Public money and human purpose: the future of taxes.

Most countries use taxes and subsidies that undermine that well-being of both the taxpayers and the environment. But there are some positive - and now proven - alternatives.

For the first time since the Great Depression, the economies of industrialized countries arc in decline. This will come as a surprise to those who are accustomed to appraising economic performance in terms of growth. Indeed, production per person in rich countries has climbed 40 percent in the last 20 years. But that does not say what has happened to personal incomes, or to the natural capital that fuels this growth.

If economic performance is measured by what matters more, the signs of decline are clear enough. Most citizens of industrial countries do not report that they feel better off today than they were 20 years ago. In the recent French election, voters cited high unemployment as the social problem uppermost in their minds when they went to the polls. In the United States, for 15 years the news media have been carrying stories of massive corporate layoffs of factory workers, and, more recently, of professionals and middle managers.

In fact, for more and more people, it is actually getting harder to earn a living wage. Industrial economies are producing more wealth, but much of it is in the form of luxuries for the upper class - fancier cars, larger homes, more jet travel. The percentage of people who are holding down jobs and earning enough money - enough to pay for food, housing, clothes, and other necessities - is actually falling. In Western Europe, the ranks of the jobless have grown from 2.6 percent of the labor force in 1973 to 11.3 percent in 1994. In Ireland, unemployment reached a depression-like 16.2 percent in 1994, and in Spain, it hit 17.9 percent. Signs of potential trouble are emerging even in Japan, where last year's 3.1 percent unemployment was the country's highest rate in decades.

In the United States, though most people can still get jobs, the secure, well-paying positions they once expected are now harder to find. Many workers have to struggle just to stay afloat. The number of people working nights or holding down two jobs in the United States has climbed from 5.8 million to 8 million in the last 10 years, while the ranks of temporary workers have tripled. The portion of U.S. workers whose wages are so low that the government still classifies them as poor, even though they are not unemployed, rose by a third between 1973 and 1993, from 2.1 to 2.8 percent. Wages - especially for people who never went to college - have declined.

The declining prospects for large numbers of people in rich countries are a far cry from the outlook of 30 years ago. In the 1960s, the workers of Western Europe and North America were riding a tide of unprecedented economic growth and technological development. Incomes had doubled in a generation, vaulting millions into the middle class, and making the widespread economic despair of the 1930s but a bleak memory. Conventional wisdom said that by the 1990s paychecks would double again, so that young workers could make in a season what their grandparents had made in a year, and what little poverty still remained could be easily stamped out.

Yet, rather than looking like the first gyrations of an era of economic perpetual motion, the great boom now appears to have been no more than an extraordinary but passing growth spurt. Growth has slowed substantially since 1973, and more importantly, its significance has changed. In the 1950s and 1960s, economic growth for industrial countries as a whole always meant growth in the middle class as well. Today, that trend is moving in the opposite direction; there's more money being made than ever before, but it's going into fewer pockets. Even some people with college educations, who rarely had job worries a generation ago, now find themselves unable to secure the kinds of work they are cut out to do.

Economists disagree about why the bottom has slowly been falling out of the job market in industrialized countries, but they have some good guesses. Prime among them is that new technologies and management practices are thinning the ranks of whole job types. Increasingly automated factories and flattened office hierarchies appear to be making assembly-line workers and middle managers either less valuable (forcing down wages) or obsolete altogether (swelling the ranks of the unemployed).

What industrial countries are now experiencing, then, could be the beginning of a long-term economic transformation. And developing countries, which are replaying the economic history of rich countries in fast-forward, will sooner or later reach the same threshold. If so, it will not be the first time that such a thing has happened. Industrial innovation - whether technological, like the invention of the steam engine, or managerial, like the invention of the assembly line - has always been a revolutionary force. It has often disrupted the communities it has touched, and rendered whole ways of life obsolete.

