The Case for a Sustainable Excess Profits Tax

Abstract

Taxes designed to counter unsustainable behaviours that lead to environmental destruction are usually styled as surtaxes on purchase prices. It makes more sense to locate the source of the profits derived from such behaviours and tax them in order to internalize the environmental costs that are currently externalized to current and future societies. Since profit extracted by externalizing environmental risks constitutes economic rent, it could be taxed at high rates without creating inefficiencies. We propose a method for doing so in the form of a “sustainable excess profits tax”—a SEP tax. The tax base of a SEP tax can be constructed by using life cycle analysis methods to identify the portion of corporate profit that is attributable to the externalized environmental costs of production and distribution at all stages of supply chains. We establish the core elements of a SEP tax, demonstrate its theoretical justification, and examine its practical feasibility.

Keywords: taxation, life-cycle assessment, environmental externalities, economic rent, windfalls, cost savings, carbon pricing, pandemic, COVID-19

JEL Classification: D63, D78, E62, F23, F42, H20, H25, H87, K33, K34, O19, O34, O38