Daily Archives: 29 October 2005

Tax Commission Response 4: Environmental and indirect taxation

Another link for the document I’m blogging on about (pdf).

I’ve written a lot about environmental taxation, so I thought I’d save that til last, except to again note my despair that environmental tax policy is considered so marginal by the working group that it doesn’t even warrant its own section.

Firstly, VAT. This is a problem tax. It undeniably hurts the poor more than the rich (the stats at the back of the paper shows that the poorest-richest quintiles pay the following percentage of their incomes in VAT: 11.4, 7.5, 7.0, 6.2, 4.7). There is therefore a respectable social justice argument for wanting to minimise this.

Yet there are two problems. Firstly, having a system of VAT is a prerequisite to European Union and we could only really reduce the standard rate to 15%, which would be effectively meaningless. Secondly, because of the way it operates, reducing it would be inflationary, with the public seeing very little benefit. We been here before with decimalisation and conversion to the Euro.

VAT is therefore pretty safe, with the pain of reducing it, let alone scrapping it, vastly outweighing the short term benefits. But there is certainly no case for increasing it.

This section is also about “sin taxes” such as alcohol and cigarettes. There appears to be a growing view within the party that, as part of a strategy to tackle the problems associated with binge drinking, alcohol taxes should be increased. I share that view, although I would want to see it matched, pound for pound, with an increase in personal allowance. It shouldn’t be seen as a revenue raiser and we should respect the right of everyone to moderate drinking.

One of the reasons the government has been wary of raising tax on alcohol has been the danger that it will encourage the black market and booze cruising. That may well be a danger, but the real problems associated with binge drinking lie with drinking in legal establishments. The pendulum has swung sufficiently for this to now be a higher priority.

Now back to the environment. I’ve already outlined my overall view on this, specifically, that we should radically raise environmental taxes and offset this amount by a combination of an annual “dividend” and increased personal allowance. By taxes, I am technically talking as much about user-charging and permits as an old-fashioned tax.

There are two specific ideas which have been causing a degree of interest among environmentalists and policy makers. Both are technological solutions. The first one I have already mentioned, personal carbon allowances. The idea here is to divide the UK’s annual carbon allowance on a per capita basis. Each UK citizen would then pay these credits each time they purchased something which emitted carbon into the atmosphere (presumably using some kind of smart card – the technology is already with us). People who used very little could sell part of their allowance on the open market, while those who needed more could likewise purchase it. Thus, rather than leaving it to the exchequor to guesstimate the level of tax required to cut emissions, the market would do it far more efficiently.

I really like this idea, but I’m wary of getting too carried away with it. Firstly, the cost of and disruption caused by implementing such a measure would be immense. It would take at least a decade to introduce and there are serious questions about what we should be doing in the meantime. Secondly, I would have real concerns, less about the actual civil liberty implications (which are pretty irrelevant), but whether the public would regard it as an imposition. Whether or not ID cards are introduced in this country, be in no doubt that there will be a major backlash against them in five years time. I’m not sure what the country will make of a party that is pledging to simultaneously take away one compulsory bit of plastic while forcing another one in its place. I’m worried that the system may be too clever for its own good and be politically impossible to implement.

What I would advocate instead is far simpler: require businesses to bid for carbon use rights from the government and have business pass on the costs while government will pass on the revenue in the form of a divi. You wouldn’t need to issue every individual with a piece of plastic to use the system, and yet it would still deal with the social justice aspects.

The other technological system being touted is road user charging. It was actually Milton Friedman who first advocated this system. The original idea is simply to charge road users a rate for using the road based on the level of demand: thus busy roads would cost more to travel on than rarely used country roads.

Both the government and the Lib Dems however are also proposing replacing petrol taxes with it, and using the system to charge people their environmental costs as well.

