Undercover Economist

Green lite

I recently discovered that I am entitled to an occasional tax-free breakfast, because I cycle to work. (The UK government advises that “Under general principles such meals are a taxable benefit in kind but regulations exempt them from tax, as long as they are provided on designated ‘cycle to work’ days.’’) Good to know – and a reminder that the idea of using the tax system to promote environmental goals has taken a wrong turn somewhere.

The basic idea behind green taxes is sound. Since people usually respond to financial incentives, whenever something is taxed they tend to do less of it. Usually, that is a problem. When the government taxes income, we slack off. When the government taxes moving house, we may stay in the wrong size house on the opposite side of town from our new job. What’s more, whenever the tax dissuades someone from earning income or moving house, the tax office loses out as well.

But when the government levies a “green tax’’ – that is, a tax on some polluting activity – these vices become virtues. If the tax does not dissuade the polluters, they pay through the nose, funding public spending or tax cuts on the rest of us. And if the tax does dissuade the polluters, all the better, because pollution will fall.

All very well in theory, but the practice has been shameful. Green taxes have been fussy and poorly-targeted, by turns too stringent and too lax. For fussiness, one need only point to the tax break on occasional breakfasts for bicycling commuters. It is hard to imagine that the environmental benefits outweigh the red tape, but no doubt some minister was able to burnish his or her green credentials with the hare-brained scheme.

As for the evidence of inept targeting, simply contrast the two most significant features of the UK’s green tax “system’’. On the one hand, fuel for domestic heating is effectively subsidised, attracting VAT of 5 per cent instead of the usual 17.5 per cent. On the other, the tax on petrol, which raises far more money than any other green tax in the UK, is a lot higher than can reasonably be justified on environmental grounds and was raised still further in the recent budget.

That conclusion comes from the environmental economists Ian Parry and Kenneth Small, who tried to estimate the appropriate gasoline tax in the US and the UK, taking into account congestion, pollution, and the fact that gasoline tax revenue would allow other taxes to be cut. They concluded that US gasoline tax should be more than doubled, while UK gasoline tax should be roughly halved. Green taxes are a good thing – but we all know that you can have too much of a good thing.

What are we to make of a government that is so confident of its omniscience that it will subsidise my breakfast on environmental grounds, yet at the same time cannot get the most basic decisions right, setting petrol tax far too high and tax on domestic fuel far too low?

I realise that I am complaining that gas-guzzlers are taxed too much and pensioners in fuel poverty are taxed too little. Fine. I’ll contribute my tax-free breakfasts to the pensioners and recommend that the government use its much-vaunted winter fuel payments to deal with the problem. But holding domestic fuel taxes low, thus encouraging the entire nation not to bother with double glazing, is a clumsy way to help the vulnerable.

But I am not holding my breath waiting for sensible green taxes.

This government – like most governments – likes to use the tax system as a way of expressing its moral views: hooray for pensioners, down with Jeremy Clarkson. Cheap politics for them, less so for the taxpayer.

Also published at ft.com.