Little tax, lots of pressure

Manon writes*

Global issues like climate change require governments to invest in ways that will cost them in the present to hopefully provide a better future. But, investing in the future is a lot harder when you are already struggling with investing in the present. The wealthiest of countries are having a hard time making such a change. For low-income countries, it seems near impossible due to a lack of government capacity.

The original Kuznets curve illustrates that as a country goes through economic development, inequality will first increase. When, due to economic growth, the government has a high enough revenue through taxes, it can set up a welfare system and inequality will go down again. The environmental Kuznets curve is based on the original curve and argues that as a country develops, pollution will first go up. However, when the country reaches a certain level of economic growth, pollution will go down again through technical innovation and switching from fossil fuels to green energy.

However, climate change is knocking on everyone’s door, albeit often a bit more urgently on those of poorer countries. Countries that have not reached the level of economic development that the environmental Kuznets curve talks about are being forced to deal with climate change before they are, in a sense, ready. This force is coming from either them being directly affected by climate change or through international pressures, such as the UN’s Sustainable Development Goals.

Low-income countries often do not have the capacity to invest in the future as their tax revenue is still low. They have not reached the point of economic development in the original Kuznets curve where they have enough tax revenue to set up a welfare system, let alone to invest in the future. A big struggle in raising the needed tax revenue to finance public spending in low-income countries is that the economy is largely informal. Many people have a varying income and are often paid in cash, making income tax hard to implement. Consumer taxes are equally hard because many people shop at smaller stores that might not keep an accurate account of sales and inventories. In such a situation, one would ideally tax the rich more heavily than the poor as they often have a more formal and constant income or assets to tax. However, these figures often have considerable political sway to prevent them from being taxed more. Furthermore, creating an administrative body that is well-educated, well-trained and well-paid has proven difficult as there is a lack of funding, coming from a lack of tax revenue. As you can see, a rather vicious cycle occurs.

Low-income countries that are still very much to the left of the turning point in any Kuznets curve are thus being pressured to make changes surrounding climate change that they cannot afford due to low tax revenue. Furthermore, these changes will most likely hurt current economic activity in the country, leading to an even larger need for public spending and simultaneously even less tax income.

Bottom line: Countries all over the world will have to work together to combat climate change by making some necessary adjustments to the way we live. Countries that do not have the capacity, due to a lack of tax revenue, to provide welfare will also be the countries that will struggle most with these adjustments.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

4 thoughts on “Little tax, lots of pressure”

  1. Govt of a developing nation should promote environmental restoration programs as much as they can if not able to provide high scale technology. For example, by engaging graduate particularly (women) students in the urban and rural sector for promoting environmental education and other skills or simply by planting trees by teaching workers how to conserve and how to care for the ecosystem both at the local and urban level.

    1. Could definitely be an interesting solution! For a government of a developing nation it could still be rather expensive and a small scale maybe not as effective. International organisations and NGOs could play an important role in environmental education though.

  2. This is indeed a very important topic you explore here. As the environmental Kuznets curve suggests, as countries develop, it will first lead to a deterioration of the environment. However, after some level of development, states will be able to build up their welfare systems and collect taxes that can be directed at lowering the environmental impact. Recognizing the fact that many developing nations have not reached the level of income that allows them to invest in green technologies, it leaves the responsibility of developed countries to take charge in helping developing nations reach their sustainability targets. However, even with external help, it still leaves many challenges for developing countries: Even if low-income nations were able to increase their tax revenues, it would still be challenging to reduce the environmental burned.

    Many developed countries have outsourced their carbon pollution industries abroad. This means that while developed countries appear to be lowering their national carbon emissions (being on the right side of the environmental Kuznets curve) if considering imports, their environmental footprint appears to be much larger. This means that developing countries no only need to worry about taking care of their carbon footprint, but also change the industries that developed countries benefit from. This means that while low-income countries develop, the burden of transforming to sustainability is much larger – more taxes need be devoted to sustainable practices. Therefore, as you mention, all countries need to work together – but the largest share of help should come from the so-called developed world.

    1. I agree! I think you bring up a very interesting point of developed countries moving their polluting industries abroad. This leads to low-income countries not only having to take care of their own carbon emissions but essentially of the all the developed countries as well. In addition to that the low-income countries often have many services that the government has to provide aside from climate change. A good way to hold developed countries accountable could be to indeed include imports in a country’s measure of sustainability!

Leave a Reply

Your email address will not be published. Required fields are marked *