Tax

Take a second to think about the plastic bottle from which you just drank, the computer you have just typed on, the chair on which you sit. Typically, for such goods, raw materials are taken, the item is produced, then it is consumed and eventually thrown away. The results are shrinking natural resources and growing landfills.

Circularity goes far beyond the concept of recycling. It is a complete system, involving changes in business models and product design, as well as collaboration between suppliers and customers. The circular economy is not about making things “less bad” but about making things “much better” – in effect, it’s about creating economic value. And that includes the creation of new jobs to meet the need for new skills in craft, design and product repair.

What has tax got to do with it? For these changes to take hold, incentives should be put into place. An appropriate tax policy can provide such incentives. However, our tax system is not yet adapted to promoting the circular economy.

Today, 51% of globally collected taxes are derived from labour taxation, while environmental (or consumption) taxes – energy, transport, pollution and resources – represent only 6%. Shifting towards a circular economy will involve designing a tax system with different taxation of renewable and non-renewable resources. Why should we heavily tax something that we want companies to use – humans, who can themselves be considered a renewable resource – while having low taxation on non-renewable material resources?

As early as 1993, the European Commission noticed this need for a tax shift. In 2010, an EU report stated that “shifting taxes away from labour should be a priority for all Member States.” More recently, the Rifkin report (The Third Industrial Revolution) also outlined the need for a taxation system that would place Luxembourg as the EU circular economy leader on the basis that “an innovative tax system motivates actions to innovate on the production side through resource efficiency improvements that cut costs, as well as motivating customers to purchase more energy and resource-efficient products to lower costs.” This would ultimately imply a holistic change to the tax system by shifting the tax burden from labour to (non-renewable) resources, waste and emissions in order to incentivise economic actors to adopt more sustainable business models.

(Source: ‘Circular Economy Calls for New Tax Thinking‘ by Georges Bock, KPMG Luxembourg, 19 July 2017) 

Knowledge Centre

This section contains a small number of documents on alternative tax models for the circular economy and a folder on tax incentives.

Information

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