Matching taxation principles with environmental policies
A HM Customs & Excise case study

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Page 6: Some features of a ´good´ tax

Taxes that are linked to types and levels of economic activity have one very important feature. People and organisations know that one way to reduce their tax bill is to reduce their level of activity in that particular sphere, e.g. car drivers who want to pay less tax can think in terms of owning a smaller-engined car, reducing their annual mileage, and staying out of congested city centres.

A 'good' tax is one that works in the way intended by those who introduced it. An environmental tax can be said to be working if it is seen to:

  • discourage producers and consumers from economic activities that are harmful to the environment e.g. indiscriminate production and dumping of pollutants and waste; excessive use of fuels; opening up of new quarries and opencast mines as a first resort
  • encourage producers and consumers to engage in economic activities that are 'environmentally friendly' e.g. design, build and operate power stations that are more fuel-efficient; undertake far more recycling and waste reclamation; design, build and sell more fuel-efficient cars, trains and aircraft; devise ways and means of re-using secondhand building materials
  • generate revenues greatly in excess of the cost of administering the taxes. These revenues can then be used constructively in ways that also improve the environment e.g. replanting of forests, restoration of meadows, regeneration of waste land and brownfield sites
  • avoid undesirable side-effects e.g. large numbers of businesses closing down or moving to other countries rather than 'improving their act' at their present location
  • be borne by the persons and organisations at which they are targeted, and only by them
  • gain the understanding, consent and even the active support of the persons and organisations that find themselves paying the tax.

This is a formidable list of requirements for any tax, and by no means easy to achieve in all respects. Not everyone would agree on the extent to which each of the taxes within the UK government's portfolio of environmental taxes currently meet all of these requirements. The main features of some of the taxes are outlined below.

HM Customs & Excise | Matching taxation principles with environmental policies