and ecological outcomes were very important. The report was mapping out what was quite a significant change to the tax system and the economy as a whole, and that just seemed to be of not very much attention.
What was your thinking around that one?
I agree. I would have loved for that to get a lot more attention. I’m sure many people and organisations in New Zealand are with me because the submissions were significant on the topic.
Yes, I agree that that was disappointing. The focus was clearly on the capital gains tax, and that became clear halfway. I think I pushed it and pulled it as hard and as much as I could within the constraints. I mean, it’s not an isolated task. It’s a constant discussion within the group, with Treasury, with the other departments, and with the people and the groups that submitted on this topic.
On the environmental topics?
Now, the group famously included people who were split on the issue of capital gains tax, but I’m taking it that the group was actually as one on this whole question of environmental and ecological changes.
To the extent that this was all about the long term, yes, and where we should go in the long term. It was really interesting. When we started, I remember on day one, there was a comment made as in, “Oh, taxation, surely that is to stimulate economic growth.” I said, “Hang on. No, that’s not why we’re doing this. It’s really about increasing our well-being.”
I think, throughout the year, we’ve been quite consistent in refocusing that on broader well-being. You see the living standards framework approach pop up quite prominently.
Now, exactly how to give shape to that and how to work with it is still not always easy.
You mentioned earlier on that tax sends pricing signals around. That’s one of the things, as a tax practitioner, it’s fairly obvious. People’s minds get concentrated very quickly when tax comes into play.
One of the things in the report that was very interesting, as you pointed out, is that we are at the bottom of the OECD and what we levy in terms of environmental taxes, but you can see countries making dramatic changes quite quickly through a tax pricing.
For example, the UK waste levy, they increased it very sharply and they got two things in. They actually did so not as a part of a grand “we’re doing this to raise more tax” but as a change in behaviours. They have achieved quite a bit with that quite quickly. Is that correct?
Can you elaborate a little bit more about what the British did there?
If you look at the start of the report, you’d see that we do acknowledge that the taxation system is also there to change behaviour. I think those are huge achievements in principle. The fact that we didn’t really put the resources into the treatment for the environment taxation is another story, but this is quite significant because it is the first time that this is on the table from a systemic transitioning perspective.
You’re absolutely correct that we’re not using externality taxes effectively. That means that activities have negative impacts on third parties, and you can correct that in principle, based on the classical theory that you raise a tax and change the prices and behaviour in that way.
We’re not using that much. That’s the first step. Let’s use that.
And then, the second step, that’s going to have impact – often, I have to say – also that, if you raise prices, it’s often the lower deciles of society that get impacted, so you also have to adjust for that.
Of course, if you put in a fertiliser tax, then the agricultural sector is going to say, “Hang on, that’s problematic.” In that case, we were thinking to take the revenue of a fertiliser tax which could easily be $2bn per year. And then, use that money in your market to help transition the sector to a better place.
If you have, for example, farms that are marginal soil, marginal farms, can you find any way to move that into another form of agriculture that is a bit more regenerative where the soils do start to store more carbon – things like that.
Finally, in the long term, what you really want is taxing the bad environmental impact and pollution, and shift that to something that’s more desirable – such as give people money to not be poor. That’s called an ecological tax shift.
What we put in the report is quite visionary. It’s based on environmental footprint tax. We called it a natural capital tax. And so, imagine that you tax the activities that are high-impact, high-tax activities that are not so high impact with the medium tax, and where you see regeneration of say a native area or permaculture – regenerative-based agriculture – that’s where you get a tax credit. Then, it becomes a comprehensive additional leg in the taxation system that we currently don’t have yet.
We’ve just had the release of the zero-carbon bill.
How do you think tax/pricing structures will be part of that as we had towards 2050? It seems to be that they’ve got to be part of that for the very reasons you’ve just explained. The act is a very good signal.
As Sir Michael said at the launch, recycling these to help people transition rather than basically taxing them and leaving them to go cold turkey is just not a desirable outcome.
First of all, it’s going to be very expensive to transition. If we don’t, it’s even more expensive, so we better get on with this. It’s got to come from somewhere.
The revenue has to be generated somewhere. If you don’t use even the basic externality taxes, then you end up having to skim it off the revenue from income, from business, and from consumption from an economy that is truly fossil fuel-based and growth-oriented, and it cannot continue to grow, it’s already sort of pushing its environmental and social limits. Systemically, that doesn’t make any sense.
What you really have to look at is how is taxation going to play a role in this.
You’re absolutely right. We have the idea of recycling some of that revenue for transitioning those sectors.
You were asking me about the zero-carbon bill that’s out there. It was a little bit disappointing to see that they put it in with the ETS – the emissions trading scheme which need to be reviewed anyway. I would have liked to see that lifted a little bit higher – a bit more significant, a little bit more permanent.
We had quite some discussions when it comes to the ETS. Personally, it’s no secret that I would have preferred carbon tax over the game of an emissions trading scheme. But, now that we have the emissions trading scheme, why not give it a go?
