Aldyen Donnelly: The indispensable report

(May 18, 2011) I attach a copy of one of a series of Xcel workbooks that, since 1999, the UK Treasury publishes as part of a set of “Pre-Budget” documents. It shows the estimated impact of all government taxes and transfers/benefits (cash and in-kind) on working families, by income decile. The Treasury also publishes a similar analysis for retired and not working families, and a workbook that combines all families.

Under Maggie Thatcher, the UK government implemented a massive income-to-consumption tax shift starting in 1993. When Labour become government in 1997, they introduced policies to marginally accelerate that shift from income-to-consumption as the basis of taxation. (For example, they increased the Maggie Thatcher “fuel tax escalator” from 3.5% per year to 5% per year.) In the early 1990s, government (correctly, in my view) realized that their over-reliance on corporate taxation was stifling private investment and costing the economy jobs. Leading economists advised that the best way to make up any government revenues foregone to corporate tax cuts was to increase consumption taxes.

But over the period of the 1990s, after financing corporate (and some personal) income tax rate cuts with new and increased consumption taxes, the income gap between the UK’s rich and the poor grew at a rate unprecedented in modern times, privately-financed employment in the goods-producing and construction sectors crashed (relative to the 1980s trend), and growth in the public sector accounted for almost 100% of GDP growth–all outcomes that were counter to those predicted by widely-regarded economists who upheld the hypothesis that consumption taxes are both fairer and less distortionary than income taxes.

By 1999, the frequency and volume of public protest against the UK tax regime was politically quite threatening. Government had been responding with ad hoc measures like home heating rebates, but these unfunded measures were unsustainable. In the year 2000, for the first time in history, the value of total cash and benefits delivered directly to all UK families exceeded the total tax revenues collected from them. In other words, corporate taxes had to be high enough to cover all debt service, defence, economic development, R&D, education, etc. spending at a time when (1) government was committed to cutting if not eliminating corporate taxation and (2) government spending was increasing as a % of national GDP. The UK got to this untenable place entirely by mistake. This mistake could have been easier to see and avoid, I think, had legislators started looking at the attached dataset 10 years earlier.

Then-Chancellor (Finance Minister) Brown realized this was a financial emergency and ordered Treasury staff to prepare and publish a detailed analysis of the impacts of all taxes and transfers/benefits on UK families, by income level, and to go back as far as available databases would allow. So the attached workbook went back to 1977, but was only first published in 2000.

It was only by looking at what this dataset that the UK legislators saw the highly regressive nature of certain (but not all) consumption taxes. Immediately upon seeing this data, the UK Parliament committed to stop shifting the burden of government taxation from income to energy consumption, among other commitments. In the 2000 UK Budget, this commitment is explained and the UK “fuel tax escalator”–a scheduled annual 5% per year increase in excise taxes on energy–was terminated. The VAT rate on transportation fuels was also cut to 5% (having just previously been cut from 17% to 8% as an emergency family relief measure), where it remains today.

In addition to these workbooks, the UK Treasury also publishes a status report on how it is doing relative to the goal of reducing government’s reliance on regressive tax revenues. After making some progress through 2005, the Treasurer has admitted that the situation has eroded somewhat in the years since then. It turns out that fixing this situation is much harder than creating it.

I sometimes feel that BC, Canada and the economists on whom our legislators are relying for advice are caught up in a 1995 UK mindset. We appear to be on a path to repeating this UK mistake, still embracing economic hypotheses that prevailed in the 1980s and were disproved by this UK experiment in the 1990s.. Wouldn’t it be better to learn from the UK experience and avoid the mistake altogether?

Just take a quick look at the last spreadsheet in the attached workbook (blue type = my additions to the official published document). The data clearly shows that energy consumption taxes (carbon-weighted or otherwise) are highly regressive–though not as regressive as value added consumption taxes. Though still imperfect, vehicle taxes appear much more equitable. And vehicle taxes that are pro-rated to vehicle weight and emission ratings (as opposed to kilometers of use) are almost progressive–shifting some of that load that would otherwise build up on middle income families (as in the actual 2008/09 UK data) to the higher income families.

UK legislators did not simply guess that it was a better idea to tax vehicles on the basis of their weight and emission ratings (a tax shift that was first implemented in the UK in 2002-2004). They did not figure this option out until after they saw and considered the implications of the attached data.

(Please note that “disposable income” is defined differently in this UK workbook than I defined the term in my previous message.)

I strongly encourage BC and federal legislators to ask their respective Finance departments to produce this set of estimates for BC, not just for the current situation but also for any proposed tax system shifts. Whether or not this becomes annually published data–as it is in the UK–is another decision.

It is not clear to me how our legislators can make prudent decisions about what to do about the HST, carbon taxes and other parts of our tax system without repeated access to and review of this information.

Aldyen Donnelly, May 18, 2011

1 Response to Aldyen Donnelly: The indispensable report

Cold Air says:

May 24, 2014 at 2:35 am

Reblogged this on Colder Air and commented:
This old post by Aldyen Donnelly informs on the foolishness of regressive energy taxation… a lesson ignored in Ontario.