Tax Commission Response 4: Environmental and indirect taxation

Another link for the document I’m blogging on about (pdf).

I’ve written a lot about environmental taxation, so I thought I’d save that til last, except to again note my despair that environmental tax policy is considered so marginal by the working group that it doesn’t even warrant its own section.

Firstly, VAT. This is a problem tax. It undeniably hurts the poor more than the rich (the stats at the back of the paper shows that the poorest-richest quintiles pay the following percentage of their incomes in VAT: 11.4, 7.5, 7.0, 6.2, 4.7). There is therefore a respectable social justice argument for wanting to minimise this.

Yet there are two problems. Firstly, having a system of VAT is a prerequisite to European Union and we could only really reduce the standard rate to 15%, which would be effectively meaningless. Secondly, because of the way it operates, reducing it would be inflationary, with the public seeing very little benefit. We been here before with decimalisation and conversion to the Euro.

VAT is therefore pretty safe, with the pain of reducing it, let alone scrapping it, vastly outweighing the short term benefits. But there is certainly no case for increasing it.

This section is also about “sin taxes” such as alcohol and cigarettes. There appears to be a growing view within the party that, as part of a strategy to tackle the problems associated with binge drinking, alcohol taxes should be increased. I share that view, although I would want to see it matched, pound for pound, with an increase in personal allowance. It shouldn’t be seen as a revenue raiser and we should respect the right of everyone to moderate drinking.

One of the reasons the government has been wary of raising tax on alcohol has been the danger that it will encourage the black market and booze cruising. That may well be a danger, but the real problems associated with binge drinking lie with drinking in legal establishments. The pendulum has swung sufficiently for this to now be a higher priority.

Now back to the environment. I’ve already outlined my overall view on this, specifically, that we should radically raise environmental taxes and offset this amount by a combination of an annual “dividend” and increased personal allowance. By taxes, I am technically talking as much about user-charging and permits as an old-fashioned tax.

There are two specific ideas which have been causing a degree of interest among environmentalists and policy makers. Both are technological solutions. The first one I have already mentioned, personal carbon allowances. The idea here is to divide the UK’s annual carbon allowance on a per capita basis. Each UK citizen would then pay these credits each time they purchased something which emitted carbon into the atmosphere (presumably using some kind of smart card – the technology is already with us). People who used very little could sell part of their allowance on the open market, while those who needed more could likewise purchase it. Thus, rather than leaving it to the exchequor to guesstimate the level of tax required to cut emissions, the market would do it far more efficiently.

I really like this idea, but I’m wary of getting too carried away with it. Firstly, the cost of and disruption caused by implementing such a measure would be immense. It would take at least a decade to introduce and there are serious questions about what we should be doing in the meantime. Secondly, I would have real concerns, less about the actual civil liberty implications (which are pretty irrelevant), but whether the public would regard it as an imposition. Whether or not ID cards are introduced in this country, be in no doubt that there will be a major backlash against them in five years time. I’m not sure what the country will make of a party that is pledging to simultaneously take away one compulsory bit of plastic while forcing another one in its place. I’m worried that the system may be too clever for its own good and be politically impossible to implement.

What I would advocate instead is far simpler: require businesses to bid for carbon use rights from the government and have business pass on the costs while government will pass on the revenue in the form of a divi. You wouldn’t need to issue every individual with a piece of plastic to use the system, and yet it would still deal with the social justice aspects.

The other technological system being touted is road user charging. It was actually Milton Friedman who first advocated this system. The original idea is simply to charge road users a rate for using the road based on the level of demand: thus busy roads would cost more to travel on than rarely used country roads.

Both the government and the Lib Dems however are also proposing replacing petrol taxes with it, and using the system to charge people their environmental costs as well.

So far so good. There are several major objections to this however. The first one is the technology and its civil liberty implications. The system will mean that every car must be fitted with a transponder to make it trackable by global positioning satellite. This is not going to be a cheap system to introduce, and the government will end up knowing exactly where every car in the country is at the touch of a button (let’s leave aside how they hope to prevent people from simply removing the transponder from their cars and driving around invisibly for another time).

The Lib Dem response to this is to call for civil liberties to be safeguarded. Fair enough, but this is a New Labour Government we have here. They are simply not going to listen to such concerns. Is the Parliamentary Party prepared to vote against this Bill if they can’t get safeguards implemented, or will they support it as they agree with the overall policy? Their position is as clear as mud.

Secondly, both the government and the Lib Dems are agreed that the total revenue raised should be no higher than the taxes it will replace – VED and fuel taxes. This is a potentially crazy position. Environmental taxes as they currently stand are not changing behaviour; they are simply revenue raisers. If the system is to achieve what it intends to do, create a system for managing congestion, then environmental taxation will effectively be cut. How is this progress?

The revenue will also presumably have to cover the costs of running the system, so what are we planning to cut or tax to make up the shortfall? Worse, the Lib Dem policy also calls for increased investment in public transport. What with?

Leaving aside the integration with environmental taxation for a moment, environmentalists should feel slightly ambivalent about road user charging. Making roads more efficient is good for the economy but will hardly remove cars from the road. The congestion tail certainly shouldn’t be wagging the environmental dog. There is a serious question here: if we significantly increased taxation on fuel, wouldn’t we achieve a reduction in congestion as a useful side product? If that is the case, why go through all the pain and trouble of introducing a vastly complicated scheme?

As it stands therefore, I am unconvinced of the need for road user charging and propose what I hope would be a simpler and easy to implement alternative to personal carbon allowances. I’m a great lover of technology, but the modern day parable of Astronaut pens and Cosmonaut pencils should always be borne in mind.