Before stepping down as German Chancellor, Angela Merkel plans to impose a tax on carbon pollution, which in turn has re-ignited a debate, especially in the developed countries. This focuses on the effectiveness of such a tax and its ability to tackle complex issues such as funding state budgets, reducing deficits, and financing development projects.
Although economists have mixed views, they agree that a tax would be a double-edged sword and must be only used to achieve desired goals without damaging other economic aspects that are as important, if not more, than taxes.
The German disagreement on this issue, however, is useful and logical. The declared reason that promoted Merkel to propose a carbon tax is to reduce greenhouse emissions, particularly in areas of transport and construction.
However, this kind of tax, as some economies suggest, will stunt growth rates and affect the spending capacities of the middle-class, not to mention the low-income segments. According to Bloomberg, Merkel said that carbon taxes should not increase the burden on people as much as possible.
Currently, Merkel’s party and others within the ruling coalition are in disagreement on this issue, particularly as the Germans are already paying €25 billion (Dh102.77 billion) annually in environmental-friendly energy allocations.
Taxes are a complicated issue, especially in light of the increase in public spending in many countries and which would lead to reduced revenues. Decision-makers are confronting a difficult equation.
On the one hand, they have to finance budgets and reduce deficits, while at the same time maintain the growth rates and raise living standards of its people, who undoubtedly will be affected by the new taxes.
The first part of the equation is simple. New taxes require no more than a legislation or a decision by the authorities, and yet this will have an impact on growth rates. All sectors will be affected and impact demand for goods, services, job opportunities, and spending on leisure and durable goods.
Taxes will affect the competitiveness of the country because of the high cost of investment and living standards, and this is what Europe will feel the most, even as it tightens regulations to fight what it calls tax havens.
These are countries with very low “effective” rates of taxation and fees for foreign investors. Or they don’t levy taxes at all so as to be a magnet for investments. This measure has in fact helped revive those countries whose people enjoy high income levels despite the lack of any natural resources.
However, such a complex and longstanding topic as taxes, which has been addressed by classical economists, is gaining new meaning.
This is due to societies’ transition to higher forms of growth. Taxation requires in-depth studies to identify its forms of usage and time of implementation, which would help economies gradually absorb and adapt, and thus reduce the negative aspects.
Taxation has long been a basic component and no advanced economy can be developed without it. But dealing with it must be done with caution and gradual to avoid the negative consequences as much as possible.