Friends of the Earth Guernsey

Introduction

"It is important that whichever strategy is finally adopted, all measures, including the proposed direct tax strategy, indirect tax matters and public sector expenditure policies are taken together as a total package."

The Consultation Document (1) rightly recognises that the constantly shifting standards of international taxation pose a threat to the ongoing security of the finance industry within the island, although it is disappointing to note in the document that the word "sustainable" is only used in a financial context, and the word "environment" is applied (except for one instance in the footnotes) solely to the "business environment".

Whilst recognising the contribution to States revenues made by the finance industry, we are concerned that something so central to the entire life of the island and its inhabitants as taxation can be subjected to such dramatic ad hoc manipulations to secure revenues from a single sector.

However, there are wider concerns which will impact on the industry globally, and on Guernsey's future sustainability, that should be considered before making wholesale administrative changes.

Alternative strands to the island's economy would be beneficial in spreading the revenue load across market sectors - not only in recognition of the threats identified in the Consultation Document, but also in response to a more severe, global issue. The future of the energy market, given analysts' current fears concerning the imminence of Hubbert's Peak (2) in global oil supplies indicate that oil prices of $100/barrel are near at hand, and there is unlikely to be any subsequent return to lower prices (3). Not only is this an issue in terms of security of energy supply for the island, but it has the potential to precipitate a global recession, if not a full-blown depression, that will surely impact on investment and other financial markets, as experienced in the oil crises of the 1970s and 1980s. But it also offers a unique opportunity that should be used to encourage the development of the renewable resources available in tidal and wave power locally, far in excess, if properly tapped, of any realistic local requirements.

Finance has been Guernsey's "Golden Goose" in recent decades, and it is an industry in which events beyond the island - global recession, international regulatory regimes, and tax competition most notably - can have a disproportionate impact on the local sector's competitiveness. The proposed changes, whether flat-rate, zero-ten or any other variant which places the needs of the finance industry above any considerations of other market sectors, and contorts the local economy in order to fit the demands of this industry, would seem to lessen Guernsey's independence of action and detract from issues of domestic equity and sustainability of the economy and society as a whole. Not placing all of one's eggs in a single basket is a commonplace that applies especially to golden eggs. The threat to a single sector, surely has to be an opportunity for diversification, rather than increased dependence upon that threatened sector.

We would also suggest, in such uncertain times, that a more radical approach to tax reform is appropriate, alongside a new re-appraisal of the island's genuine regional economic advantage. The search for the next Golden Goose should be viewed in the light of a world that will have a more desperate need for clean energy than for financiers. Hence we believe that the islands would gain greater security, stability and economic well-being by developing, as a matter of some urgency, the considerable natural, renewable energy resources available in the tides and waves around their shores.

The question must be asked: Are the proposals a no-regrets policy? If there was a global downturn in world markets, such as those precipitated by the OPEC boycott or Iranian revolution during the 1970s and 1980s, would the proposed changes assist or hinder the island's resilience and recovery?

Ecological Tax Reform

"There is a growing debate … on the advantages of making a more strategic shift in tax policy away from taxing "goods" such as labour and capital, towards taxing "bads" such as pollution and resource use." Secretary of State for the Environment, 21st April 1994.

(In) its 1995 Report the British Government Panel on Sustainable Development supported taxing people 'on the value they subtract' rather than 'the value they add'.

It is widely accepted that taxation is needed in order to fund government expenditure, and that government expenditure is required for the continued well-being of society. However, the raising of funds is not the only purpose, or impact, of taxation. The way that taxes are levied also has a vital role in bringing about a society based on social equity and ecological sustainability.

The Brundtland Report, which provided the definition of sustainable development that has been accepted by the States, also acknowledges that: "The most basic of all needs is for a livelihood: that is employment."

