Some people have noted my criticism of Michael Gove's plans for a ‘simple sales tax' to replace VAT and have said that maybe he has the right idea since VAT is regressive, as I have always argued.
They are right, of course. Contrary to what the Institute for Fiscal Studies say, VAT is regressive and there is virtually nothing that can be done to completely correct this within the design of that tax. Within the tax system as a whole that issue can be addressed, and should be (but it is not at present). But VAT is regressive.
And so, let's for the record make clear that a sales tax seeking to collect the same sum for the Treasury will also be regressive. And a simple sales tax - which is bound to be a fat tax on all sales, irrespective of what they are of - will be even more regressive. In other words, a sales tax does not solve this problem.
Those who say that the purchase tax that the UK had before it joined the EU and which it had to give up when joining what was then the EEC, would be better. It was more selective in its application. But that tax created its own, massive issues, because rates varied enormously and that always creates boundaries between products and all boundaries in tax can be abused. I would, as a result, not agree with those suggesting this tax. I also think it has all the inherent weaknesses of a sales tax within it.
So what's the solution? There are two. One is a VAT with more progressive tax rates. This would mean that some goods now subject to a standard rate would carry higher rates of VAT, as happened in the UK for a number of years under Margaret Thatcher (rather surprisingly). And of course, some more items could become zero-rated. So long as the rest of the tax system was still progressive to compensate, and so long as generous benefits are paid (which is how Scandinavian countries create overall progressive systems despite VAT rates higher than those in the UK) then I could live with this.
The other option is more radical. It is what I have called a Carbon Usage Tax, although it is in fact a tax on the flow of funds through people's bank accounts. This overcomes the inherent weakness in VAT which is that it is on consumption alone and it is inevitably and always the case that the best off spend less on consumption as a proportion of their income than do most in the population. This is, after all, why they are the best off. This tax is explained here. In essence it would apply a progressive charge to all flows through a person's accounts in a month, corrected annually to establish a final charge. The rates would be very low, but progressive i.e. the larger the flow the higher the rate. A significant annual allowance would be permitted. It would exclude many from the charge. Transfers between accounts under common control (which would need to be tightly defined) would be excluded, but not much else would be. And for those tempted to spend using offshore accounts, offences to cover avoidance, with the opportunity for HMRC to assess an alternative sum owing instead, would have to be enacted. But this would be progressive by design, and would work simply because very few big transactions are paid in cash. But I would not suggest it instead of VAT. I would, in any case, prefer it replaced employers' national insurance, which I think more harmful to the economy than VAT.
I am open to their suggestions. But remember we do need £140 billion.
And please do not say land value taxation, because it will not come anywhere near that sum when it would also have to replace council taxes.
The floor is yours......
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I like the Carbon Usage Tax. A Carbon Usage Tax plus a basic income sounds like a good combination… but this would need more detailed modelling to sort out what kind of rates both of these would be set at.
I am game…..
Question, would you be required to link all your accounts? If not you get rich people having their monthly dividend (or paycheck if they work) going to a new bank every month and then using 40 accounts to buy a yacht.
How do credit cards work with this? Or payment of debts in general? Does the insanely high amount of interest that usurers charge get taxed too?
That would go over like a lead balloon here in the states. We have a very artfully constructed fiction that the government doesn’t have access to our bank accounts. They don’t have total access to just go snooping but if they have any reason whatsoever they can get it.
IMO this kind of sounds like a cross between a carbon tax and a luxury tax. One of the key benefits of a carbon tax is its easy to administer, just tax oil, nat gas, ect. I wonder if it wouldn’t just be easier to keep the two seperate and find a better way to make sure rich people don’t just dodge the luxury tax by purchasing overseas, or some other way rather than monitoring all bank accounts.
I did not propose this for the States. I suggested it for the UK.
And let’s be clear – it would not be hard to establish relationships between income and CUT liability and so find cheats. Of course rules would be needed, but it would really not hard to find many of the obvious cheats
And I have no problem with credit cards, and Paypal, being linked accounts.
