Can Central Asian governments do well by doing good?
The only certainties in life are debt and taxes – and the fact that abusing one will enable the government to avoid the other. Even if they don’t particularly want to protect the environment, governments in Central Asia may take an interest in pollution taxes because they raise funds disproportionally from foreign investors and consumers. In the past, Kyrgyzstan and Tajikistan have assumed large public debts as a share of gross domestic product -- 80% in Tajikistan and 99% in Kyrgyzstan in 2001, according to the most recent data available from the World Bank. Both countries have also run public deficits, again expressed as a share of gross domestic product -- 1% in Kyrgyzstan in 2001, and a phenomenal 7% in Tajikistan, in 2004, which was whittled to zero by 2008, according to the World Bank. Such governments may leap at an easy opportunity to reduce their obligations.
Might green taxes provide that opportunity? That remains to be seen. True, green taxes differ from the government’s normal means of raising money – taxing income, savings and consumption – that discourage some economic activity. A payroll tax lowers after-tax returns to the worker of another hour of labor, so it may dissuade him from offering that hour. Substituting pollution taxes for income taxes may raise as much money for the government and encourage work. Pollution taxes may yield a “double dividend.”
Some economists have speculated that tax revenues might increase. People might work more hours, generating output, sales and income – all of them taxable.
Green taxes are slow to catch on. Europe is relaxing its embrace of the double dividend. Its tax revenues from environmental taxes fell from 6.9% in 1995 to 6.4% in 2005, according to the European Environment Agency. However, to control carbon emissions that contribute to global warming, the European Union has adopted a scheme much like the green tax.
Blowing the whistle on penalties
A glance at figures for Central Asia suggests that some countries in the region may also profit by switching to green taxes. Kazakhstan relies heavily on taxing income, profits and capital gains. These sources accounted for nearly half of all its tax revenues, compared to 9 percent in Russia and 4 percent in Tajikistan, in 2004, according to data from the World Bank. Kazakhstan’s taxes may severely penalize work, production and saving.
Uzbekistan may also penalize savings severely. Like Kazakhstan, it taxed individuals in the top income bracket at 20% in 2004, substantially higher than Russia’s top marginal tax rate of 13%, according to the most recent data available from the World Bank. Taxing the top bracket may affect savings disproportionately: The rich save a larger share of their incomes than do the poor, since they can more easily afford material needs. (If subsistence requires $500 a year, then a household earning $500 a year can save nothing; but the household earning $50,000 a year is in happier straits.) Indeed, the top tax rate in Uzbekistan applied to an unusually large share of Uzbeks. The top tax in Kazakhstan fell on individuals earning more than $47,600 a year; in Uzbekistan, the minimum top income was $666, about a third of average income. These burdens may induce savings to flow out of Central Asia and into Russia. And the failure of three countries in Central Asia to provide recent basic data about their top tax rates is not encouraging.
I do not want to exaggerate the benefits to the region of adopting green taxes. With the possible exception of Kyrgyzstan, governments in Central Asia are relatively small to begin with. Their spending shares of the national economy range from 9% in Tajikistan in 2004 to 18% in Kyrgyzstan in 2005, according to World Bank data. (The statistic for Kyrgyzstan reflects ironically on the nation; in the early Nineties, it was supposedly the poster child in Central Asia for market reform.) By comparison, the public share of the economy in the United States – which has had one of the leanest governments in the West – was 16% in 2003. It is unlikely that additional reductions of the government’s role in the economy – by cutting taxes on income, profits and capital gains – can produce benefits comparable to those that arose from the region’s initial transition to market economies.
(Due to self-reporting, the statistics may understate a government’s actual expenditures on goods and services. On the other hand, the estimates of gross domestic product (the size of the economy) ignore the underground economy, which is probably substantial in Central Asia. The overall effect of the two understatements on a government’s share of GDP is uncertain.)
Another factor suggests that the region can gain only modestly from green taxes – the moderate impact of factor taxes on economic growth in other nations. (“Factors” are inputs used in production: Labor, capital, and natural resources.) For tax revenues, the United States relies almost entirely on income, profits and capital gains. Yet this did not prevent an economic expansion that lasted (save for brief recessions in 1991 and 2001) for more than two decades until the financial crisis of 2008.
All this notwithstanding, it may make sense to tax bads rather than goods, particularly when foreigners will pay the bill. -- Leon Taylor, tayloralmaty@gmail.com
Notes
1. The deficit expresses the government’s spending in the current year that it can’t cover with current revenues. The debt expresses the full amount owed; it sums all unpaid deficits to date. The deficit is like the spending that you charge this month to your credit card; the debt is like your total balance remaining to be paid.
2. The measure of government spending includes purchases of goods and services but not capital purchases for defense.
3. Parts of this post draw upon a newspaper article of mine written for the Caspian Digest in 2006.
References
European Environment Agency. EN 32. http://www.eea.europa.eu/data-and-maps/indicators/en32-energy-taxes-1/en32
World Bank. World development indicators. Various years. Online at www.worldbank.org
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