The drive for profitability at all costs has often been at the cost of jobs under conventional economic thinking, and unemployment has even been used as a tool for constraining wages (or as once stated by the erstwhile Chancellor of the Exchequer, Norman Lamont, mass unemployment was a "price well worth paying", although its "worth" was not to those who were expected to pay the price). In much of Europe a situation has arisen where unskilled workers are finding fewer and fewer opportunities and are slipping into long-term unemployment, and young people are finding it harder to obtain work. At the other end of the scale there are increasing skills shortages in industries that seek to intensify mechanisation to "contain wages", yet find that it becomes necessary to pay inflated wages for scarcer skills. Meanwhile, social security benefit systems have tended to create poverty traps in which people are restrained from positive economic activity by marginal losses in income upon entering low-paid work.

This situation is unsustainable in a very real sense: long term unemployment undermines the social fabric, creates a drain on welfare resources and disenfranchises a significant section of society. The sustainable solution to reverse - or prevent - such a situation is to create livelihoods, not merely profitability.

It is significant that Guernsey has both a high dependence upon income tax revenue and a large migratory workforce fulfilling low-wage roles. Local residents have shunned employment in both horticulture and tourism due to the low wage aspect. Ecological tax reforms could dramatically alter that situation and make it possible to recruit local workers once more.

The effects of a large migratory workforce on the island's overall sustainability must be carefully evaluated. Not only is it a symptom of imbalance in employment and resource-derived tax revenue, it is also a strain on the island's economy and infrastructure.

Reforms to the income tax structure would need to be balanced by different environmental and social policy objectives. For instance, we would propose taxes on vehicle fuels, non-recyclable resources, water and sewage, potential pollutants such as pesticides and persistent chemicals, waste disposal, high energy use, green-field development, and so on. To a degree each case must be balanced by income tax reductions, to maintain fiscal neutrality, although there is scope for increasing taxes on certain environmentally or socially influential activities. To maintain the concept of equity inherent in sustainable development, the income tax side of the equation should be developed to favour the lower paid sectors of society first, as they would have the most difficulty in adapting to the new charging structures on goods and services. In particular, we consider the proposal to apply a ceiling to high-earners' taxation grossly regressive, shifting the burden further down the scale of ability to pay.

Whereas we would favour a shift of the burden of taxation away from income tax entirely, were it to be retained, at the very least we propose raising income tax thresholds considerably before any changes to the actual rates of taxation. If personal tax allowances were based on a theoretical minimum wage - £5 per hour for a 40 hour week, for example - the level of £10,400 per person would be a realistic sum that would allow people to provide for their own needs before they start contributing towards the wider community needs.

The net result of such a change would be a market that reflects environmental and social costs, encourages employment and reduces the need for benefit payments.

Our goal should be to tax what is bad for the environment and community, not what is good for the economy; ie to tax the value subtracted rather than the value added by individuals and entities.

Market forces

Often environmental solutions are labour intensive, rather than capital intensive, and it is this factor that has resulted in many of them being seen as 'too expensive' when compared with traditional industries or methods of production. Many environmentally damaging activities occur because the "market" favours them over sustainable practices. This can be used as an excuse for not taking the sustainable option.

Although it is politically fashionable to refer to the western economic system as a "free" market, this is economic self-deception. This "free" market frequently suffers the hand of governmental intervention, and is globally distorted by subsidies, tariffs, and trade cartels such as OPEC, and locally distorted by such perverse subsidies as tax allowances against private vehicle usage, personal loans etc. It is not inevitable that this situation should pertain. It is quite feasible to restructure some of the factors of the economy to shift the benefit of rational economic self-interest towards sustainable behaviour.

Private Transport

The way the private motor car has come to replace public transport is partly due to market forces. Here the economic issue is in the balance between marginal and fixed costs. In the case of the car, the fixed costs are high: cars are expensive to buy, they must be taxed annually, they must be insured and maintained and so on. In comparison, the marginal costs are low: petrol is cheap, and hence the rational response to the market conditions is to use the car as much as possible once it is paid for. In contrast to this, public transport has high marginal costs because the entire cost of a journey is payable at the time of travelling. Add to the equation the fact that the community as a whole pays for roads and parking provision, and suffers the negative effects of noise, pollution and loss of alternative transport options, the market is clearly seen to be freer for some than for others.