And I really can’t see the issue re accounts when so much credit data is already available to anyone, including government
What mechanism would you use to ensure that Carbon Dioxide use is taxed at higher rates than consumption which uses minimum CO2.
Some people might be putting transactions through their bank accounts to fill up their petrol tanks, turn up their thermostat, or pay to a charity which sponsors children going abroad to broaden their horizons e.g. scouts, madrassas. The next person might put the same amount of money through their account on a swanky low-pro commuting bicycle, an Arran sweater and a donation to the Woodland Trust.
Personally, I’d like the first person to pay a tax equivalent to the social cost of the consumption, and the second person to pay a bit less. You could call it a carbon dioxide consumption tax, or just go straight to the combusters and apply a CO2 tax. But this isn’t what you have in mind. So how is effective micro management at the point of using a bank account achieved. Or is the fact a transaction passed through a bank account, and hit with a CUT, amoral with regards to whether CO2 was created?
This tax cannot do that
How do you propose progressive carbon taxes?
Well, you are the expert. I’m just going for constructive criticism. Any new tax will obviously have opponents so it’s important to not just think what would the most efficient tax be, but how easily can this be distorted and demonized by those who would pay the most; and are those attacks likely to sway average people? Government monitoring what and how much you buy might be an effective boogie man even if it doesn’t actually give them any data they don’t already have.
For example the average Republican HATES the death tax (aka the estate tax) even though they will never be anywhere close to having to pay it. Propaganda works.
So wha5 you don’t like about this idea is that it could be attacked?
“How do you propose progressive carbon taxes?”
There is the tax the energy companies and UBI out 100% of the revenue, not that I necessarily favor that.
Who will pay that energy tax? Really pay, I mean?
“So wha5 you don’t like about this idea is that it could be attacked?”
No, I just think that might be a rather potent attack.
“Who will pay that energy tax? Really pay, I mean?”
The people who use the most carbon, people who use less get a net refund. It’s not totally progressive since rich people can afford the upfront cost of reducing their CO2, but on the other hand they consume more. But, like I said, I’m not necessarily in favor of that tax anyways. But you really seam to be taking my comments as an attack, which they aren’t meant to be, so I’ll just drop it.
I agree re changing the name
I will
But I really can’t see how the right get a net refund
As I understand what your proposal for CUT is – everyone’s bank account will be assessed to establish the flows and a tax applied within some (as yet to be established) rules and tax charges. This will possibly replace some other tax (to be established) Have I understood this correctly?
There are around 65 million Personal current accounts (PCAs) in the UK according to the CMA which demands some form of system to automatically assess the flows etc., a unit in HMRC to deal with it and investigate any anomalies and to apply an ‘alternative charge’ if they are suspicious.
Politically, this will probably be a very difficult sell to the public (we the government will access your bank accounts, review all transactions and make a charge. If we don’t think that’s enough then we’ll calculate a number which you’ll have to pay) I suspect this will lead to more cash transactions it will be impossible to police.
If I’ve understood correctly I’m not sure this would ‘fly’ without detailed explanations.
The basis for estimation is very easy indeed – banks already have the data. The only issue is on linking accounts.
And cash is simply not an alternative – most do not have access to it for a start, unless they take it out of their bank account….
“And cash is not an alternative…people do not have access to it for a start”.,
What planet are you on? Many self employed (builders, Pilates instructors, golf pro’s the list is endless) normally want to be paid in cash. Many do not declare their earnings so they definitely won’t when it comes to transactions.
And what of those who say withdraw money from their account.. no one will know if it is spent on “luxury items” or buying fruit and veg of the local farmer it sweets for their children. Do you propose every transaction has to come with an invoice and shown on a tax return? It is sheer madness, it has no legs. And that’s before the electorate complains as to the evasiveness of the idea..a complete non runner for so many different reasons.
