'Taxing Bads' - (27.03.07)

A political consensus appears to be emerging in favour of using higher taxation to encourage (or discourage) certain types of behaviour. Whether reducing climate change, road congestion or obesity, higher taxation on specific activities is seen as a solution to social problems. This is clearly not a new policy approach, progressively higher taxation on cigarettes over a number of years has been used to discourage consumption. The question is the degree to which this approach can be used in other areas.

There is a risk that using taxation and charges may legitimise the behaviour which politicians are trying to discourage. Examples of this are available; paying for blood donations in Australia reducing donation levels, charging parents a fine for picking up their children late from nursery resulting in more late arriving parents, requiring consumers to have water meters resulting in lower response to voluntary water saving messages during times of drought.

The reason why taxation may not always work is clear. It is likely that health warnings and awareness are the main reasons for falls in tobacco usage, not higher taxation. Taxation is too blunt an instrument that can be seen as existing for revenue raising rather than for discouraging certain behaviour. Taxation is also regressive in wealth terms, the poor are frequently hit to a greater extent than those with higher disposable income.

So what are the alternatives. Quotas for particular activities, especially where these can be traded are likely to be more effective. This could work with alcohol, fat, congestion and climate change. In particular, this could be seen as a form of income redistribution that rewards people whose lifestyle (with less communting for instance), may also leave them with a lower disposable income.

Congestion charging, for instance, is unlikely to be accepted unless it is accompanied by an alternative that involves compulsory restrictions on the amount that people can drive during peak hours. Establishing a trading system for these rights may make the policy more accepted in the long run.