So far so good. There are several major objections to this however. The first one is the technology and its civil liberty implications. The system will mean that every car must be fitted with a transponder to make it trackable by global positioning satellite. This is not going to be a cheap system to introduce, and the government will end up knowing exactly where every car in the country is at the touch of a button (let’s leave aside how they hope to prevent people from simply removing the transponder from their cars and driving around invisibly for another time).

The Lib Dem response to this is to call for civil liberties to be safeguarded. Fair enough, but this is a New Labour Government we have here. They are simply not going to listen to such concerns. Is the Parliamentary Party prepared to vote against this Bill if they can’t get safeguards implemented, or will they support it as they agree with the overall policy? Their position is as clear as mud.

Secondly, both the government and the Lib Dems are agreed that the total revenue raised should be no higher than the taxes it will replace – VED and fuel taxes. This is a potentially crazy position. Environmental taxes as they currently stand are not changing behaviour; they are simply revenue raisers. If the system is to achieve what it intends to do, create a system for managing congestion, then environmental taxation will effectively be cut. How is this progress?

The revenue will also presumably have to cover the costs of running the system, so what are we planning to cut or tax to make up the shortfall? Worse, the Lib Dem policy also calls for increased investment in public transport. What with?

Leaving aside the integration with environmental taxation for a moment, environmentalists should feel slightly ambivalent about road user charging. Making roads more efficient is good for the economy but will hardly remove cars from the road. The congestion tail certainly shouldn’t be wagging the environmental dog. There is a serious question here: if we significantly increased taxation on fuel, wouldn’t we achieve a reduction in congestion as a useful side product? If that is the case, why go through all the pain and trouble of introducing a vastly complicated scheme?

As it stands therefore, I am unconvinced of the need for road user charging and propose what I hope would be a simpler and easy to implement alternative to personal carbon allowances. I’m a great lover of technology, but the modern day parable of Astronaut pens and Cosmonaut pencils should always be borne in mind.

Lib Dem ID campaign

I’ve been asked to plug the new Lib Dem Anti ID Cards.

Happy to do so, but this is a blog and so people will forgive me if I make a few comments.

Firstly, please can we move away from the idea within the party that petition=campaign. I get so despairing because the Party’s Campaigns Department really seems to think that is all they need to do. It looks especially poor given the quality of the NO2ID site.

Secondly, could it not feature a bit of news on it about what the party is actually doing on ID cards? It is remarkably content-free.

The Lib Dems need to embrace single issue campaigning outside of election time and through it develop a supporters network. But that means running as effective single issue campaigns as NGOs, not a vague approximation.

Perfect markets versus reality

Jonathan Calder has been discussing the government’s new education proposals and I have adding a few helpful comments, leading to this series of questions from Bishop Hill. This has made me realise I’m in danger of being misunderstood, but I thought I’d clarify what my position is here rather than there.

First of all, I think it is important to say that I’m not anti “choice” and I’m certainly not anti markets per se, indeed one of my main interests is how markets can help us achieve environmental goals in a way that simply regulating and imposing sin taxes never could. However, I’m concerned that when we talk about choice in relation to public services we are talking about real choice, rather than simply having a range of relatively neutral options. Roger Levett in “A Better Choice of Choice” (I’m sure Jonathan won’t approve of me linking to a Fabian pamphlet!) talks about “choice sets” whereby we should be enabling people to make full choices about their lives rather than make narrow decisions which close off other choices later on.

I also think that discussions about markets are essentially meaningless unless you also discuss externalities at the same time, and remain fully cogniscent of the fact that the perfect market is a myth. People who don’t I believe are open to the accusation that they are market fundamentalists, eulogising about an ideal that only has a tangential relation to reality.

So I get very uneasy when I read Jonathan writing this:

But would any schools want to grow to this enormous size? Would any parents want to send their children to them if they did? Mark’s case seems to be that governing bodies and parents are both criminally stupid and need local education authorities to save them from themselves.

