Mirrlees argues for reform of eco taxes

Green taxes in the UK should be reformed to achieve their environmental objectives more effectively, the Mirrlees Review has recommended.

However, policymakers should be wary of calls for a major increase in green taxes to finance a significant shift away from the use of other levies, warns a new report from the body chaired by Nobel prize-winner James Mirrlees for the Institute for Fiscal Studies (IFS).

The paper's authors argue that a switch from taxes on work to taxes on pollution and other undesirable environmental spill-overs would not necessarily improve the functioning of the wider economy.

Green taxes, like other charges, can raise production costs and output prices, weakening work incentives. So a 'green switch' from labour to environmental taxes would not necessarily provide the beneficial 'double dividend' of improving economic performance as well as protecting the environment that some advocates suggest.

While there is a good case for environmental tax reform, says the report, it 'should appeal first and foremost to the potential environmental gains'.

Even if there little scope to shift a significant part of the tax burden onto environmental taxes, the authors argue that there remains considerable scope for useful reform.

For instance, a national system of road pricing should, they say, be introduced as soon as administratively and politically feasible, with revenue raised offset by cuts in road fuel duty.

Commenting on the study, IFS director Robert Chote, said: 'The green tax system in the UK is ripe for reform, so as to achieve the Government's environmental objectives more effectively.

'A significant “green switch” in taxation also has great rhetorical appeal, but… perhaps of greater concern to the politicians is the fear that they would be punished by the voters for increasing green taxes without being given much credit for reducing other ones.'

The new document from the Mirrlees Review of the British tax system follows the body's paper last month that recommended corporation tax be reformed or replaced by a higher VAT rate.

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