Dutch tax system still rewards non-sustainable business

Despite efforts to transition into a circular economy, the Dutch economy is still largely a traditional, linear one. One of the reasons is that circular entrepreneurship is by no means always profitable, and sometimes companies are even penalised for trying to act responsibly. The Dutch tax system is one of the reasons why.

In a linear economy, natural resources are extracted or harvested and refined into end products, to be purchased, used and disposed after use. In this climate, manufacturers benefit from the limited lifespan of their product; it's actually designed to break down after a certain amount of time, so the consumer will need to replace it. Since natural resources have always been so abundantly available and pollution has long been considered a side issue, the linear principle has until recently gone unchallenged.

Reduce to rubble or reclaim resources?

Over time, we've come to realise that this linear system is unsustainable. Resources are starting to run out, the planet threatens to become uninhabitable due to global warming, and waste processing poses an ever-growing challenge. We need to switch out of the linear economy and its focus on consumption and instead embrace the circular economy, based on reuse of resources, materials and products. The methods of the future are repairs, remanufacturing, refurbishment and recycling.

The construction sector is a case in point. Currently, when a building has been written off, it gets demolished with a wrecking ball and reduced to rubble. In a circular economy, materials such as concrete and wood and removable parts like window frames are reused. Buildings can be “mined”. New Horizon is a great example of a company that does exactly that. The enterprise views the city as a “mine”, extracting resources and materials from donor buildings and reprocessing them for reuse.

Social and environmental value

In a circular economy, a company's social and environmental value is added to its social profit; this value is not defined in monetary terms and is therefore often overlooked in economic decisions. Although more and more companies publish “'integrated value reports” and set a “fair price” for products, this is not the standard yet.

For example, companies are incentivised by the current accounting system to write down their assets to zero as fast as they can, which goes directly against the circular economy's principle of products retaining their value. So a cornerstone concept in our current accounting system like depreciation simply doesn't fit into the circular economy. It discourages companies from hiring, leasing, or using Product as a Service (PaaS).

Circular entrepreneurship lacks tax incentives

Circular companies need a large number of employees, relatively speaking. What takes more man hours, extracting various materials to be reused or simply slinging the wrecking ball at an old building? In the same vein, repairs, renovation, and maintenance for the purpose of extending a product's lifespan are relatively labour-intensive processes.

So, while the switch from a linear to a circular economy entails less use of materials and more labour, it's clear that the current tax system is based on taxing labour. In Europe, only 6% of all tax revenue comes from natural resources, pollution and energy, versus 51% from labour. As a result, companies are tempted to exhaust natural resources, while circular companies with their many employees get penalised.

Lowering the tax burden on labour

The Ex'tax Project, a foundation under Dutch law, advocates a gradual adjustment of the current fiscal system by means of a tax shift. It's a simple plan: we can increase taxes on the consumption of natural resources, and use the revenues to lower the tax burden on labour. The overall total revenue for the government will remain the same.Pictured below, the Ex'tax concept garners support from scholars, politicians, international companies, and organisations with ties to the corporate sector. However, governments have yet to implement the proposed system.

The European Commission mostly views environmental tax as levies on energy, transport, pollution and extraction of natural resources. Ex'tax, however, has defined over a hundred ways to tax a wide range of natural resources and types of pollution. A few examples of sources of pollution are gold and cobalt extraction, harmful emissions such as carbon, and pesticides used in agriculture.

The proposed higher taxes on natural resource consumption will pose some challenges to today’s businesses, but this contributes to the realisation of the circular economy. For example, if you need to decrease your water use and carbon emissions, higher taxes will encourage you to innovate with sustainable technologies. Likewise, bio-based and renewable materials will become more and more mainstream. Gradually, more and more linear product lifecycles will become a closed loop.

Hiring more attractive

The benefits of the Ex'tax system are not limited to the environment. Lower taxes on labour makes it cheaper to employ people and will create jobs. While unemployment is currently low, this opens up opportunities for groups who currently have a hard time finding employment, such as low-skilled workers and people with a distance to the labour market. Not only will production processes change, we will also achieve a better social balance.

Wide support for Ex’tax

The concept of Ex'tax is finding increasingly widespread support. In its report “New Era, New Plan” (2016), written in cooperation with KPMG Meijburg, PwC, Deloitte, Trucost, and Cambridge Econometrics, the Ex’tax Project demonstrates how 554 billion euros' worth of taxes can be shifted from labour to natural resources. The macro-economic calculations show how this reform would lead to better economic growth, higher employment, lower imports, and decreased consumption of natural resources. And on top of that, carbon emissions will go down. Finally, we have the basic ingredients for a true transition towards the circular economy.

In summary, Ex'tax improves the business case for efficient use of resources, technologies, and renewable and bio-based materials compared to the business case featuring heavy consumption of natural resources and the application of polluting technologies. Moreover, this tax reform will vastly improve the financeability of the circular economy.

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Just recently, circular entrepreneurs published a call for a tax shift in Dutch financial newspaper Het Financieele Dagblad.