I have done more work to estimate the shadow economy than most
But most is not cash based, it is just not declared
And you will note that you are conceding that much (not all) of so-called cash transactions actually flow from and to bank accounts
Of course the tax will not be perfect – but no tax is. Is it likely to be better than most taxes in this regard? Actually, yes it is. Because the banks will collect the vast majority of it
I have never fully understood how your CUT is a tax on carbon usage. Yes consumption and transactions are all other things equal associated with carbon usage but should such a tax not ideally give incentives to transact and consume in carbon neutral ways?
You have suggested that a direct CO2 tax is not possible, but why can you not just charge the extractors and importers of fossil fuels at the source (where social damage and so tax liability is easily estimated by quantity) and let the increase in costs trickle down the supply chain trickle down from there?
What I am suggesting is a tax in all consumption of all sorts, ultimately
What you are suggesting is a tax on energy consumption, which is proportionately highest amongst those worst off
Which one is fairer?
Which one is likely to have greatest impact in excess consumption?
Those are my questions
Build in credits for the poorest households or renewable generation grants if you’d like, after all the burden should shall on those most elastic in their consumption if the aim is reducing quantity of emissions.
Although (not having good data on it) my hunch would be to dispute the idea that the poor are responsible for more emissions proportionally. I would expect frequent flyers and large corporations to be the most emitting and the most wasteful–and so those who ultimately bear the greatest burden
Luxury items – boats, planes, cars, multiple homes, jewellery, perfumes etc should definitly be charged more. Insurance policies for such high value items are another route for identifying these items.
Advertising expenses should not be tax deductible for many items which are not consumed by the majority or are unnecessary (luxury items, gambling, etc).
The TV licence should be abolished and public service broadcasting should be funded via the Treasury like all public services – properly overseen by the likes of the NAO to ensure value for money.
Charitable status – its a horror story that needs overhauling.
Some of these are nigh on impossible – not least because many are sold second hand
Johnson would have been better off offering free TB licences to all over OAP age…
What about scrapping the current basis for levying VAT based on arbitrary criteria, and replace it with a progressive rate dependent on the commodities production carbon footprint? Carbon free products would be potentially zero rated and others on a sliding scale up to a maximum say 30%. This would make carbon neutral goods more competitively priced and accelerate the uptake of green products.
This would only apply to the supply of goods that can be assessed as to their carbon footprint.
Services would continue to be taxed at a standard rate.
Re CUT. Wealthy individuals are in control of more resources than most small companies and I’m sure that the “Big 5” would soon develop and sell schemes to counter its effectiveness. In any event we would no doubt be required to extend anti-avoidance legislation on an annual basis and the tax code would become ever more complex and unworkable.
Why don’t we require any individual with a net worth in excess of say £1m, to produce, have audited, and file a set of Personal Financial Accounts via the MTD process, and assess liability based on the growth in net worth year on year? Any reduction in net worth would create the equivalent of a tax loss to be carried forward to the following year. The accounts would need to be backed up with independent valuations of property, shareholdings and other high-value chattels.
Discounts on the rate of tax charged could be given for investments in green industries; again this would promote the GND initiatives.
The problem with that Bob is who decides what is carbon free? It’s a serious issue and one we may need to get to, but I can’t see it happening as yet
I like the net wealth accounts – but then I also proposed a wealth tax largely on that basis in The Joy of Tax
In your other article you said this was “of course, a financial transaction tax”. It’s nothing to do with carbon as others have pointed out. I’m all electric. Say I spend £100 per month on electricity. My supplier is Green & Renewable plc – 100% renewable. My neighbour spends the same between BP Oil and Coke & Coal Power plc – 100% carbon. We pay the same tax?
In the first article a correspondent, Martin Heath, proposed a Carbon Added Tax. That seems a better way forward as it would actually tackle carbon at source. I wonder if he’s worked it up at all?
I am about as ignorant of tax as possible, and that includes a period making VAT returns for a micro-co. But if an ignoramus may pose a few questions ?
1. The name is a mistake – it is only tangentially and inefficiently connected with carbon usage, and will strike most as greenwashing.
