Good UK Tax Design

As I continue to check for arugments for/against carbon tax (and they are mostly for), I’ve ended up studying overall what good tax design should look like as if someone designed it now.

Lots of work was done on this all the way back in 2011, summed up in the Mirrlees review. I find it disappointing but unsurprising that most recommendations haven’t been taken up. Still here are the top 7 conclusions and more evidence in support of a wide carbon tax at source. See here for more on carbon tax:

"Against  the criteria  set out in our  vision, the seven  major flaws in the  UK tax system are:

1. Despite  improvements  for some groups  in recent years, the  current system of income taxes and welfare benefits creates serious disincentives to  work for many with relatively low potential earning power. The benefit system in particular is far too complex.

2. Many  unnecessary  complexities and  inconsistencies are  created by the fact  that the various parts  of the tax system are poorly  joined up. These range from a lack  of integration between income taxes and  National Insurance contributions (NICs) to a lack of coherence between personal and corporate taxes.

3.The present treatment of savings and wealth transfers is inconsistent and inequitable.   There is no consistent tax base identified, saving is discouraged, and different forms of savings are taxed differently.

4. We    remain  some way    short of having    a coherent system  of environmental taxes to  address imperatives around climate  change and congestion. The effective tax on carbon varies dramatically according to its source, and fuel duty is a poor substitute for road pricing.

5.The  current  system of  corporate taxes  discourages business  investment and favours debt finance over equity finance. Its lack of integration with other parts of the tax system also leads to distortions over choice of legal form. Corporate taxes have also been subject to increasing international pressures.

6. Taxation  of land and  property is inefficient  and inequitable. There is  a tax on business property—a produced input—but not on land, which is a  source of rents. Taxation of housing involves both a transactions  tax and a tax based on 20-year-old valuations.

7. Distributional goals are pursued in inefficient and inconsistent ways. For example,  zero and reduced rates of VAT help people with particular tastes rather than being targeted at those with low overall resources; and council tax is regressive for no obvious efficiency-improving reasons.”

See here for free downloads - go straight to the conclusions if you don’t want to wade through the evidence!

https://www.thendobetter.com/investing/carbon-tax

https://www.ifs.org.uk/publications/mirrleesreview

Carbon Tax, an assessment

​Petition idea: Debate the merits of a wider carbon tax (or equivalent) with revenue raised being directed back to the people or to long-term innovation investment.

Taxing carbon is one of the best ways to incentivize the reduction of greenhouse gas emissions.

By putting a price on carbon, emitters are confronted with the environmental cost of their actions and forced to manage their carbon output. While other policy interventions are also required, putting a price on carbon is central to reducing emissions cost-effectively.

As part of the EU, the UK is involved in a form of pricing carbon via the EU emissions trading system (EU ETS).

However 58% of emissions are out of scope of the EU ETS as they originate in transport, buildings, waste management and agriculture.

If the UK leaves the EU there are scenarios where a Carbon Emissions Tax will be collected but only by UK stationary installations currently in the EU ETS.

Parliament needs to debate the introduction of a wider carbon emissions tax for all industries and sectors and in a way that is just for society.

Positives:

A carbon tax or similar is widely supported by economists (both those associated with right wing ideas as well as those associated with left wing ideas). It goes across political lines.

There is support from business and industry. Most notably many fossil fuel companies are supportive, but the support cross all business industries (for instance, Microsoft).

Much of the infrastructure is already in place to be able to collect such taxes.

Negatives:

A carbon tax is considered “regressive” as it impacts those on low-income more than higher income.

Areas of Debate and Mitigation

A “Carbon Dividend” could be committed to be given directly back to the UK people. This would mitigate the regressive impact. This could be means-tested to further help those on lower income. Adjustments to VAT could also be made. A graduated ramp up can also mitigate impacts.

Or, when, for instance, electricity prices go up by £100, the government could give a £100 dividend that lowers internet costs of a similar non-carbon intensive good/service.

The tax revenue could also be ear marked for innovation. As energy innovation is likely to be a vital part of transitioning to a lower carbon economy.

The tax revenue could also be ear marked for other positive long term investments such as healthcare or education or other investment which have broad support.

A border adjustment for carbon content of imports and exports may be needed to discourage free-riding by other nations.

Formation of a “climate club” as suggested by economist William Nordhaus should be explored.

A mix of all the above ideas is possible and deserves debate.

Conclusion

A comprehensive carbon tax plan should enable reduced emissions, predictability for business, and stimulate long-term investments.

There is strong support from multiple stakeholders across the socio-political divides for a more comprehensive carbon tax. This support is further strengthened by economic and academic work and popular opinion. Negative economics can be mitigated leading to an overall positive for society.

This needs proper parliamentary debate.

Selected but not-comprehensive sources

(will be updated periodically - message me if you have good sources)

https://www.gov.uk/government/publications/carbon-emmisions-tax/carbon-emmisions-tax

https://www.nytimes.com/2018/10/13/climate/nordhaus-carbon-tax-interview.html

http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2017/03/Working-paper-212-Andersson_update_March2017.pdf

http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2017/12/How-to-make-carbon-taxes-more-acceptable.pdf

https://www.clcouncil.org/

http://www.igmchicago.org/surveys/carbon-tax

Nordhaus DICE model below:

and some papers: https://econpapers.repec.org/RAS/pno115.htm

 https://scholar.law.colorado.edu/articles/308/

 https://energypolicy.columbia.edu/research/carbon-taxes-how-they-work

 Comments (I will add useful comments on sources or ideas to those who message me)

A near universal benefit/dividend softens the tax impact.

Means-testing in general is expensive and prone to errors, it may be better to simply give benefits widely or at least to 80 percent of people, almost universal.

Carbon price escalators have been deemed a success because it provides visibility and graduation; allowing businesses to plan.

The proceeds must be ring-fenced by law so the Treasury doesn't raid it and then split into three elements: one, which goes to everyone except the richest, another to innovation and the remainder specifically to industries that are stranded or most severely affected by anti-competitiveness from carbon tax.

Making sure the impact does not fall on the low income is important, which is why the re-distribution element is crucial.