This is an obtuse caricature. There are numerous examples of cases where a series of perfectly rational choices lead to fundamentally undesirable outcomes. Take bus services for instance. If significantly larger numbers of people used buses, services would be cheaper and more reliable. Unfortunately, what has happened since deregulation is that bus services have got worse, leading to more people making the perfectly rational choice to switch to using the car, leading to worse congestion and less money going into the bus service. This in turn leads to more people using their cars, and everyone suffering from worse congestion and worse pollution.

In Jonathan’s comments I included the example of local shops and post offices, to which Bishop Hill retorted: If everyone agrees that local shops are better why does everyone shop at supermarkets?

Yet this has been well documented. It doesn’t take a mass switch from local shops to supermarkets, just a critical mass which renders local shops unprofitable. This has been well documented by the New Economics Foundation’s series of reports on the emergence of “Ghost Town Britain” – a loss of just 10-20% of trade after the arrival of an out of town supermarket is enough to start shutting shops, despite the vast majority of local people actively supporting them.

Bringing all this back to education, and my quote from Jonathan above, it isn’t simply a case of governing boards deciding the perfect size of the school for them; there will always be pressure to expand. From a purely economic point of view, smaller schools are less cost-efficient than larger schools. It will be a brave governing board that chooses to remain small ahead of books and equipment. And, to use the word du jour of our Great Leader, any such school expansion will be “irreversible” – once you’ve built a new wing to accomodate 200 extra students you can hardly go back to a smaller size later.

Bishop Hill asks: Don’t you think that parents should make the decisions about how their children are educated? The children are not public property after all.

I am working on the assumption that children are the responsibility of wider society as well as parents. I’m sorry if that is an outrageously leftist notion but if it isn’t the case, then there is absolutely no case whatsoever for the state funding of education.

Should parents be able to make decisions about how their children are educated? Yes, but there are limits. It is not in societies interests to have children being indoctrinated into a cult or otherwise be kept ignorant of basic truths about the society they will have to live in for the rest of their lives. There is a liberal argument for and against disallowing children to be taught in such a way, but I trust there is very little question among liberals about whether wider society should pay, or even subsidise it.

There is also the question about whether parents are equipped, in a messy world without the market ideal of perfect knowledge, to make proper choices.

Vince Cable has recently written a Centre for Reform pamphlet entitled Public Services: Reform with a purpose. In it, he adapts a typology by Nicholas Barr to assess the suitability of public services for use of markets. This typology has five criteria:

  1. information easy to get or easy to improve access to;
  2. information easy to understand;
  3. low cost of bad choices;
  4. diversity of tastes;
  5. low transaction costs.

Vince concludes that in the case of schools, 3 and 5 are certainly not the case while the degree to which information is easy to get and understand is questionable.

You will pardon me about remaining sceptical (using the precise definition of the word) about the marketisation of education if one of the so-called arch-marketeers in the Lib Dems shares my scepticism. But what is to be done? Well, Theo Butt-Philip hits the nail on the head: it isn’t for national government to be dictating a line from above, but for local government to be given the room to experiment. Surely no Liberal Democrat would argue against that?

But I accept that that is a bit of a cop-out. My honest answer is that I don’t know. What I suspect however is that the solution lies matching local accountability with a system that allows schools to innovate and allows the maximum amount of choice for parents and children while recognising that places will always be limited to some extent. I am certainly sold on the idea of school selection by lot as the least unfair way of managing demand. I also see the answer lying in lots of small schools with strong identities rather than vast sausage-factory like impersonal institutions. I just don’t believe the market, completely unaided, will be able to do this without a democratic infrastructure to nurture it.

A final point to end on though, and I should preface this by emphasising that I really do have a lot of time for Jonathan Calder’s views – he’s listed in my ‘top blogs’ with very good reason and I seem to agree with him on most things. But I do find it a little hard to take being told that any scepticism about marketising education is dreadfully reactionary while simultaneously being told that the market has no place in dictating broadcasting rights to major sporting events. If the market can’t get that right, why on earth would we want to unleash it on our children?