Looking back on a technological revolution long after the technology has matured and been assimilated, it is easy to forget how long the transition took - and, for many, how unsettling it was. For example, starting in the late eighteenth century, English industrialists began using paddle wheel-driven and then steam engine-driven factories to crank out cheap goods, putting thousands of weavers, tailors, and other craftspeople out of business. Of course the manufactured goods were cheaper than the old hand-made ones, leaving the growing consumer class more money to spend on other products - and spend they did, on everything from bicycles to light bulbs. Whole new industries sprang up, creating enough new jobs to replace all the old ones. With machines amplifying their effort, workers in the new industries could produce more, and became more valuable.

Yet, not until 50 years after the take-off of the Industrial Revolution did wages and working conditions start to improve for the great majority of workers, and it was several decades more before those conditions could have been called anything but unconscionable. The decades of pain that spanned much of 19th-century England still echo down to us through the outraged voices of Charles Dickens and Karl Marx.

No one knows exactly how much the current economic transformation will resemble those of the past. Though millions of factory workers are losing their jobs or watching their paychecks shrink, social safety nets are making widespread poverty of Dickensian proportions a remote possibility in rich countries. On the other hand, there is a greater danger this time that a permanent underclass of capable but poorly paid workers could develop, particularly in the United States, where a college degree is becoming essential to finding a good job but is also becoming more expensive.

The challenge facing economic policymakers now is to alleviate that pain as much as possible by, on the one hand, minimizing the loss of good jobs, while on the other, helping people adapt to the inevitable cutbacks. In the short term, as current political discourse makes clear enough, they need to find ways to generate more jobs and higher wages. In the long run, they need to make it easier for more people to achieve the high education levels that make workers valuable in the modern economy, and to encourage the growth of the sorts of sunrise industries that will open their doors to these workers.

THE USES AND MISUSES OF TAXES

One of the most powerful tools that a government can use to guide its economy is its tax code. Taxes are often regarded simply as ways for the government to raise revenue to fund its programs. What is frequently forgotten is that levies can have powerful disincentive or incentive effects: they mostly discourage the very things they tax, and encourage untaxed alternatives. Taxing payrolls discourages hiring, but encourages automation. Taxing investment hampers the development of new industries, while encouraging the entrenchment of obsolete ones. In economic terms, taxes on productive activities distort the economy, depressing employment and incomes, and making today's economic problems worse. Economists call this the "deadweight burden" of taxation.

Throughout Western Europe, for example, high payroll taxes are thought to be exacerbating joblessness by making employees more expensive for employers. For every franc or deutschemark a worker earns in the European Union, an average of 40 percent goes to payroll taxes. This compares with 30 percent in Japan, and 20 in the United States, both of which have much lower unemployment. Ironically, the taxes that go to support a strong safety net of social programs may actually be contributing to the very problems they arc intended to solve.

Other countries have their own tax code perversities. The United States does not allow its citizens to deduct what they invest in education from their income taxes - and thereby puts college beyond the reach of many of them. Yet, when businesses invest in themselves by buying new equipment, they are allowed to deduct the costs from their corporate profits tax. This tilts the economy towards using fewer people for valuable work, and more machines.

What politicians often overlook - especially those who exploit the unpopularity of taxes in general - is that even though taxes are inevitable, such distortionary ones are not. In fact, there arc some kinds of taxes that do no harm to the economy, and others, such as pollution taxes, that actually help it work better. The British economist Arthur C. Pigou first explained this principle in the first decades of this century, and it can be quite simply summarized: it is bad to tax good things, and good to tax bad things.

It is one of the great, silent scandals of economic policy today that governments - virtually all governments - depend largely on taxing socially beneficial activities to raise revenues, thereby failing to give them much encouragement. Moreover, when we look more deeply into the effects of tax codes on economies, we begin to see that the overtaxation of constructive activities like work and investment is just one face of a more fundamental problem: there is also a chronic tendency to undertax destructive activities, such as pollution and resource depletion - activities that threaten long-term economic security. (See Table 1.)

