Numbers that don’t mean anything: green taxes

(1) The proportion of the total tax take raised from green taxes

The point of levying ‘green taxes’ (or any other kind of ‘sin tax’) is to reduce the occurrence of certain undesirable behaviours – say, emitting CO2 – by specifically increasing the cost of engaging in them.

Actually, there are other possible reasons – you might want to raise money generally, to make your party look green, etc. – but the particular point of thinking about green taxes as green taxes is that they’re a tool to reduce emissions. (You might also levy a tax for the purpose of raising money to spend on reducing emissions, but that’s green spending rather than green taxing.)

So, the more of your tax take that comes from green taxes, the greener your tax policy, right? Wrong.

Say you make a big cut in income tax and hold other taxes constant. All of a sudden, your green taxes account for a higher proportion of your total tax take. Are you discouraging emissions any more than you were? Of course not. In fact, if the income tax cut stimulates economic activity, then you’re likely to end up with more CO2 being emitted. And because there’s more money in people’s pockets, they’re better able to spend their way past the green taxes that you do have in place.

So this leads us to…

(2) The proportion of GDP taken by green taxes

This is more promising, as it avoids the problem above. But it still doesn’t have the significance that people imagine it does.

Some activities are harder to discourage with taxes than others – stickiness vs elasticity, as the economists put it. If something is very important to people (or organisations), then you have to tax it fairly heavily to see much of a deterrent effect. On the other hand, if an activity is pretty insignificant, then even a modest tax will make a lot of people shrug and do something else instead.

So if you tax a sticky activity, you’re more likely to raise revenue than to change behaviour. If you tax an activity with high price elasticity, vice versa.

Tying this up with what I said about the point of green taxes, it’s clear that those levied on sticky activities are likely to fail. They may bring in the cash, but they’ll not do so well at discouraging CO2 emissions. Taxes on more elastic activities will succeed in their deterrent role, but bring in less and less money as more and more people change their behaviour.

The more successful a green tax is, the less revenue it will raise.

So the proportion of GDP taken by green taxes is a factor of how high those tax rates are combined with how unsuccessful they are at reducing emissions. In anything other than the short term (before people have had a chance to adjust their activities), it’s not an eco-virility symbol but a badge of failure.

This also means that the suggestion that higher green taxes should be matched by lower taxes elsewhere is either idiotic posturing or an underhand way of cutting the overall tax take.