In the case of motoring, the tax regime can be readjusted such that the burden on buying and owning cars can be reduced, and replaced with a higher burden on running a car, as would be achieved by replacing motor tax with increased fuel duties. Current pump prices for petrol amount to approximately 50p/litre (a little over half of UK prices) raising a total of £2m annually from fuel duties, whilst vehicle excise duty raises an additional £6m. Even were this to remain a fiscally neutral measure, the marginal costs of motoring and public transport would become more readily comparable To raise the entire motoring-related £8m revenue from fuel duty alone would require the current 6.8p/litre to be quadrupled to 27.2p/litre which would allow all vehicle excise to be abolished without impacting States revenue, whilst shifting the burden from fixed to marginal costs. This change would result in a financial benefit for anyone using less than 550l fuel per year, or assuming an average fuel efficiency of 10 miles per litre, driving less than approximately 5,500 miles annually. The element of choice becomes clearer with this tax, as either more efficient cars or more restrained driving can reduce what is paid. Although the pump price would rise by 40%, this still only amounts to an extra 2p per mile. No administrative changes would be required. The "market messages" that travellers now receive were chosen, they did not arise accidentally. The States could easily replace those messages with ones that reward desirable choices.

This would have many benefits beyond the obvious environmental ones. It would act as a brake on over-dependence on the car without unduly penalising the less well off who are truly dependent on car travel at the moment - as the fixed costs of motoring would be reduced. On the other hand, heavy car use and vehicle inefficiency would be penalised.

The precise details of where to set the trade-off between fixed and marginal costs would need to be calculated, such that drivers using more than a certain amount of fuel per year would be financially worse off, whilst those below that level would be better off. The precise level to choose would be a political decision based on environmental targets.

It would also be possible to move the "use me" market message on to public transport by promoting the use of season or multiple-trip tickets. As with the high fixed costs of motoring, such ticketing encourages greater use of public transport as the marginal cost to users is very low, whilst fixed costs will remain the same despite the amount of use made of the service.

Another pricing strategy which has been raised on numerous occasions is, of course, paid parking. This would again provide an increase in the marginal costs of motoring - especially in relation to short journeys - whereas at present it is zero, and the cost of parking provision is borne by all taxpayers through general revenue, and by all members of the community through lack of amenity and opportunity costs of the inefficient land use. We hold this to be inequitable, as it requires non-motorists to subsidise the unsustainable behaviour of car users. If it is to be genuinely recognised that high traffic density has an adverse effect on the island, then this issue must be tackled head-on. Not only does traffic affect islanders' quality of life, it is also cited by visitors as the island's number one tourist "turn off" possibly decreasing visitor revenue; it has effects on health through emissions and noise; it deters people from using more sustainable modes of transport such as walking or cycling; and congestion also adds an economic cost. In light of this evidence, and given a commitment to sustainable development, there is no justification for providing free, publicly subsidised parking any longer.

One final area that ought to be examined in this context is the tax structure surrounding company cars, mileage allowances and private (employment related) car parking facilities. We should be asking whether the current situation encourages extra cars on to the roads, and what could be done to encourage cycling facilities or the issue of season tickets for public transport. Perhaps some positive tax benefits could be provided for companies offering a private bus service for their staff? The possibilities are many and varied, once a firm commitment is made to sustainable development and to a suitable public forum to discuss the options.

Similar distortions in the market beset recycled paper, because it is often perceived as being "too expensive". So long as virgin forests are cut for wood pulp and paper recycling remains labour-intensive, the current market conditions will continue to favour new paper over recycled. This is because labour is expensive (i.e. heavily taxed) and virgin forests are cheap (i.e. lightly taxed). By shifting the burden of tax from employment to resources the market conditions would begin to favour the sustainable option rather than the damaging option, and also promote employment.

Energy

In the field of energy use we find that the tariff structure rewards environmentally damaging behaviour patterns at the expense of sustainable energy use.

In this case the fixed costs include initial connection charges to mains services and regular standing charges for ongoing connection to the service. The marginal costs are the fuel prices, and these often include bulk discounts for heavy users.

Again this is a socially regressive regime, with low-level users paying a higher charge per unit than a heavy user, because the fixed costs are spread over fewer units. Heavy use is doubly rewarded - firstly because the fixed costs are spread over a larger number of units and secondly through bulk discounts. As the consumer moves from frugal to liberal and on to extravagant energy usage, the cost per unit becomes less and less.

