One way to respond to these tax distortions is to sharply raise taxes on pollution and natural resource extraction and sharply reduce existing taxes on property or labor or investment. In brief, tax pollution, not people or property. Most existing taxes can be justified only because government needs the revenue. Pollution taxes are inherently justifiable because pollution has a cost. One could argue that even if government didn't need the money, we should impose pollution levies or taxes simply to make the goods and services we buy reflect their real cost.
Pollution taxes boast another unique and attractive feature.
They are the only tax where tax avoidance is legal and encouraged. Taxpayers are urged to improve the efficiency with which they use energy or to switch to renewable resources. Both actions would reduce their tax payments while at the same time enriching the overall economy. The issue of tax restructuring is already on the political agenda in Washington and in many states. Most tax reform proposals involve extending state sales taxes or imposing a national value added tax.