This post was first published on Business Green.
“In this world, nothing can be said to be certain, except death and taxes.” So observed Benjamin Franklin in 1789 (and possibly a great many others before him) and it is still accepted as one of life’s unalterable facts. But, while the grim reaper comes for all of us at some point, the situation when it comes to taxes is not so inevitable as the aphorism implies.
We tend to think of the tax system as relatively fixed but, in fact, it is remarkably fluid, and some of our most prominent taxes have only been with us for a relatively short time. Income tax is, for many, their most significant exchange with HMRC, and it also contributes the most to HMRC’s coffers. But it wasn’t introduced in the UK until ten years after Franklin’s observation, and then it was only a temporary measure to pay for the war with Napoleon.
Taxes can change over time to suit need
Income tax didn’t become a permanent fixture until Robert Peel’s premiership. In 1842, he reintroduced it with the aim of combatting the “mighty and growing evil” of national debt that had resulted from the advent of free trade and the loss of protective duties on imports and exports. He had only intended this peacetime measure to last a few years, but government spending, not least on the Crimean War, saw it become long term.
The other tax everyone has to pay, often daily, is value added tax (VAT). This modern invention wasn’t introduced in the UK until 1973, when we joined the European Economic Community. VAT replaced another tax on consumption, the Purchase Tax, which itself had only been in place since 1940 and was levied at different rates depending on a good’s luxuriousness. It was introduced in the middle of World War Two for the explicit purpose of “reducing consumption at home” while also helping “to meet the expenses of the war [through] a widening of the field of taxation”. At the time, the government was short of £1.4 billion for the war effort, which is nearly £81 billion in today’s money.
This quick trip through the history of taxation serves to demonstrate that there is considerably more scope to alter the tax system than many people realise. For years, alterations to tax have just involved tinkering with existing taxes, varying the rates. But, for many reasons, it’s time to question why we have this structure and whether the tax system created for the country in the 19th and 20th centuries is still fit for purpose.
There are urgent economic and environmental reasons to change
The need for interventions in this area could become increasingly urgent. The main reason, of course, is that the country is again facing a ballooning deficit that easily rivals those of the wars that have historically ushered in dramatic changes to the tax regime. Already, the chancellor has indicated a willingness to alter the VAT rate to stimulate sectors of the economy worst hit by coronavirus. On the flip side, there is also increasing recognition that the dramatic rise in public spending to deal with the impact of the pandemic will, at some stage, need to be balanced through higher taxes.
There is also growing realisation that tax is a major tool in driving forward action on the environmental agenda. According to the OECD, environmental taxes made up 6.93 per cent of total UK tax revenue, equal to 2.3 per cent of the UK’s total GDP in 2018. This makes the UK on par with its EU counterparts (the European average was 6.33 per cent of taxes, and 2.35 per cent of GDP). But there is much more scope to use the tax system for environmental good. This is especially true as the vast majority of that tax revenue in the UK (around three quarters) comes from energy taxes, on products like petrol, diesel, gas and electricity. As of 2017, other taxes, on pollution and resource use, made up just three per cent of environmental taxes, according to the ONS. That makes their contribution to the overall tax take incredibly small: around 0.2 per cent of overall tax revenue.
Currently, tax revenue is heavily reliant on labour, with those of working age, and particularly employees rather than self-employed or company directors, contributing proportionately higher amounts. (Wealth, like environmental impacts, is considered undertaxed: according to IPPR, taxing wealth at the same rate as work would raise £120 billion of additional revenue over five years.) The reliance on labour taxes also provides little incentive for employers to employ, as the Ex’Tax Project has elegantly argued. This is likely to become more of a problem as the coronavirus crisis is affecting labour intensive industries the most, and is expected to lead to unemployment on levels not seen for decades.
So, how could taxes be shifted to be fairer for people and more beneficial for the environment? Well, for starters, the tax base could shift more towards environmentally harmful activities. The eminently sensible idea, to tax more of the bad (like pollution) and less of the good (like work), could play a big part in bringing about a greener economy where employers have greater incentive to create jobs. Some European countries take more than ten per cent of their tax revenue from environmental taxes. Slovenia’s is the highest at 12.42 per cent, a level considered by some to be a milestone in that shift. But this should by no means be seen as the upper limit of what is possible. With the urgent need to both meet legally binding carbon reduction targets and boost employment, moving swiftly in this direction should be high on the Treasury’s agenda.
Calls for change are growing
With the Treasury’s net zero review due in the autumn, now is the perfect opportunity to reconsider a tax system fit for 21st century society and a zero carbon future. The calls for major reform are getting louder, not least on environmental matters: the Committee on Climate Change wants more carbon taxes, and the likes of the Grantham Institute and Zero C are building cases for carbon pricing to form the backbone of a green recovery.
MPs are interested in what more can be done, with the Treasury Select Committee reviewing HMT’s role in achieving net zero. The Environmental Audit Committee (EAC) is on the case too and has explicitly asked the wider question, as part of its inquiry into greening the post-Covid recovery, how the autumn budget can “be used to shift taxation from economically beneficial things, such as jobs and incomes; to environmental harms, such as pollution and waste”.
The EAC is also asking important questions about how changes to the tax system can drive lower impact living, including for instance, “how a reduction of VAT might nudge people to repair services” for electronics. This is an area we will be investigating as part of the new Green Alliance TransformTax project. Through it, we will be contributing to this evolving conversation, examining the opportunities for the tax system, and consumption taxes in particular, to help people make more sustainable choices. Because, while taxes are a certainty of life, exactly what they are – including who and what they benefit – is far from fixed. Now is the time to rethink the how, what and why of tax.