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Taxes, taxes, everywhere

23 February 2013

9:00 AM

23 February 2013

9:00 AM

What have obesity, misbehaving banks, unaffordable London housing and farting cows all got in common? They are all problems which, according to various campaigners over the past week or so, can be cured through the imposition of new taxes. Those calling for fiscal therapy included the Academy of Medical Royal Colleges, which suggested a 20 per cent levy on sugary drinks, the Liberal Democrats, who want wealthy home-owners to be subjected to a new mansion tax, and the Swedish Board of Agriculture, which wants a levy on meat to reduce methane production from livestock.

All these, of course, come on top of the EU’s proposed tax on financial transactions, the repeated attempts by elements in the British Medical Association for a tax on fatty foods, and the demands of Lib Dem activists this week for a tax on jewellery. The world, it seems, is full of budding Chancellors of the Exchequer, who dream of solving the world’s problems through ever more ingenious levies and charges.

There is nothing, they believe, which cannot be put right with one wave of their imaginary red briefcases. We have arrived at a strange inversion of pork-barrel politics: rather than devise a giveaway to tempt each voter’s snout into the barrel, our political parties have taken to devising taxes that appeal to every voter’s pet hate. Anti-car?  Vote for us for a new tax on cars. Anti-housing estates? Vote for us for a new tax on housing development.

There is one fundamental problem with the idea that society’s ills can be cured through tax. If taxes are a cure-all, then why do we have any problems left? In under three years, the Chancellor has already introduced 254 new taxes or rises in existing taxes, and this on top of a decade of fiscal innovation on an unparalleled scale, which has given us landfill taxes, air passenger duty, carbon credits, aggregates duties, congestion charges, the Community Infrastructure Levy and many others. Like Eskimos reputed to have 100 different words for snow, we are developing a huge variety of words for tax — charges, levies, duties and, most preposterously of all, credits, the word used for a form of tradable tax burden in carbon emissions.

Some — though not all — of these new taxes have succeeded in raising revenue for the public coffers. But as for sorting out the problems which they were supposedly devised to solve, the records are astonishingly poor. Take the London congestion charge, which is ten years old this week. Over that period it has become an accepted part of London’s scenery, with no one — not even the Mayor of London, who robustly opposed it while editor of this magazine at the time of its introduction — any longer calling for its abolition.

Yet it has achieved nothing in the way of reducing congestion: the AA revealed this week that average vehicle speeds have hardly budged over a decade. The tax has proved an extremely inefficient way to raise revenue, with 57 per cent of the £2.6 billion paid by motorists over the decade eaten up in administration charges. If every tax had such a lousy cost-to-revenue ratio, tax collection would be by far the country’s biggest industry, dwarfing manufacturing, agriculture and technology put together.

The landfill tax has hardly been a great success either. Half of all household waste is still going to landfill. In Germany, by contrast, landfill is virtually zero — not thanks to a cumbersome tax, but by virtue of a large programme of building waste incinerators.

What taxes are brilliant at, on the other hand, is creating unintended consequences. Anyone still intent on a ‘fat tax’ to discourage obesity should study the Danish experience. In 2011, the government introduced a tax on food that contained more than 2.3 per cent fat. However, it was repealed last November after it turned out that rather than reducing Danish waistlines, it reduced the profits of Danish supermarkets as citizens flocked across the border to Sweden or Germany. The remaining Danish butchers must be licking their lips: they can look forward to the prospect of a reversal of the shopping tide as Swedes hotfoot it to Denmark to avoid a possible Swedish meat tax.

The lousy record of new taxes demands a moratorium. A serious think-tank or party policy unit will study what has happened and set itself a task: to come up with a programme entirely made up of non-fiscally driven policies. Better still, it will ask: what economic and social problems can we solve by abolishing taxes? In the case of housing, for example, rather than make frustrated home-buyers feel better by devising a mansion tax to try to punish people who do own large houses, wouldn’t it be better to abolish development taxes such as the Community Infrastructure Levy, which in some areas adds £40,000 to the cost of building a four-bedroom house?

Every economy needs taxes, of course. But it is time to return them to their original purpose: raising revenue in the cheapest, most efficient and least-distorting way possible in order to fund public programmes. Using them in an attempt to achieve other policy objectives is a miserable failure.

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