By making environmental destruction cheap, or even free, governments let people and businesses ignore the costs they impose on other people living today and in the future, and encourage them to [TABULAR DATA FOR TABLE 1 OMITTED] pollute to a point at which the costs to society far exceed the benefits. As a result, the lack of environmentally sound taxation also drags down the economy. One person's pollution becomes another's property value loss, doctor's bills, or cleanup costs. In Germany, for example, the losses from noise, air, and water pollution are equivalent to 5 percent of German economic output, according to Lutz Wicke, an economist at Berlin's environmental protection agency. Polluters pay one of those percentage points (in cleanup costs), but society bears the rest.

Not only do governments often fail to penalize people and businesses for hurting each other via environmental damage, but they frequently pay them to do it. Subsidies for coal and oil production, copper and iron mining, pesticide and fertilizer use, deforestation, and other environmentally destructive activities - amount to roughly $800 billion a year worldwide, equivalent to 3 percent of global economic production. If subsidies were a country, they would rank eighth in the world in economic output - a country nearly the size of Italy being supported entirely by the rest of the world as a welfare state. That is not to say such products as lumber, fertilizer, or copper wires are bad, but that if their production were taxed instead of subsidized, we might use them more sparingly - achieving the same social benefits with less environmental damage.

All of these missed taxing opportunities and "perverse subsidies," as environmental writer Norman Myers has termed them, ratchet up the perceived need for distortionary taxes, increasing the dead-weight burden on economies. On top of this is the harm that undertaxed or subsidized environmental damage does to other people and to nature - the innumerable "externalities" overlooked by conventional business accounting. Today's misaligned taxing priorities deal a double blow to the global economy.

In sum, there is a powerful argument for governments turning today's taxing and subsidizing priorities on their heads. To shore up economic security today, and brake economic decline in the years ahead, they need to tax good activities less. To preserve the environmental viability of modern economies over the longer term, they need to tax bad activities more. By shifting the burden of taxation from good things to bad, governments could begin to address the great economic challenge of our time: making greater use of people, and less use of nature.

WHAT SHOULD TAX CODES DO?

Tax codes are the products of accretion. Over time, they shrink and grow, innovate and retrench. The changes brought by each succeeding generation of policymakers are affected by conflicting, sometimes chaotic, forces: different definitions of what's fair, competing theories of how to address the most urgent problems of the day, varying winds of political climate or of resistance to change, and - of course - the omnipresent need to raise revenue. What results is a mix of principle, pragmatism, and anachronism. As John Kaye and Mervyn King, two authorities on the British tax system, have described the results, "No one would have designed a tax system like this, and no one did."

As economic and environmental troubles deepen, and the links between them become more visible, it may be necessary to rebuild tax systems from the ground up. To do so, it would first be essential to clarify just what we want such systems to accomplish. There are many criteria for judging taxes, including how easy they are to administer, how easy they are to understand, and how much money they raise. But in the face of today's economic challenges, three principles stand out as most urgent.

1. Shift From Taxing Income and Sales to Taxing Exploitation of Resources, When That Exploitation Generates Windfall Profits.

From a narrow, commercial perspective, the earth's natural wealth is like found money - as if nature had set the stage for the industrial revolution by sprinkling cash across the landscape.

Though natural wealth might seem to be the equal birthright of all people, much of it ends up in the hands of the few - typically large energy, timber, and mining companies that get low-cost land or cheap mining or logging concessions from governments.

Logs, oil, and other resources are often worth much more than they cost to find and extract. And as the supplies dwindle and global population and affluence rise, their value climbs. For example, fish prices have more than tripled since 1975, as global demand has outpaced supply. Similarly, prices for wood from virgin forests have also climbed steadily. But the costs of procuring these resources has not necessarily risen. If anything, it may have fallen, as fishing boats have been replaced by giant fish-processing ships and lumber cutting operations have become larger and more mechanized.

