Taxing questions

The discussion over recent weeks about ‘green taxes’ – as well as ‘green crap’ (are taxes crap?) – has raised a number of issues, but not to my mind all of the right ones. Front and centre has been the effect on the cost of living – the implications of higher energy prices for the ‘fuel poor’. The other ingredients of what has become a complicated political mess are a Labour opposition pledge to cap energy bills (as part of the ongoing attempt to paint the government as indifferent to falling living standards among the less well-off); the gag response within the bulk of the Tory party to anything that smacks of a measure to deal with climate change; the need to deal with a fiscal deficit; and the potential role of welfare reform in tackling that deficit.

ECO logic

I can’t say I was ever a particularly strong fan of the approach to levies that has fallen under the spotlight recently. It seemed to me that government was at risk of linking two distinct issues – poverty alleviation and energy pricing – rather more closely than a cool-headed approach would suggest. I never did understand why levies on bills were considered a good way to fund the ECO system . It appears that the government expected privately-owned energy companies to act in good faith and to spend money as soon as it came in. The one thing we could always have been fairly certain of was that the revenue would be generated faster than it was spent, and the companies have not disappointed us in this (perhaps only this?) respect.

Thinking about the problem logically, to the extent that there is an argument for spending on improving the thermal properties of the homes of people on low incomes, then given that such a programme of spending would not be expected to be sustained indefinitely, what seems to be called for is an ear-marked, time-limited, fund. Ideally, its source would be general taxation: after all, when there are matters of poverty and income distribution to be addressed, it would be odd if the first reaction was to think, ‘oh, let’s change the price of energy to pay for measures to assist the less well off’. It doesn’t look good – you use a measure that increases hardship in the short-term to fund measures to alleviate hardship in the longer term – a problem that has now been well publicised.

That having been said, it is not such a straightforward matter to blithely state that the revenue should come from ‘general taxation’, as though this is some bottomless vat of revenue. Taxation is never especially ‘general’, neither to those who are privileged (burdened?) to determine its sources, nor to those who must pay it. So this raises the question as to where this ‘general taxation’ should come from.

The one percent

And here, to me, is where the real damage appears to have been done by the ongoing “green crap” frenzy. The political manoeuvring around energy prices is making it increasingly difficult to highlight the desirability of generating additional revenues through environmental taxation. There are very sound reasons for wanting to tax emissions from energy generation (as opposed to allowing private companies to raise levies on bills). One reason would be to generate revenue in a way that makes the economy more efficient (as energy prices are thereby made to more closely reflect the true costs of the emissions). Another would be to generate revenue that might otherwise have to be raised through taxes, such as those on income, employment, profits or sales, which tend to exert a stronger damping influence on economic activity.

Cameron may want to cut the “green crap”: but he risks shifting tax onto the wrong targets. Photo by UK Home Office, via Wikimedia Commons.

The energy price debate also seems to have become the central issue in discussions about poverty, even though reforms to the welfare system seem likely to have a much more significant impact on low income households. Knocking £50 off household energy bills might amount to a saving (across all UK households) of £1bn or so, but the welfare bill is more like £120bn. Somehow or other, the debate about whether people will ‘heat or eat’ has become centred upon the £1bn, rather than the much larger financial implications of how the welfare system is being rejigged.

Some means will, in any case, have to be found to replace the £1bn foregone in energy levies; whatever it is, it will have some degree of impact on the economy. The government claims that its changes, designed to keep a lid on price rises, can be funded through clamping down on tax evasion. But am I really expected to believe the government was waiting to be aroused from some state of slumber by this debate before it decided to act on tax evasion and loopholes? If it makes sense to clamp down on tax evasion now, why didn’t it make sense to do that a couple of months or years ago?

It’s a measure of the low quality of the debate – and the Labour opposition has to take its share of responsibility for this – that it seems almost heretical to suggest that environmental taxes, including taxes on energy,  remain one of the best ways to raise funds for the public purse. Some will, no doubt, laugh at this as a suggestion in the current climate, but even the current government is already doing this, albeit to a limited degree. The decisions to ditch the recycling of revenues under the CRC Energy Efficiency Scheme, and the introduction of the carbon price floor both have revenue raising effects, and the government is justified, in my view, in keeping these in place.

The question we might ask is whether these mechanisms are raising enough revenue, and in the right way. Separately – and I mean, separately – we should be asking whether the welfare system offers adequate protection to those in genuine need of a safety net. In most cases, people in ‘fuel poverty’ are those facing a more generalised form of poverty (and if they are not, we might have less reason to be so concerned). Having effectively made energy pricing an instrument of welfare policy, the political fall-out may have made it more difficult to shift the burden of taxation from things we don’t want to tax, like employment and income, to things we should be taxing, such as pollution.