The impact of such a scheme on energy efficiency measures is also negative. In cases of fuel poverty - where fuel bills are a major part of a household's expenditure, even though little fuel may actually be used - reductions in energy usage don't yield a proportional reduction in bills due to the fixed costs. This makes investments in energy efficiency less attractive by extending the payback period. For wealthier, heavy consumers the lower unit costs and the ability to afford high bills also undermines any incentive to reduce energy usage. Simply increasing fuel costs to increase pressure for efficiency measures is neither effective nor equitable under this scheme.

This is a criticism that was levelled at the UK government's imposition of VAT on domestic fuel, and is a major drawback to a tax-only approach. Although a pure "carbon tax" or "energy tax" can be applied in the current pricing structure to reduce demand, it still penalises the fuel-poor and provides little incentive for the wealthier, extravagant user.

However, by revising the price structure, to a progressive rather than regressive regime, all of these concerns can be addressed.

Another theme that must be addressed in Guernsey's energy supply is demand side management (DSM). This is an area where conservation measures can become a source of profit for fuel utilities, given proper commitment. An Energy Saving Trust (a multi-stakeholder partnership) should have a very strong input to make in this field, as it would provide a forum between energy utilities, their customers and other interested bodies. Demand side management has a central role in any sustainable energy policy for Guernsey as we will need to contain energy consumption if we are to achieve reductions in carbon dioxide emissions in the short term. It would entail the promotion of energy efficient appliances, home and office insulation and the provision of advice for customers. There are considerable commercial and employment possibilities in energy efficiency businesses, and the general improvement of housing stock provides other social and economic benefits: there are health benefits to be gained by reducing damp, cold and mouldy conditions, housing values are enhanced and reduced fuel bills lead to a freeing up of money which then becomes available for spending on other sectors of the local economy. Energy supply relying on imported fuels does not provide very much local revenue relatively speaking.

A major strand of DSM is least cost planning, a practice developed in the USA whereby gas and electricity regulators will only allow fuel utilities to pass on the costs of investments to their customers if they can prove they have taken the most cost-effective response to demand. This has resulted in many utilities finding it more profitable to sell, or even give away, insulation, heating controls or other energy-saving measures than it would be to build new generating capacity. In this way it has been made possible for fuel utilities to profit from conservation rather than increased fuel supply, but the approach will only work when all fuel utilities operate under the same scheme. To properly address DSM it will be necessary for the local fuel utilities to cooperate, and that is not likely if they perceive energy efficiency primarily as a threat to their business. They must be able to benefit from sustainable behaviour.

Besides reducing energy demand, it is also necessary in a post-Kyoto, post-Hubbert climate to begin replacing generating capacity with renewable energy and cleaner technologies. Removal of perverse subsidies should be considered, such as the tax allowances for diesel generating equipment in the absence of a similar allowance for renewable technologies, for instance.

Other Services

Progressive tariffs could also be applied to publicly provided services, such as water, sewage and waste disposal, by applying similar principles modified to suit the particular commodity.

The difficulty with any measure aimed at improving resource and energy efficiency is that it must apply in a way that reflects the real behaviour of consumers. At the point of use, at the level of householders' individual decisions, the alternative system must operate in a manner that promotes sustainable use, rather than damaging use, and that requires that at every level of consumption, there is a sound incentive for reducing that consumption. It is also essential to ensure that constraints on consumption are equitable so as to ensure that the necessary minimum of each commodity is available to all without incurring hardship.

Because taxes on labour and capital are high, so are the prices of things that use labour intensively, such as medical care and education. As the cost of labour is a major constraint in public services and government expenditure, this needs to be tackled. The major thrust of ecological tax reform is that the burden of taxation should be lifted from employment and enterprise and on to resources and energy.

Currently, approximately 83% of Guernsey's general revenue is derived from income tax. Compared with other countries this is extremely high. Across the European Union, for instance, the figure is just over 55%. What is necessary in a context of sustainable development is to shift the balance in the opposite direction and the changes in taxation on resources should be matched by changes to the income tax regime. Researchers at Cambridge University and the OECD have determined that great employment benefits can be achieved by establishing a carbon/energy tax and "recycling" the revenue as reductions in employers' social security contributions.

