Colour me tax

Traditionally, taxes have been the means by which governments raise funds to pay for the services we require, such as health and education. But there is a growing trend for people to suggest that taxes should also be used as a means of penalising certain activities, or of changing our behaviour.

Take, for example, the high level of tax on tobacco. I’m not entirely sure whether the intention is to be punitive or to change people’s behaviour by discouraging them from smoking. Superficially, it seems to be the latter, but if the tax was high enough to achieve that aim, then the government would presumably have to find an alternative way of raising the same monies to fund our services. So, as something of a cynic, I’m not so sure that the tax is really about changing behaviour at all – I suspect that the no-smoking legislation is going to be far more effective in cutting consumption.

The one thing that is certain is that it’s a regressive rather than a progressive form of taxation, in the sense that it – like most taxes other than income tax and wealth tax – inevitably has a disproportionate impact on those least able to pay for their tobacco addiction. But anything that keeps income tax down, particularly if it can be presented as having some beneficial social effects is always going to appeal to politicians seeking votes, especially when they perceive that elections are lost and won on the question of income tax.

Which brings us neatly to the subject of so-called ‘green’ taxes. The Lib Dems have been at it this week – 'Green Tax Good - Income Tax Bad' seems to be their mantra – but all the parties seem to be talking to some extent about green taxes. So, are their motives entirely honourable?

Well, the Lib Dems are quite honest up to a point – a paper on the Green Switch by three of their MP’s last year said that “Green taxes will continue to yield substantial sums to the exchequer if they do their work properly”. They also suggest that green taxes need to be ‘revenue-neutral’, such that the total amount of tax collected does not fall.

Their argument is actually, in fairness, a little more subtle than that when it comes to the detail; but it is surely reasonable to conclude that they are therefore not expecting green taxes to deter too many people from doing the things that cause the environmental damage. They argue, as I understand it, that the taxes help cut out the more ‘marginal’ journeys, rather than persuading people to give up the car.

And that in turn brings us to the question of fairness. It is more likely to be the least well-off who are cancelling their 'marginal' journeys due to cost, while the more wealthy continue to use their car and just pay the extra taxes - after all, they’re the same ones who will have benefited from the cut in income tax. If anyone finds that they simply can’t afford their week in the sun due to the marginally increased cost of air travel tax, it will be the least well-off; the wealthy will continue to enjoy their two or more holidays each year.

This is not an argument against taking action on climate change – far from it. It’s a pressing problem, and we all need to take it more seriously. But is it right that it is the least well-off who should have to adjust their lifestyle as a result of ‘green’ taxes, whilst the better-off benefit from tax cuts on their income and can still afford to carry on as before?

Are green taxes really about changing our behaviour, or are they a back-door way of switching tax from progressive systems to regressive systems – whilst at the same time avoiding legislating and regulating in ways that might actually make a bigger difference?