As a result, profits in these industries can soar far above what would be needed to reward companies for their investments - or far above what the companies can be fairly said to have earned. Governments can significantly reduce the drag of the tax system on the economy by taxing enough of these unearned profits to reduce other, more burdensome, taxes. The rate can be set at a level that benefits society at large, while still learning resource companies enough profit to give them an incentive for continued production.

In terms of what's good or bad for people and the environment, taxes on windfall profits are neutral. They neither encourage nor discourage resource extraction. They simply redistribute the financial gains in a more equitable way. If societies decide that further cutbacks on logging, fishing, or mining are warranted in order to protect people from costly side-effects of these activities, or to protect the long-term stability of the economy, they can impose even higher taxes, as described in the next section.

Robert Repetto, an economist at the World Resources Institute (WRI) in Washington, D.C., has detailed several examples of the waste and injustice that can occur when governments forgo windfall taxes. One egregious example occurred in Indonesia. In 1970, President Suharto, newly in power and seeking a quick fix for the country's economic problems, awarded generous timber concessions to foreign logging companies and declared five-year income tax holidays, many of which were extended to fifteen years.

Between 1970 and 1984, the companies harvested 285 million cubic meters of raw logs, deforesting about 700,000 hectares a year by the end of that period. The logging cost the companies $49 per cubic meter on average, including a fair profit margin. Yet because international timber prices were so high, they were able to charge $116 per cubic meter, most of which they pocketed. Just between 1979 and 1982, they picked up an extra $8.8 billion, of which only $3 billion went to the government in the form of taxes. The other $5.8 billion - almost exactly what Indonesia received in foreign aid - was taken out of the country to enrich shareholders back home. (All of these figures are in 1994 dollars.)

2. Calibrate the New Taxes So That Polluters and Depleters Will Feel the Costs of the Harm They Do Others of Their Own and Future Generations

The idea that people should bear responsibility for the harm they do others is the cornerstone of most moral and legal codes. Yet it is surprisingly absent from the world's tax codes. This omission effectively insulates people from the economic consequences of their decisions for their neighbors and the environment. It tacitly encourages them to act only in their own interests, while ignoring those of society. But in the end, like impatient commuters trying to pass each other on an overcrowded highway, everyone ends up worse off.

For example, James MacKenzie, also of WRI, has estimated that the true economic cost of driving in the United States - adding in the health costs of air pollution, the increased risk of global warming, the money spent to finance a formidable military presence in the Middle East, the damage done by traffic accidents and congestion, and the untaxed land used up by roads and parking lots - works out to be over $3 a gallon of gas (80[cents] per liter). Yet the price that U.S. consumers pay at the pump sits at around $1.20 per gallon (32[cents] per liter). The other $2 in costs, though, are no less real for being invisible to the buyer - they just get imposed on other people. Partly because driving seems so cheap, Americans collectively drive far beyond the point at which the costs outweigh the benefits.

Similarly, a study done at New York University examined the economic impacts of clearing tropical rainforests for cattle grazing, in terms of soil erosion, climate disruption, and other impacts. The bottom line cost added up to $200 per hamburger. Since burgers retail for around $2, a reasonable inference is that deforestation can do a hundred times more economic harm than good. While the preciseness of such numbers might be debatable, there can be little doubt that such gross misalignments between true and apparent costs not only propel the destruction of nature but do damage to the global economy.

One of the guiding ideals of ecological tax reform is that those who reap the benefits from environmental degradation should also pay the costs. Taxes on tailpipe emissions, for example, would provide individuals with incentives to change how much they depend on driving. Taxes on virgin timber harvests, similarly, would give paper manufacturers an incentive to incorporate more recycled fiber into their products, thereby reducing their perceived need to engage in deforestation.