Although this measure is fiscally neutral it reduces the tax burden on jobs, increases it on energy, and the net result is job creation and resource efficiency measures on the part of employers.

Land site value tax

One of the few resource taxes which are reliably progressive is the land site value tax, (LVT), which is assessed upon the unimproved market value of the site, in accordance with allowed uses under planning regulations. The LVT is then levied in proportion to the assessed value, typically at levels around 1% per annum. Such taxes are in use around the world, including some states of the USA, Australia, Singapore, Denmark, Abu Dhabi, Finland, Jamaica, Kenya, and South Africa. Each particular locality has its own variations on the system, but the underlying principles are the same. Most jurisdictions use the revenues to offset or even replace income taxes, reporting economic benefits as a result.

In 1989 the city of Brisbane established an inquiry into its LVT, and after considering many alternatives, decided to retain it. Amongst their conclusions they found: "that a rate levied on the value of unimproved land is an appropriate means of local government revenue-raising. The Committee's conclusion in this regard is in line with the findings of other recent Australian inquiries. Most members, however, go further. In their view a rate on unimproved land value is not merely appropriate: it is the most efficient and equitable source of general revenue, both in principle and in practice."(4)

As with the other global commons (clean air, water supplies, etc) land itself is not created by human activity, or at human cost, and its economic value is dependent upon the works of the community at large. For instance, retail premises in St Peter Port's High Street would be more valuable than an identically sized premises at Pleinmont, regardless of ownership, business efficiencies, or the retail sector served. It gains this extra value through the community's greater investment in urban infrastructure which enables ease of access for consumers, provision of services and utilities, security and policing, and so on. Under a land value tax, the disparate values of the two sites are recognised, and the beneficial owner would be charged appropriately in accordance with allowed usage under land-use planning laws - whether or not it is being productively used.

This last point is essential to grasp, as it directly addresses the issues of brown-field vs green-field development, dereliction of empty properties, and speculative land monopolisation. Sites which remain unused are removed from the economy, denying housing, income and employment opportunities to the wider community, not to mention adding the disamenity of urban eyesores which are magnets for vandalism and other anti-social activities. LVT does not propose to tax the improvements made by the owners, nor their revenues from usage of the site: it is not the same as a Rateable Value, which values the property, but a site-value tax (although some jurisdictions run both taxes together). Some advocates of LVT have proposed that it should be the single source of all taxation revenue, however, realistically it should be seen as one component of a broader ecological resource taxation base, similar to fuel duties, carbon tax etc, a component that also mitigates the potentially regressive aspects of these others. It would also be a fairer and more revenue-stable method of taxing property than the ad valorem document duty, which can dry up in the event of economic conditions which slow down the property market. The land site value is donated by the community at large every day of the year, not merely when property changes hands, and in fact by easing the transfer of properties, will assist the market in allocating resources efficiently.

Administratively it is reputed to be the easiest of taxes to apply - land cannot be hidden to evade payment; it is assessed by periodic valuation rather than annual forms, audited accounts, and returns; and needs very little bureaucracy to collect. It directly addresses the value received by the owner from the community and the global commons, rather than the value added by the economic activity which is conducted at the site. It socialises (ie taxes) the costs of economic activity, and through the replacement of income tax etc, privatises the added value - an enterprise will pay for what it uses, but retain what it earns.

We would strongly urge the States to investigate this option as applied around the world.

Sharing the Commons and A Basic Income for All

In prehistoric times there might have been some parliamentary control over public expenditure, but there certainly has not been in my parliamentary experience. Arthur Balfour, 1905.

Ecotax reforms address the revenue side of public finance, by establishing the principle that the "commons" which nature provides (clean air, water, land, absorption of pollutants, raw materials etc) should be charged to those who use them. But these are all resources where no individual has any greater right of access than any other, and that which is used by one, is thereafter unavailable to the rest. In as much as the "commons" belong to everyone, so their use should be charged, and the proceeds distributed equally and universally.

