tl;dr
We argue that no taxes should exist simply to raise funds, all taxes should be aligned with public policy objectives. This leads to a proposal where the majority of funds are raised through a Land Value Tax, a Carbon Tax, a Consumption Tax and Sin taxes.
Two Birds with One Stone
Each tax has two primary effects:
- Raising funds for the exchequer
- Changing behaviour
For example, fuel tax raises a certain amount of money but also reduces the amount that people drive by increasing the cost of doing so.
For some taxes, changing behaviour is a primary objective (for example cigarette duty) but for many the behavioural impact runs counter to our policy objectives. Income Tax, for example, has many negative impacts on the market. These taxes exist because of inertia (each government largely raises tax in the same way as its predecessor) and because they historically were easy to administer (Income Tax was first successful when the collection was outsourced to companies and the worker never saw the pay) but they need not.
Thinking about it from first principles, why not think of a set of behaviours you wish to discourage and raise all of your funds taxing them?
Bad Things
- Emitting CO2 (and other greenhouse gasses)
- Grossly disproportionate distribution of essentials
- Consuming things that kill us
Carbon Tax
Greenhouse gas emissions are a classic market failure – those doing the emitting pass on the costs (global warming etc) to everyone else to deal with. The solution from classical economics is to tax the emitters to bring the cost of emitting in line with the cost to society. The complication is taxing imported emissions (the carbon used to make imported Chinese steel), but this does not seem insurmountable. Default import taxes can be set at sensible levels, with companies able to provide documentary evidence of their emissions to reduce their liability.
This tax would nudge the U.K. towards greener sources of energy whilst raising substantial funds for the exchequer.
Land Value Tax
Society should ensure that everyone has access to at least a base level of the essentials needed for life – shelter, warmth and food. Additionally, it is important that society provides people with the opportunity to have their own space – to start a family, move for new opportunities or to take responsibility for themselves.
Currently, we as a society are failing in this obligation. It is too expensive for young people and those on lower incomes to access the space they require, in part, due to the extreme inequitable distribution of land.
By taxing the value of land, a force is created in the tax system to penalise under-utilisation of our existing housing stock (eg. second home owners or a couple living in 5 bed home) and land.
This tax has a nice intuition behind it. It can be thought of as a ground rent to the government for securing the land militarily and protecting your property rights via maintaining society and rule of law. Those with the most land to protect pay the most.
Sin Taxes
Cigarettes, alcohol, sugar and fizzy drinks, and at some point perhaps recreational drugs are all goods that damage the health of the consumer and put a burden on the health services and society. We should therefore maintain taxes on these goods to raise funds for the exchequer whilst reducing their use.
People tend to complain about the Nanny State with regards to Sin Taxes. But surely it makes more sense to tax your consumption of sugar and in doing so raise funds rather than taxing your purchase of running shoes (via VAT) and spending that money on an expensive public health campaign to discourage sugar consumption.
The Impact on the Economy
Recall that these taxes will replace all existing forms of taxation including all income taxes, inheritance tax (land is now taxed continuously), VAT and stamp duty.
In the long run, a new equilibrium will be formed where:
- Take home income will be higher
- House prices will be lower and the cost of continuing to own property higher
- Energy intensive goods will be more expensive
- The transition to non carbon energy sources will be accelerated
Transition
Implementation must be gradual, tapering up the new taxes and down the existing taxes over a five year period to allow the economy time to adjust.
House prices are the major implementation difficulty. They are undoubtedly too high, however plunging recent buyers into negative equity defeats the object of trying to help those who are struggling to afford their own space. Implementing at a time of moderate to high inflation (ie now) may help soften the blow, but some targeted help may be necessary to for those who have recently bought houses.
Levelling Up 