Intelligent Taxation

 

The reality of climate change is now firmly embedded in our public discourse. News media are awash with horror stories of fire and flood, and hopeful ones about giant offshore wind turbines, massive solar farms, electric vehicles, and heat pumps. The implication from these is that technology is pushing us in the right direction and technology will save the day.

But speak to any climate change scientist and you realise that the pace of our adoption of sustainable technologies and behaviour is significantly slower than it needs to be if we are to have any hope of avoiding catastrophic changes to the climate of the planet. Catastrophic means fire, flood, and famine displacing millions of people in every part of the globe. So even if you don’t become a refugee, you will certainly become very closely acquainted with lots of people who are fleeing the destruction of their homelands.

The technology that we need exists, and we are theoretically capable of changing our behaviour, but the speed at which we are able to change is limited by access to finance. Everything that we need to do to arrest the rising temperature of the planet – adopting technology and disrupting the ways that we live our lives – costs money that we either don’t have, or are unwilling to spend.

As I argue elsewhere on this blog, economics is limited by physics, not finance, so the lack-of-money argument is utterly bogus. The only thing that we’re short of are policies that direct finance towards the type of physics that will get the job done.

I have no doubt that in order to change quickly and effectively to technologies and behaviours that can take us to net zero, our economy has to be much more agile than our current ways of using money will allow. Elsewhere I propose a combination of negative interest and universal basic income to give us that agility, but being agile isn’t enough: we need to make sure that we are all running and jumping in the right direction.

100 years ago an economist called Arthur Pigou suggested that the incidental costs to society of things like industrial pollution should be compensated by taxing the polluters. So-called Pigouvian taxes are now firmly embedded in our fiscal system. Duty on alcohol and tobacco, for example, helps to pay for dealing with the health problems associated with their consumption. But the duty also inflates the prices of vodka and cigarettes, which discourages people from buying them. Encouraging people to act in certain ways is the most interesting feature of Mr Pigou’s bright idea.

All taxes are Pigouvian, even if they weren’t conceived as such. Sales tax (e.g. VAT) discourages the purchase of goods and services. Payroll taxes (e.g. NICs and PAYE) are taxes on jobs, discouraging employment. Corporation tax discourages organised productive activity.

From a Pigouvian point of view, if we want a vibrant, productive, agile economy, all of these taxes are counterproductive. I call them stupid taxes, and they account for the vast majority of government revenue, holding our economy back from doing useful stuff like tackling climate change. We are in desperate need of some fiscal intelligence.

A carbon tax is an example of a Pigouvian tax that seeks to alter our behaviour for the better. Its proponents are becoming ever-more strident but some of us who have studied the idea aren’t so keen.

Perhaps the strongest argument against a carbon tax is that it will hit hardest those who are already struggling to pay their energy bills, while those who are wealthy will continue to use the same amount of energy and just grumble about having to pay a bit more. There is also a good chance that industry will simply cut costs elsewhere (e.g. wages and conditions of workers) to compensate for the carbon tax, all of which means very little reduction in greenhouse gas emissions.

If we want to push our economy down the road towards net zero at a faster pace we need something more intelligent than a carbon tax.

Let’s first of all abolish all of the stupid taxes. No more VAT, NICs, income tax, corporation tax, or anything else that discourages useful activity.

Replace these stupid taxes with a single tax that encourages us to do everything in ways that are physically sustainable, i.e. fully-integrated into the circular economy, which includes net zero greenhouse gas emissions.

Then let us expand the definition of sustainable to include things like working conditions, corporate governance, financial transparency, and the like.

Our Sustainability Tax is applied to all retail goods and services at the point of sale.

A Sustainability Index records everything that is involved in the production and delivery of goods and services, and awards them a rating.

Goods and services that are wholly sustainable are given a zero rating – there is no tax to pay.

All other goods and services on the Index are taxed on a sliding scale depending on how sustainable they are.

The sustainability rating is prominently displayed on the packaging or invoice so that buyers can see how much tax they are paying.

Participation in the Sustainability Index is voluntary. Vendors choose to add their goods and services.

Goods and services that are not included on the Index are automatically taxed at the top rate, which might be 40% when the Index is established, but rises over time.

Early adopters of sustainability in each sector gain significant market advantage over their competitors, encouraging everyone to participate with the Sustainability Index.

All of the personnel who are currently employed to administer and enforce the stupid taxes are redeployed to administer the Sustainability Index and enforce collection of the Sustainability Tax.

The ultimate objective of the Sustainability Index is to reduce Sustainability Tax revenue to zero, at which point we will have a truly circular, sustainable economy.

Long before we get to this point public spending will, of course, have to be funded by other means. This will be easy to do when the myth of tax-and-spend has been consigned to the dustbin of economic history and we have established a rational system for financing public spending, one that is based on the real limits of sustainable physics, not the artificial limit of the availability of money.

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