A radical carbon tax reform

| 2nd August 2008
Dr Adrian Wrigley lays out his ideas for a radical Carbon Tax and explains how replacing the Council Tax with a Land Value Tax could solve the current housing crisis...

The Conservatives are considering an array of tax tweaks this week based on studies by the Centre for Social Justice. Their latest recommendations include tax rewards for married couples and welfare measures aimed at "ending the costs of social breakdown". But although they deserve full marks for identifying the symptoms and establishing that the culprit is the structure of the tax and benefit system, their "solutions" show an astonishing failure to grasp the magnitude of the social, economic and environmental crises that we face.

Founded on the philosophically appealing but flawed concepts of "taxation based on ability to pay" and welfare assistance to "those most in need of support", the tax and benefit system has become a terrible bureaucratic monster. Tax treatment of marriage is the tip of the iceberg since the impact of this tax monster runs deep - promoting environmental outrages such shelling British prawns in Thailand for sale back in the UK. The flights each way are exempt from tax and enable cuts in highly taxed British jobs. The poverty trap this creates causes unemployment and degrades the environment

The necessary reforms are simple but radical. We need to re-examine the tax, benefits, subsidies and laws that affect the core economic and environmental foundations of society, and embark on a 20-year programme to abolish those found to be unnecessary, complex or harmful. The few taxes remaining will be developed as the basis for a freer, fairer and sustainable society. Prosperity will rise as wastage falls.

A new Carbon Tax would allow the phased abolition of VAT across Europe. This would be a welcome step for business owners and customers alike, boosting the service sector and cutting red tape. The new tax would be levied on the extraction and importation of fossil fuels, and the release of global warming gases such as methane. The UK carbon tax rate needed to replace VAT today is £140/tonne CO2 – about 40p on a litre of petrol. A carbon tax would drive investment in the low-carbon sectors, particularly into power generation, transport and home energy efficiency. It would lead to the abandonment of calls for new airport runways and terminals as the aviation sector decreased in size, and green subsidies, biofuel mandates and pollution permit trading systems would become unnecessary.

Another high priority is addressing the root cause of the housing crisis. Almost any productive activity undertaken in the UK is subject to hefty taxes. Investment, saving, working and innovation all pay more than their fair share to The Exchequer. The only refuge from high taxes is the housing market, a situation that causes booms, busts and inequity.

Evidence of a real housing "shortage" is absent. A real shortage would show up as overcrowding nationwide. People would be walking the streets in the hope of finding a room. Room prices would be high, and there would be no empty houses.

We have a crisis of affordability and allocation. People are borrowing eight times their income to get on the housing ladder yet there are 700,000 derelict houses, 500,000 second homes, and hundreds of thousands of pensioners’ homes with at least three bedrooms spare. The overheated Spanish housing market shows that rapid building programmes do not cure price bubbles.

Turning the Council Tax into a monthly land value tax (LVT) paid by all landowners based on the full rental value of the underlying land is key to a just and rational tax system. This would allow the elimination of Inheritance and Capital Gains Tax, and Business Rates. Equivalent to 0.25% of current house prices, the LVT would also fund major welfare reform and a simple flat rate income tax.

The LVT would help bring derelict city land into productive use. Single people in large houses would tend to move to smaller ones. Under LVT, outsize homes cannot be an alternative to a pension so elderly people in large properties would either "roll up" their pension payments via a charge against their house, or would move to smaller premises.

The impact on housing supply and demand would be startling: plans for new towns would become redundant; the need for new roads and other infrastructure would evaporate and, together with the Carbon Tax, the LVT will protect the countryside and prevent suburban sprawl.

Green Party supporters will recognise the ideas here but also see substantial differences. Two things are certain: tweaking taxes will not do – sweeping reform must become mainstream, and the debate on ecological taxation is just beginning.

Dr. Adrian Wrigley is seeking help to set up a new think tank dedicated to the study and promotion of the radical ecological tax reform debate. Email him at: ecologist@linuxchip.demon.co.uk

This article first appeared in the Ecologist August 2007