Unlike regulations, market signals would impinge much less on personal freedoms, giving individual polluters (or resource depleters) the leeway to decide how much to alter their practices, and how to go about doing it. Ideally, those for whom cleaning up is cheapest would do it the most and those for whom it is expensive would do it the least, so that pollution cuts would be achieved at minimal cost to society. More importantly, taxes would stimulate the growth of new, clean technologies and industries such as electric cars and steel recycling. The higher the pollution taxes, the less pollution would eventually be produced.

The U.S. Environmental Protection Agency (EPA) has demonstrated how market signals can be used to cut pollution at minimal cost. It offers to sell electric utilities permits to emit specified amounts of sulfur dioxide (S[O.sub.2]), an acid rain precursor. (It also gives many permits away, a political compromise necessary to gain industry support.) A utility can then choose among three options, whichever is most cost-effective: (1) giving up the opportunity to sell its permits to other utilities, or buying more from the EPA (in effect, paying a tax in order to keep polluting), (2) installing S[O.sub.2]-scrubbers in its smoke stacks, thereby avoiding the tax, or (3) switching to low-sulfur coal or other fuels, such as natural gas. The EPA will issue fewer permits each year, so that by the year 2000, emissions should be at half their 1990 level. It estimates that the permit system, in addition to rescuing many of the country's forests and lakes, will save electricity consumers $1 billion over what traditional regulations would have cost.

In general, there are three types of environmentally destructive activities than can be taxed in order to improve the economy:

1) Those, such as greenhouse gas emissions or the pollution of fisheries, that take a direct toll on people today or in the future, through lost jobs, property damage, or other costs that are often thought of in dollar terms.

2) Those, such as building homes on the habitats of endangered birds species, that do not hurt people directly, but that hurt species and ecosystems which may make valuable contributions to the earth's biological diversity and stability.

3) Those, such as the logging of virgin forests, that deprive future generations of limited natural resources. If our great-grandchildren were here today, they could vie in the marketplace for natural gas, fresh water, and trees. This would force prices up, and encourage us to buy less and leave more for them. Instead, resource prices stay myopically low, inviting us all to consume them as if there were no tomorrow. Taxes can work to correct this inequity.

Trying to put numbers on the costs of different kinds of environmental harm is problematic, both technically and philosophically. How much smog-induced harm is done by driving a car in the city depends on how cleanly the engine burns, what kind of gas is in the tank, how many other cars are around, the temperature and humidity of the air, the number of people breathing the air, and what the various pollutants will actually do to them. Estimating these variables perfectly would require sophisticated mathematical models and impossibly detailed knowledge of local car use patterns, smog chemistry, and human biology.

Then there are deeper problems. What price does the community of Nikel, Russia, really pay to live downwind from the world's largest nickel processing plant, and to suffer the world's highest birth defect rate? What is the true value of a blue whale, or of a hectare of wetland about to be built over in suburban Miami? How much oil will our grandchildren need? How much weight should we give to the needs of generations hence, versus our own? These are complex moral questions that can never be simply, satisfactorily answered.

Yet, that does not mean they can be avoided. Whenever human interests collide with each other or with nature, mediation becomes a necessity. Whether policymakers are designing a regulation or a tax, they have to consider the tradeoffs between jobs and health, profits and nature. And the only way to compare is to equate.

If policy makers try to sidestep the issue by allowing the economic distortions in existing tax systems to continue, they only send the signal that nature and human well-being are next to worthless. Economies will - and do - respond accordingly.

Fortunately, these difficulties have not stopped policymakers in a growing number of countries from exploring environmentally sound taxation. In the United States, an exhaustive survey by the Center for Global Change in College Park, Maryland, has found more than 250 state-level environmental taxes. Around the world, the International Monetary Fund has identified 42 countries with environmentally-motivated tax provisions.