The other side of the equation is, of course, government expenditure. In the 2003 Budget Supplement , one of the stated Core Principles and Objectives is:

To promote simplicity and transparency in application and administration for all concerned.

This is a principle that needs to be applied especially to the area of social security payments. Rather than adopt a targeted approach which necessarily entails means-testing - always and everywhere an unpopular and socially-divisive process - and hence a costly and complex bureaucracy to administer it, we would suggest consideration of the idea of a Basic Income, available by right to each and every citizen. This is an area also being investigated by the government of Ireland. A Basic Income scheme aims to ensure that no-one has an income below an established poverty-line, and usually scaled according to the recipient's age, and so take the place of all benefits, from child allowances, tax allowances and reliefs, through to state retirement pension. It would be lowest in the case of children, highest in the case of the retired in recognition of varying living costs with age. It would require minimal social security administration, as it would be universal.

Guernsey's social security expenditure accounts for approximately 20% of the total (£60m of £300m), or just over £900 per person per annum were the entire budget to be distributed directly. Currently, this budget is spent as a remedial measure - ie finding people already in a state of financial distress and needing assistance, often with added social problems consequent upon poverty and exclusion. In many other fields we accept that "prevention is better than cure".

A weekly income of £275 (or £14,300 pa) has been established under the Corporate Poverty Programme as a minimum livable income in Guernsey, although this implies a total expenditure far exceeding today's entire tax take. Clearly such a scheme could not be implemented in the short term, although the principle could be applied on a smaller scale, by recycling some ecotaxes as ecobonuses at least to recognize every member of the community's equal share of the island's ecological space.

On the other hand, remedial social expenditure could be reduced, the current £43 million indirect taxation revenue increased, and as yet the revenue value of the proposed LVT has not been established. In terms of the relief of poverty, Basic Income is by far more effective than the discredited theory of "trickle down", as established by the Irish Government's "Basic Income" Green Paper of 2002 (5). If the income tax / social security model worked, and wealth did "trickle down" to the poorest, then Europe's fastest growing economy would not be experiencing ever-increasing levels of poverty and a rising wealth gap. If a GDP growth rate of 5%+ is insufficient to make the old model work, it is likely that it will never work. In contrast, the Irish Green Paper found that a Basic Income would lift 70% of families in the lower 4 deciles of the population out of poverty. (5)

The justification for such a scheme is that it recognises each and every individual's equal right to access of the "commons". A phased introduction would be feasible, starting from the redistribution of ecotax revenues as "ecobonus" payments. Hence it would counter the regressive tendencies of resource taxation: those using fewer resources would be recompensed effectively by those who use far in excess of a fair share. For instance, a German study (6) concluded that, if part of the revenue from an energy tax were distributed to households as an ecobonus, the change would have positive economic and employment effects, and would reduce the net tax burden on low income households. A Swiss study (7) concluded that if the revenue from levying two Swiss francs per litre of petrol were distributed to all adults as an ecobonus, people driving less than 7,000 kilometres a year would benefit, while people driving more would lose.

Such redistribution of community wealth directly to its members adds another progressive element to the overall mix of measures, as the 'value' of the Basic Income would be proportionately greater for those with lower income from other sources.

As Basic Income is not a benefit it would not be withdrawn upon entering employment or increasing income, and so would not engender the poverty trap. It is also not a tax allowance, but a real payment - allowances may look generous on the part of government, but raising tax thresholds does no good at all to those who are below them and still unable earn more (relieving tax which is already not payable), whilst continuing to be of value to those whose earnings exceed the threshold.

Summary

In Guernsey, broadly four fifths of the burden of taxation falls on those things which are generally seen as "good" - employment, capital and enterprise - with negligible taxes on environmental or social "bads" such as pollution and the inefficient use of energy, land, and materials. The effect of heavy taxes on labour has been to penalise enterprise and to encourage the substitution of labour by other inputs to economic processes such as energy and machinery. Further, the current tax system often subsidises pollution by incompletely accounting for (externalising) the ecological costs of producing and consuming goods and services such as energy and food.