You see some of the suggestions in the report hint that we should probably raise the minimum price for carbon – because, at the moment, it’s way too low – and make those price signals much clearer.
Let me think about the numbers. I think, at the moment, we’re about $24.00 per ton carbon. Even including basic externalities, you would need $50.00 to $80.00 per ton carbon.
Double or triple, in other words.
Just to clarify, when you’re talking about externalities, what do you mean?
Like I said earlier, those are the impacts that activities have such as burning fossil fuels and releasing carbon into the atmosphere. That has impacts on third parties that are beyond the emitter. That’s what an economist will call an externality.
I think the report talks about basically turning ETS into more like a tax.
What would be the minimum measures in terms of environmental taxation you think need to happen while that’s going on?
In terms of pricing for ETS pricing?
No, leaving this subject of ETC pricing aside because that’s a very difficult one because they’re talking about the I see they split out methane and carbon and the impact on the farms and the agricultural sector is the one that’s causing it, but other environmental taxes that could come into play. I think we touched on one earlier – the waste levy.
What other opportunities are out there that could happen quite quickly in your view?
There’s the congestion tax that’s one the table. There are a few of those taxes that people are thinking about. The congestion tax is one of them.
At the moment, we are using externality taxes such as on fuel, but that’s mainly used directly. It’s already recycled into ACC and those types of systems. There is a precedent we are proposing is what I’m saying.
Yes, and the congestion charge in the UK in London is probably one of the best known congestion charges, and that’s what the group was thinking about in that because they were all sort of saying, “You know, helping people into public transport, making FBT or fringe benefit tax around providing public transport, removing that, that was one of the proposals within the group.
There are quite a few interesting little things in there which could have a big impact because they take vehicles off the road.
Yes, you’re right.
There’s a lot of interesting, little things in there, but you’re absolutely right. I’m hoping that those are the conversations that will continue. They might not have been the big splash on the release of the report from the Tax Working Group, but they’re there. If people want, that hopefully provides some support on the conversations that they’re having anyway.
I’m saying that capital gains tax has been a discussion for 30 years in this country. I was not under the impression that we would have a comprehensive environmental tax after one go at all, but I do hope that all of these little tidbits that are in there will amount to something in the future.
There’s another real interesting one that I thought there was a lot of conversation about giving accelerated depreciation for multi-unit buildings – housing, right? And so, I argued, “Can we do that then for buildings that are actually more durable and that are more environmentally friendly?” but the answer was no because they’re more durable. You can’t depreciate buildings.
To me, that gives the wrong signal. What do want – bad buildings but a lot of them and have them cycle through really fast? Yes, that would work from a growth economic perspective, but not from the more sustainable and regenerative perspective where I think we need to go.
Yes, I think it is 37 percent of our emissions are transport related. I imagine also there’s a fair significance of emissions relating to trying to keep our fairly rudimentary housing, poorly insulated housing, and just trying to heat that. That was what group was driving at. And so, we build these multi-unit buildings that are ecologically and environmentally more efficient.
There are long-term downstream effects from doing so in terms of cutting our emissions as well. And then, there is the other hidden benefit which we don’t really talk about which, again, the Welfare Expert Advisory Group touched on that – better housing means better health which means less spending on children with dramatic fevers. These are all good outcomes long term, but they’re not easy sells or the short-term cost is seen as too expensive.
Did you feel that you were forever running up against the immediate short-term cost was always a barrier rather than the long-term gain? Was that a theme in the group?
Oh, absolutely, that’s the problem.
We do things in a very marginal way. What’s the next small step that will give us an improvement? But we don’t really have the capacity to think about it as a system – how these things interact and how some of these benefits are adding to each other. Just as you were saying, if you have healthier houses, you have healthier people, then that saves costs – people being sick, not being at work, healthcare costs, et cetera.
Therefore, the action between those places where those decisions are being made need to be much tighter and more integrated. And so, yes, we do have to eventually make a decision on what we’re going to do right now so that the specific treatment of a proposed text in synch with any of the other policy approaches that you might want to suggest or you might want to take, they need to work together.
And so, if you look at the environmental chapter, you see that it started with tax or policy. When would you use a tax? When would you use policy?
I think one of the big achievements was that we concluded actually they work together. You know, if you raise a tax, it needs to be in synch and in support of the type of policies that you’re proposing.
I think that comes back to your zero-carbon bill proposal. There’s going to be a lot of policies. In order to pay for them, in order to enforce them, in order to stimulate different technologies, different types of businesses, we have to bring in those revenues. They have to work together. You cannot, in my mind, separate them.
The fringe benefit tax and transport, I think, is quite an interesting area where there’s a lot of competing interests going on here and we’ve got a horrific road toll. I should say tax doesn’t work in isolation. It is tax and policy because a lot of things are interconnected.
We have an old transport fleet. But, right now, about 70 percent of all new passenger vehicles being sold are SUVs which are much larger vehicles that are not as fuel-efficient, so we have a problem there. Electric vehicles are struggling to come through.
