The tax system can be used to help the environment but green taxes can also be misused as a form of stealthy, regressive taxation.
Governments don’t just use the tax system to raise revenue – they have also used taxes to encourage and discourage behaviours and practices. They are levied to internalise the externality of pollution.
Duties on tobacco have been used to discourage people from smoking and tax relief for mortgages have been used to encourage home ownership.
‘Green taxation’ is today’s most fashionable form of taxation - not least amongst Crunchy Conservatives.
Perhaps the most successful green tax policy was the lower duty that western governments levied on unleaded fuel throughout the 1990s. This made it economically advantageous for motorists to switch from more heavily-taxed leaded petrol.
Today’s most successful form of green taxation is probably London’s congestion charge.
Green taxes should be governed by at least three rules, however. Without these rules politicians will exploit the environmentalism of certain values voters and raise green taxes for the wrong reasons and in the wrong ways.
Rule 1: green taxes should be revenue neutral
High tax economies are weak, job-destroying economies and where taxes are levied on polluting factories, for example, there should be compensatory tax relief for business as a whole. Otherwise green taxation becomes an example of tomato environmentalism - green environmentalism that mutates into red-coloured big governmentalism.
Rule 2: green taxes shouldn’t hurt the poor
Some green taxes are stealth taxes. The Major Government argued that its extension of VAT to household fuel was environmentally-motivated. Few people believed it. More serious was the regressive impact of VAT on fuel. Fixed-income pensioners and low-earner families bore the brunt of that particular tax.
Rule 3: green taxes shouldn’t get too complex
Tax systems become more and more expensive to navigate if used by governments for too many policy goals. The environment, family life, charities, small businesses and other political causes stop being the main beneficiaries when tax systems get too complex – the real beneficiaries become tax accountants.
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