28 August 2008

Green Taxes - How to Completely Miss the Point

The TaxPayers' Alliance have released a report called "The Burden of Green Taxes," in which they claim that green taxes are too high, on the basis that the taxes are much higher than are required to cover the social cost of carbon emissions. The report goes on to claim that high green taxes harm the competitiveness of the UK, encourage companies to move overseas and potentially cause jobs losses. The final conclusion is that green taxes should be frozen or cut.

I have to admit that I took an instant dislike to the TaxPayers' Alliance, purely because of the name; nothing is guaranteed to irritate me more than people claiming to speak on behalf of others, especially a group as disparate at "Taxpayers," which is pretty much everyone. Having said that, their main mission is to reduce government expenditure, which is something I generally agree with, so I think I approached the report with a fairly open mind. Having picked my way through it, I would describe it as 79 pages of detailed analysis with a completely erroneous conclusion.

The first point to consider is that carbon emission is only one of the externalities of fossil fuel use. Driving, for example, causes congestion and air pollution too. The report does acknowledge those externalities, but dismisses them as not warranting pricing, thereby implying that polluting the air is not something which should place a cost on the polluter.

Even if you put that aside and take all the calculations at face value, accepting the idea that green taxes are too high because they exceed the costs of the externalities relies on the reader ignoring the fact that most other taxes are levied on activities which have no direct externalities. If you apply the TPA's reasoning to taxes such as income tax and VAT, it implies that they should be zero, as that is the cost of their externalities.

Now, if that was what they were suggesting, with a move towards public revenue being raised purely from green taxes set at the level of the externalities, along with a land value tax, I'd be all for it. As a geo-libertarian, that would be my ideal system, on the basis that it would only charge people for doing things which have a negative impact on others. Unfortunately that isn't what the TPA is proposing. If they were, they'd be defending green taxes and calling for income tax to be phased out, rather than pushing in the opposite direction, by attacking green taxes while waxing lyrical about the idea of a flat income tax.

To me, the argument that we should levy less tax on activities which have negative effects on other people just doesn't make sense when we're still levying taxes on activities which have no negative effects on others.

The idea that green taxes are bad for business is erroneous too. When you tax something you discourage it, so a tax on pollution does certainly discourage polluting businesses from operating in the UK, but, by the same token, income tax, as a tax on earnings, discourages labour intensive businesses from operating in the UK and a tax on profits discourages profitable business from operating in the UK. When looked at as a complete picture, it becomes obvious that if the government wants to raise a certain amount of tax without reducing the benefits gained from businesses, it makes sense to raise it by taxing and discouraging pollution, rather than taxing and discouraging jobs and profits.

If there were no income tax or VAT then the the time would be right to debate the pros and cons of reducing green taxes, but until then, the TPA is attacking the wrong target.

Copyright © 2008 Paul Lockett (paul-lockett.co.uk). Verbatim copying and distribution of this entire article are permitted worldwide, without royalty, in any medium, provided this copyright notice is preserved.

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