Malaysia, for instance, has decided to use the tax code as part of its strategy to get the lead out of gasoline. By adjusting its gas taxes, it has made leaded fuel 2.8 percent more expensive than unleaded. Partly as result, the market share of unleaded gas has shot from 0 to 60 percent since 1991. Since lead has been linked to emphysema and to lower IQ scores among children, there seems little doubt that the modest tax hike has easily paid for itself.

Sweden has been an international leader in tax reform. In 1990 and 1991 its Parliament enacted a series of new environmental taxes which brought in $1.25 billion a year and were used to pay for reducing taxes on labor, savings, and other income sources. Chief among the environmental taxes were levies on air emissions of the acid rain precursors sulfur dioxide and nitrogen oxides. In the first year of the sulfur levy, emissions dropped 16 percent, and in the first year of the nitrogen tax, emissions dropped an impressive 35 percent.

Surprisingly, the countries with some of the newest market economics - those of Eastern and Central Europe - are also among the leaders in using market mechanisms for environmental policy. Estonia, Hungary, Poland, and Russia all tax a variety of air and water pollutants, though political corruption and economic turmoil in some of these countries may, for the time being, be undermining the use of these taxes in practice.

Nevertheless, part of designing good taxes is understanding their practical limits - and integrating them with existing rules and laws. For example, zoning laws in many industrial countries enforce development patterns that spread houses apart and keep them away from stores and offices, making driving - and high gas use - a virtual necessity. Similarly, when consumers buy appliances or houses, saving money on energy bills is usually a low priority - people often do not pinch pennies the way economists want them to. In such situations, even very high energy taxes will do little to prompt people to save energy. Zoning law changes and mandatory efficiency standards may be needed to make taxes more effective and fair.

Beyond this, there are times when a greater benefit is achieved if the government, not the market, has the final say. If waste incinerators continue to be built, they are likely no matter how heavily taxed to be disproportionately located in poor and minority neighborhoods, unless these communities gain legal recourse to protect themselves. If endangered species are to be effectively protected, they may have to be treated as essentially priceless - in which case, laws, not taxes, will be needed to guarantee their survival. And some pollutants, such as DDT and dioxins, may be deemed unacceptable in any amount - and therefore more appropriately barred by law than by high costs.

These limits, though, leave great scope for environmental taxes. Taxes can help fight global warming, smog, toxic pollution, groundwater pollution or depletion, deforestation, and overfishing. Done carefully, shifting to ecological taxes can minimize the pain of transition and the loss of personal freedom as governments force the global economy back from the brink of environmental self-destruction.

3. Shape the Tax Code to Help People Participate and Survive in the Modern Economy

Since the bulk of government revenue in industrialized countries comes from taxes on sales, wages, corporate profits, and buildings, government tax codes are a major drag on those countries' economies. Some of those taxes weigh heavily on people who are struggling to participate productively in the modern economy.

Prime examples of such dead-weight burdens are the high labor taxes in Western Europe, the generally poor tax incentives for investments in education in the United States, and heavy use of sales taxes (also known as value added taxes or VATs). Sales taxes, in particular, are popular with politicians because they exact their toll a few dollars at a time, arousing relatively little ire among constituents. However, sales taxes and VATs hurt the poor and middle class people more than the rich, because they are flat taxes (see box).

If policymakers are to shift away from such taxes because they are unfair, however, what about the new taxes that will replace them? It turns out that many pollution taxes in their purest form are even less equitable than sales taxes: they are regressive, taking larger shares from lower incomes. This is because in modern economies, the basic necessities of life - housing, food, transportation - tend to entail more manufacturing for what they cost than intangible luxuries such as concert performances and restaurant meals. As a result, pollution taxes hit the poor harder.

For this reason, it is important that ecological tax hikes be part of broader sets of tax changes aimed at bringing economic gains to those who need them most. Some funds from the new taxes can be used to reduce existing taxes on wages and sales, to cut income taxes at the bottom end, making them more progressive, and to provide tax credits for investing in education. If this is not done, tax reform will simply trade one injustice for another.