Did the group talk much on that area at all? Perhaps more fringe benefit or changing fringe benefit? Or is that just part in the whole “let’s reallocate the revenue” to drive better outcomes?
The fringe benefits were recommended to be taken off to support public transport. I think that was a big one already. And so, I think we left it at that – to do that specifically and look at SUVs, et cetera. I think that was not a battle that was ready to be fought at this point in time.
Again, you have to then also look at what is policy willing to do.
In the Netherlands, at the moment, they have the proposal that there will be no gasoline cars sold by – what is it 2030? Or Amsterdam won’t allow any gasoline-based cars in the city after 2030. Those were some really big policy proposals.
If you want to then say, “How are we going to help people to transition to reward that?” then, indeed, you have to link that to taxation and tax the bad and maybe invest in a better system.
We’re not ready for that yet, but the discussion has been started is what you’re really saying there.
Well, we could be ready for that. Someone has to put their hands up and say, “Here’s what I want to talk about,” and then go and do it.
You mentioned in passing the interaction of tax and social welfare. As I said, that wasn’t part of the group’s terms of reference.
What are your thoughts on what the Welfare Expert Advisory Group has to say because they’re proposing quite significant changes, actually, around how tax and the abatement process and the whole area there? Anything there that stood out for you? Did any of these points come up in passing in discussion amongst the group?
They might have come up in passing, but it was very clear from the brief that that was not to be discussed because there was a welfare group that was discussing that.
We had some interaction with that group as they started later than we did. We clearly had some conversation on what made sense to talk about for us in relation to what they would be talking about.
You mentioned the achievements of the group.
What in your mind would be the biggest achievement of the group’s work?
I think the fact that we’re talking about well-being consistently instead of economic growth. I think that was a major achievement. It sounds small, but it’s actually not.
The introduction of an ecological tax shift and having talked about how you can move toward a significant pillar in the taxation system based on taxing environment and look for those ecological-positive outcomes. It was an idea that we acknowledged that the taxation system is there to also change behaviour rather than from a neoclassical perspective that would be “please don’t distort,” but to use it deliberately to distort behaviour in a positive, desirable way. I think that’s an achievement.
We also have – and no one has talked about it, really – a significant contribution from a Māori perspective. They found quite some work from kaitiaki perspective what the taxation system could do and how we could weave those perspectives more deliberately.
Yes, I was fascinated to see that. I had noticed that myself. It’s the whole Te Ao Māori introduction was quite revolutionary compared with previous groups.
Yes, and that came about because we acknowledged the living standards framework.
Now, my personal view on the living standards framework is they still keep those four capitals, natural, social, human, and built/financial separate. When we started to talk about how that looks from an ecological economic perspective, you would put natural capital as the foundation of those other three capitals that are embedded in natural capital.
At that point, the conversation with Te Ao Māori started to pick up on that. It was really a venue to talk about Māori perspectives, and I really appreciate that. I think that’s the way to go.
Well, of course, I would have liked that we got to talk about this a little bit louder. It’s a tiny little step in the right direction. But, given that these things take time, I kind of have to respect that.
Having said that, we don’t have time. If you look at the latest reports from IPCC – and now also IPBES – on the ecological destruction that’s going on at the moment along with the climate crisis, then it’s clear that we don’t have a lot of time, so we do have to become a lot broader, and we do have to start using taxation as one policy instrument alongside other policymaking to create the system that we really want, and it has to become more regenerative – a regenerative economy.
We’ve just had a visit from Kate Raworth to New Zealand – Doughnut Economics – that’s a very stylised way of talking about ecological limits and more socially desirable outcomes, and they have to be in balance. At the moment, they are not.
There are lots of those alternative ways of thinking about economics and how we create a more desirable society –out there. I think, once we start connecting those dots, it will become clear that taxation is actually a really important lever in this system that we have to start using more deliberately.
Was it worth it that you gave up 16 months of your time in this exercise?
Yes, I think it was.
It was a unique opportunity. It was the first time that this was discussed in the way it was.
I’m very proud of the document that we’ve achieved. It is a consensus document. Had I written it by myself, it wouldn’t have looked like that. But, at the same time then, you don’t have these conversations in isolation, obviously.
I’ve had really good feedback from, say, the young tax lawyers, basically saying, “Oh, thank you so much! Now, we can start talking about those issues.” Given that these things take about 30 years, I think I’ve planted a seed with it, and that’s very satisfying.
So, what’s next for you?
Well, continue fostering that collective wisdom for our transition to a more regenerative economy.
Well, thank you very much, Marjan!
That’s been a fascinating discussion. I think you’re absolutely right. It started a whole conversation, and there is a lot of stuff in there which will come in, and I don’t think it’s going to take 30 years. I think it’s going to happen a lot quicker than that. If it happens in the way that you’ve talked about and that Sir Michael talked about recycling, there will be a lot of buy-in into it.
Thank you, again, for coming and appearing on The Week in Tax!
That’s it for this week.
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Have a great week!
Until next time, ka kite anō!