Most taxes are distortionary - they introduce inefficiencies into markets by discouraging the use of the input being taxed, whether it be labour, resources or capital. Properly calibrated, environmental taxes are one of the exceptions to this rule because they help to eliminate distortions to the market caused by pollution damage, and its associated costs. Land value tax in particular has been recognised as one of the least distortionary taxes possible.

A gradual reversal of the current inequitable ratio of direct to indirect taxation could be envisaged through a revenue-neutral programme of changes. Revenue recycling is therefore a key issue: increased resource and pollution taxes could enable lower taxes on enterprise and employment.

As well as making labour cheaper - and hence making entrepreneurship more rewarding - a programme of Ecological Tax Reform would encourage new, environmentally-friendly industries which tend to be more labour-intensive. For example, recycling is more labour-intensive than landfill. A serious programme of insulating low-income homes could create jobs, raise living standards among those in most need and become viable under a tax scenario which saw higher fuel costs and lower employment costs. The suggestion within the Consultation Document of reducing the grant from general revenue to the Social Security fund by increasing employer and employee contributions is regressive in that it increases tax on wages and makes labour more expensive. The consequence of putting even more of the taxation burden onto labour would compound the many problems the Island already faces from high employment costs and the associated knock-on effects.

A major shift from direct to indirect taxation could be regressive unless there are compensatory measures to offset the fact that the poor spend a higher proportion of their income on energy and other necessities than do better off households. This indicates that the introduction of a carbon/energy tax would need to go hand in hand with a programme of energy conservation aimed at reducing consumption in low income households.

Some of the areas where new tax opportunities are offered under this potential new taxation strategy are touched on below:

• Introduce a carbon/energy tax, with the revenue being used to increase the energy efficiency of the cold and damp homes of the least well-off in society and to lower taxes on labour.
• Increase fuel price for transport and move motor tax and basic insurance onto fuel. This could be complemented by investment in public transport, and regulation requiring higher energy efficiency in cars.
• Introduce a land site-value tax (LVT).
• Short term speculative trading in stocks, shares and currencies has a de-stabilising effect on the economy as a whole. In order to discourage such trading, a small tax could be levied on the value of all stocks, shares, gilts, bonds, commodities and currency transactions.
• In some countries products or materials which create specific environmental problems have been tackled by targeted taxes. These could include a plastic bag tax, taxes on chewing gum, polystyrene take-out food containers and cigarettes, pesticides and persistent chemicals, and an aggregates levy to promote the reuse of inert materials, using as a model the existing instruments for levying impot duties on alcohol and fuel.
• Social problems can also be targeted by taxation, including taxes on 15 year housing licences (to encourage businesses to invest in training local people), empty properties, alcohol, etc. There is considerable scope for generating extra revenue in these areas.
• Tax relief on personal loans should be abolished, and serious consideration given to Mike Parr's finding in his report on the Housing Market that tax relief on mortgages distorts the housing market and contributes to higher house prices.
• While 54% of the population are economically active, greater productivity could be encouraged by the introduction of tax credits or relief on childcare provision, to enable mothers to return to part or full time work, and avoiding the need to import labour.
• Consideration should be given to the concept of "Citizens' Basic Income" as a long-term alternative to the current Income Tax / Social Security model of targeted benefits and personal tax allowances.

Conclusion

Income Tax was first raised (in Britain) as a war tax to fund the conflict against Napoleon, and was intended as a temporary measure. It was re-introduced in the 1840s, again as a temporary measure, which became permanent. Its only claim to any ethics is that it is proportional to "the ability to pay". Chopping and changing of rates and applicability has removed even this feeble justification, and we are left with a highly regressive, enterprise-deadening, work-penalising system of allowances, exceptions, protectionism, evasion, and bureaucratic obscurity. Meanwhile, the genuinely important issues of sustainability and equal access to the commons are overlooked.

We have proposed therefore a simpler system, which may be reached incrementally, which shifts the burden of taxation to resources and away from income and positive economic activity.