Greenpeace Germany has attempted to avoid this problem in its current proposal for a gradually rising national energy tax. It has suggested that the German government refund the costs the tax would impose on consumers by mailing rebate checks to every home in the country. In total, the "eco-bonus" would give consumers as much as the energy taxes took, but preserve the incentive to save energy.

Over time, however, some households would fare better than others. For example, five years into the new tax, the rebates would be worth $136 per person. For the poorest households - those earning less than $6,800 a year - this would push after-tax incomes up by 0.89 percent even after subtracting out higher cost of gasoline, electricity, and other energy sources. But for the richest households - those earning more than $86,000 - it would cut incomes by a tiny 0.14 percent. Like Robin Hood, the energy tax would take a small amount of money from the rich and give it to the poor. Meanwhile, energy use would fall: by 2005, it would be 12 percent lower than without tax reform.

Under the Greenpeace plan, industry too would pay energy taxes. It would get its money back in the form of across-the-board payroll tax cuts. According to the German Institute for Economic Research, an economic think tank in Berlin, this would make it easier for companies to hire new workers, and would add 600,000 jobs to the German economy within 10 years, further boosting the prospects of those at the bottom of the economic ladder.

WHAT WILL FISCAL REFORM DO TO BUSINESSES?

These three types of tax reform - increasing neutral and corrective environmental taxes, and decreasing distortionary taxes - may each stand on solid theoretical foundations, but they seem largely unrelated to each other. What has come to be understood only recently, thanks in part [TABULAR DATA FOR TABLE 2 OMITTED] to writers such as Ernst von Weizsacker, president of the Wuppertal Institute in Wuppertal, Germany, is that these taxes can actually combine in powerful ways that make them more politically realistic and more effective.

At the level of politics, increasing environmental taxes and cutting distortionary ones at the same time can allow politicians to pursue two commendable goals - shoring up the job base and protecting the environment - without raising either overall taxes or budget deficits. This is one reason for the growing interest in tax shifting in Sweden, Germany, and other European countries.

At the level of commerce, it turns out that environmental protection often protects jobs as well. By and large, the companies that consume the most resources, those that pollute the most, and those that employ the fewest people for the amount of output are all the same group: logging, mining, and even fishing companies, oil producers and refiners, chemical concerns, steel and aluminum makers, and other primary producers.

Especially in recent decades, businesses like these have become highly mechanized, replacing labor-intensive production methods with energy- and pollution-intensive ones. In the United States, the coal industry boosted output 21 percent between 1980 and 1990, yet it laid off 97,000 workers. Per ton of coal, the number of jobs fell by more than half. Between 1983 and 1992, total mining employment fell 13 percent in South Africa, 33 percent in Japan, 56 percent in Germany, and 63 percent in the United Kingdom.

If these companies' resource inputs and pollution outputs were taxed to reflect true economic impacts, then their costs would rise substantially. Compensating cuts in payroll or other business taxes would not make up the difference unless they were disproportionately targeted at resource industries. But firms more removed from the interface between economy and environment, ranging from insurance companies to steel recyclers, would notice environmental taxes much less. And if the government cut businesses taxes at the same time, such service industries, which are often more labor intensive, would actually come out ahead.

The Greenpeace proposal, which balances energy taxes hikes on industry with payroll tax cuts, would split German industry down the middle into winners and losers. Energy-intensive businesses, representing 46 percent of private industry, would see total costs rise. Many of these could avoid part of the tax by improving the energy efficiency of their plants, but this too would cost money. On the other hand, cleaner, more labor-intensive, industries, representing 50 percent, would save money. The automobile industry, representing 4 percent, would break even (see Table 2).

Numbers like these create interesting politics. In Germany, the Federation of German Industries (BDI), industry's main lobbying arm, commissioned its own study on ecological tax reform in 1994. When the researchers at Cologne University failed to condemn the concept, BDI suppressed the study, but was later forced to admit publicly that its own membership was divided on the issue. Rarely has there been so much dissension among the ranks of German industry, according to Kristina Steenbock, former head of Greenpeace's Bonn office.