2. I am not clear if it taxes payments in as well as payments out, which among other things would lead to being taxed twice for the same transaction (insurance reimbursement of car repairs, housing cost assistance, &c), and basically amounts to a combined income and consumption tax. If the tax is only on payments out, then this has less force.
3. I assume most criminal transactions are cash based, and hence not taxed, so do not come into this: but although you play this down, I would foresee a much greater use of cash transactions by ordinary people (and entities ? – see 4)), so more transactions would be lost to tax and crime become a game that people find themselves forced to play.
4. You only mention personal accounts, and view the tax as replacing employers’ national insurance: this amounts to taxing people instead of businesses – are you sure this is fair ? It seems to me very much what Macron is trying to do in France. What has happened to making businesses pay the full costs of their activities, including the welfare of their employees ? (Of course that begs the question of how NI payments are actually used int he UK)
5.. As you agree, this tax does not discriminate between transaction types, so house insulation (£10,000 or so out of my savings) would incur the same penalty as a second-hand gas guzzling motor car. Is that really what you intend ?
6. I am not clear how you can penalize offshore transactions without big steps forward (which I am aware you are pressing for) in controlling offshore dealing.
1. I am getting that message
2. Both in and out – makes sure at least half is picked up
3. No, most criminality goes through bank accounts
4. Businesses would be taxed as well
5. Yes – no tax can do everything, other taxes will have to address that issue. That is why we always need a range of taxes
6. Offshore data is now easily obtained – more readily than UK data in fact
The ‘regressive’ issue has prompted in different jurisdictions exemptions for essential goods and services, and rebates.
Adding in your carbon tax idea could be part of the recipe.
Adding in land value taxation could be another part.
This would be rather easy on a Blockchain (with central bank issued digital currency). You could throw in negative interest rates too to discourage saving…
I have to say, in your dreams
CUT seems like a bit of a misnomer, isn’t it really a FFT (Financial Flows Tax)?
If we really want to tax carbon use, wouldn’t the simplest be to tax it at source, since there are relatively few landing points for oil and gas? To make this progressive, distribute all or some of the proceeds on a per capita basis – lower income people/families would come out better off if it were all distributed, which would engender support. If carbon capture and storage ever gets going, it could attract a credit from the carbon-at-source (CAT) tax. This is not my idea – it’s been around since at least the 1980s.
But really CAT and CUT would be complementary – CAT focussing on the decarbonisation goal, and CUT focussing on inequality.
I think I am getting a very strong message to rename it!
In New Zealand we found that the constraints on introducing a broadly-based
single-rate consumption tax were not as great as previously imagined. We had
recognised from the outset that these two features were critical in minimising
the efficiency costs of GST, including compliance and administrative costs.
Public debate tended to centre on whether Items such as food and clothing and
the activities of charities and central and local government should be exempt
from the tax in order to assist low-income families and desirable causes.
However, our studies showed that in absolute terms higher income people would
gain most from exemptions for food, clothing and other ‘necessities’. This came
through clearly in surveys of household spending. For example, had food been
exempted from GST, the bottom 20% of households would have received only 15% of
the aggregate benefit of the exemption. The other 80% of households, which were
not considered to be poor, would get 85% of the relief. To my mind that would
not represent social equity.
Such spending patterns do not apply just to food. The well-off spend more money
on everything: therefore they pay the most GST, revenue that can then be used to
fund our income support programmes.
Has this tax actually been applied in NZ?
Reply to Graham
Yes it was applied and New Zealand along with Singapore regarded as models in applying GST as compared to the complex UK exemption system.
The point is not whether a particular tax is regressive but how best with the overall taxation and benefits regime poverty can be reduced or eliminated. One other point is that VAT is good for getting a contribution from tourism.
Craig
Apologies, I misunderstood your post. I now understand what GST is (Google is my friend!)
Richard
Is there anywhere where your ‘bank account flow tax’ is implemented?
It has been used in Australia and Brazil
It was very successful in the latter so the right abolished it…..