1. Ecotax reform, including resource and land value taxation
2. Reduction and eventual abolition of income tax and corporate taxes
3. Eventual replacement of benefit-centred social security with a universal rights-based distribution of the common wealth as a Basic Income

The benefits of such a system would be to greatly simplify government activities - and therefore reduce expenditure - and to free up all economic sectors, encouraging enterprise and diversification into sustainable activities. It would address issues of equity, poverty, and social exclusion alongside local and global environmental obligations. Labour intensive social services (education, health care, social work) would become cheaper to provide. Industry and individuals alike would be taxed on the resources they use, rather than the success and efficiency with which they use them. Members of the community will be recompensed for their fair share of common resources. Evasion of tax would be made much more difficult. Revenues would be predictable on a year-to-year basis, unaffected by competing tax regimes, international pressures or the varying profitability of individual market sectors.

Furthermore, we have highlighted once again the significant export asset which the islands have still not developed, in the form of a huge natural, renewable energy resource, and the impending global issues which add to the urgency with which it should be addressed.

"All scenarios of oil depletion that do not include a transition to an alternative energy source end with economic stagnation and collapse following the production peak for all industrialized nations" (2)

Finally, we would remind readers of the following fundamental aims identified in the 2003 Budget review:

• To maintain and enhance the competitiveness of the key industry sectors.
• To adhere to international standards including the principles of the EU Code of Conduct on Business Taxation, if adopted.
• To retain a fair and equitable burden of taxation.
• To secure the levels of revenue necessary for the Island's public services.
• To ensure that the revised structure has minimal effects on individuals, in particular those on lower incomes.
• To ensure that any necessary alternative revenue streams come primarily from the industry sectors which may directly benefit from the revised structure.
• To minimise volatility in public revenues throughout the economic cycle.
• To promote simplicity and transparency in application and administration for all concerned.

We contend that all of these items are better served by an ecotax/Basic Income model than an income tax/social security model of public finance.

Mike Johnson, B.Sc.(Hons), Dip. Env. Pol. (Open)
for Friends of the Earth Guernsey, June 2005

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Appendix I

Extract from Tax Shift, Northwest Environment Watch report No.7, April 1998:

How to tell a good tax from a bad tax

Taxes to be evaluated on the basis of four criteria:

Economy

Does the tax encourage or discourage enterprise, growth in productivity, and job creation? Specifically, does the tax cause what economists call a "deadweight loss": a loss of economic output caused by distorted incentives created by the tax? Taxes on wages, for example, discourage people from working, and companies from employing people. Taxes on investment discourage people from investing. Both reduce economic output.

Equity

Does the tax fall on people in proportion to their ability to pay? Progressive taxation attempts to equalize sacrifice instead of simple percentages by taking a larger proportion of income from higher-income households than from poorer ones. Regressive taxes, by contrast, take a larger share of income from middle income and poor households than from affluent ones. Because the cost of some taxes is passed on from the initial taxpayer to others, assessing fairness requires paying attention to who ultimately feels the tax bite.

Environment

Does the tax encourage or discourage resource conservation and pollution prevention? Does the tax correct the failure of the market to reflect the environmental costs, such as pollution's effects on human health?

Ease of administration

Is the tax easy to administer and enforce? Is it easy for taxpayers to comply with the tax? Is it easy to evade?

References

1. Future Taxation Strategy Consultation Document, States of Guernsey, March 2005

2. Chege, D., Peak Oil: A Global Economy in Crisis, www.fuellingthefuture.org 2005

3. Rubin, J., Not Just a Spike, Canadian Imperial Bank of Commerce, World Markets Occasional Report #53, April 2005

4. Brisbane City Council Committee of Inquiry into Valuation and Rating, A Summary of the Committee's two-volume Report on its Deliberations and Findings (September 1989)

5. Conference of Religious of Ireland Social Justice Commission website, www.cori.ie/justice/basic_income/

6. German Institute for Economic Research (1994), Ecological Tax Reform Even if Germany Has to Go It Alone, Economic Bulletin, Vol.37

7. von Weizsacher, E.U., Earth Politics, (1994).

Further Links of Interest

Land Value Taxation Campaign

Oil depletion analysis centre

'Peak oil' enters mainstream debate (BBC News)

The International Union for Land Value Taxation and Free Trade

PeakOil.org

Citizen's Income Trust (UK)

Fuelling the Future

Iraq and the Problem of Peak Oil (article)

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