In fact, several German businesses and other industry groups have signed on with environmentalists to fight for tax reform. These include the giant AEG, an appliance maker that has concluded it would benefit from rising demand for energy efficiency; Otto-Versamd, Europe's largest mail order company; and a federation of young German entrepreneurs. Even the head of BMW has publicly supported the idea, though his own company has been more cautious.

Dividing industry against itself is essential to making comprehensive tax reform a political reality. At the same time, it cannot be overlooked that there is a human face to the decline of industries. The operations of primary resource companies often dot the landscapes of rural regions endowed with particular natural resources, from oil to iron, and company towns sprout up around them. As these industries go, so go many of the local economies they support. Unemployment is never a pleasant prospect, but when company towns go bust, workers are often forced to choose between enduring long-term unemployment and moving away.

Ultimately though, it is the addiction, not the treatment, that is to blame. Unsustainable industries must, by definition, eventually decline. Their resources will run out or their pollution will become intolerable or environmentally insupportable. Employment will fall further. The only questions are when and how fast.

But knowing that the wheels of commerce must inevitably turn does not lessen the pain of those caught in the gears. It is important, therefore, that governments phase major tax changes in gradually, perhaps over 20 to 40 years, to give people and businesses time to plan and adjust. In response to the ongoing tax changes, businesses could slowly shift away from resource- and pollution-intensive ways of operating and toward more labor-intensive ones. Workers in dying industries would have time to retrain and move to growing service or environmentally sustainable industries such as education and recycling - or even retire and let their children move on.

One person who would seemingly have much to fear from ecological tax reform is Klaus Zwickel, head of IG-Metall, the German metal workers' union and the largest union in Europe. Yet Zwickel has said he supports such a tax. With employment already falling steadily in the German iron and steel industries, it is clear that the status quo offers no security for his rank and file. In contrast, cutting payroll taxes and accelerating the transition to a sustainable steel industry might do them some good. Collecting used steel from old cars, buildings, and factories cannot be automated the way virgin ore production is, so it creates more jobs. And, it creates jobs that will last.

One of the most important lessons of ecology is that complicated, dynamic systems like ecosystems and economies only survive over the long run if they receive steady feedback about their effects on the world around them. Lacking it, they will overgrow their niches and eventually collapse. A fundamental change in the way public revenue is raised can provide much of the feedback missing in modern economies, making sure industries and individuals fully feel the consequences of their activities. The effect will be to guide individual and collective interests onto convergent paths. People and businesses will recycle their wastes, making the concept of pollution nearly obsolete, and draw renewable energy from the sun or the earth's hot interior. Tax-based feedback signals and circular materials flows will make the global economy more interconnected and dynamic than it is today, more responsive to environmental limits, and thus more likely to survive and thrive over centuries to come.

RELATED ARTICLE: WHY FLAT TAXES ARE INEQUITABLE

A flat tax is one that takes a fixed percentage of the money that each citizen earns or spends. The most common type of flat tax is the sales tax. In the United States sales taxes rarely run higher than 8 percent, but in Europe they average closer to 20 percent.

Flat taxes sound fair, but they are not. For a well-off household, a 10 percent cut in buying power might spell the loss of some luxuries, but for a poor family it can mean less food or heat. To be truly fair, the tax code must be progressive overall, taking proportionally more money from those with more ability to pay. This is why in almost all countries with income taxes, those who make more money pay at higher rates. In the United States, some newly ascendant legislators are hoping to scrap the progressive income tax, and put in its place a flat spending tax. This would amount to a straight-forward tax cut for the rich.

David Malin Roodman is a research associate at the Worldwatch Institute. He was coauthor, with Lester R. Brown and Hal Kant, of Vital Signs 1994: The Trends That are Shaping Our Future.