Partner Article

Trends in taxes: environmental sustainability is not the same as government sustainability

Three trends are emerging in taxes:

• A transition from currency-based taxation to carbon-based taxation;
• A shift from the taxation of business to the taxation of labour;
• Calls for the burden of income tax on individuals to be reduced.

So what does this mean?

First, the trend from currency-based taxation to carbon-based taxation. This is reflected in the use of tax systems in many parts of the world to encourage reductions in greenhouse gas emissions (or to penalise polluters, depending on which way you look at it).

This is very much a problem of our times so it is perhaps not surprising that, in the absence of precedents, there have been a number of false starts. For example, the European Emissions Trading Scheme appears to be failing, chiefly because too many permits have been issued. If total tax burdens remain at about the same level, then over time we may expect to see carbon-based taxes increasing as a proportion of the total tax raised.

In the UK, perhaps driven by the necessities of the financial crisis, currency-based taxes and carbon-based taxes seem to have a cumulative effect. In part, this reflects a tricky problem: how can carbon-based taxes be applied in a way which does not penalise ordinary people (and especially the most needy in society) as they seek to meet their reasonable needs for heat, light and power while at the same time imposing extra charges on those who use most? Many proposals have been made; none have yet been proved to work.

When it comes to climate-change measures, there is a risk of first-mover disadvantage. So, in the face of opposition from:

• consumers who fear unaffordable energy bills,
• power generators and large corporations worried about their business models and
• economists who are alarmed that cheap American cheap shale gas is a threat to British jobs,

it is hardly surprising that the UK government seems to be worrying about the impact of climate control measures on households. This will undoubtedly have an influence on the outcome of the 2015 election. Politicians should remember that environmental sustainability is not the same as government sustainability.

This leads to the second trend, which was highlighted in the recent World Bank “Paying Tax” report. The report confirms a general worldwide shift in the tax burden away from business and towards labour. That certainly is the case in the UK where recent reductions in the corporation tax rate, intended to attract investment to the UK and create jobs here, have been accompanied by increases in national insurance contributions.

Now for the third trend. With an election just around the corner, there are now calls to reduce the tax burden on individuals by further increasing the personal allowance and also by raising the 40% income tax threshold. While some may see this as an electoral strategy, others interpret it as the beginnings of a payback from carbon taxes. Whatever the case is, the government still needs to do more to address energy poverty.

This was posted in Bdaily's Members' News section by George Bull .