UNITAX OR TAXES SHOULD TELL THE TRUTH

A review by Malcolm Slessor (1)

Tax is generally considered a burden to be borne, but to be avoided if possible. To evade it is illegal. The existing system is a gold mine for tax accountants, as their clients seek guidance on avoidance. Though such endeavours represent an enormous waste of clever people's time, it is quite understandable. The present tax system penalises endeavour and hard work. The more you make the more the government takes. The same applies to the firms, whose corporation tax is a sore point. Profits are taxed twice. Once at the level of the firm and then as dividends. But government must have income.

The most widespread system of tax is to tax human effort. In the UK we have income tax, corporation tax, social security payments. And there is the most damaging tax of all; value-added tax, which is a direct tax on labour, for is it not labour that adds value? There is also voluntary taxation, maquerading under the name of the Lottery. This is a particular burden on the poorer sections of the community, who can less afford it, but who gamble in the hope of riches.

Let us look at tax in another way; as a signal. All stable systems, from the human body's homeostatic mechanism to the workings of the market function through signals fed back to the main system. If you are too hot, the body sweats to aid cooling. If there is too much oil on the market, the price drops. This is a universal attribute. A properly designed system responds to external signals, and thereby corrects itself. The signal from the labour tax system says "it appears to be unprofitable", "no point of working hard", "lets see how we can structure the company to avoid tax." Another consequence is that the employer, who is burdened with bureaucracy associated with employment, finds it easier and cheaper to replace employees with machines. There is much less bureaucracy associated with buying and operating machines.

So lets turn the thing on its head. If governments tax energy instead of labour, there is no tax on profits, so there is no need to appear unprofitable. Tax accountants become redundant. Work as hard as you like for you can now take home all your pay. But be careful how you use your energy, for it will now be expensive.

Such a proposal is not new. It is called "Unitax". The idea was acclaimed as the social invention of the year in 1990.(2) The idea has not gone down will with economists, who generally fail to appreciate the central role of energy.(3) Any possibility of a rise in energy prices scares the living daylights out of politicians, while captains of industry have seen it only as a threat to their competitivity, which it is not. Today there is a Unitax Association (4) devoted to proselytising the concept. It has received the accolade of being borrowed by Johathan Porrit, the guru of the green left.(5)

Imagine what it would be like in a Unitaxed country. There would be no income tax. Industry and Commerce would pay no taxes on profits nor contribute to social security on behalf of their employees or collect their tax on behalf of government. There would no longer be any need of annual tax returns, and so no need of inspectors with the right to pry into one's financial affairs. On the other hand it would be a country where no one could evade taxation, because no one can avoid using energy. Everyone, individuals (visitors and residents alike), industry and commerce all contribute to the national exchequer in proportion to their use of energy or through the energy embodied in the goods and services they buy. The black economy and the financial activities of the criminal classes, are captured. The tax dodging of the super-rich is a thing of the past. The sheer simplicity of the concept compels admiration.

Unitax is a caloric tax on primary energy, and only on primary energy, levied at the point where it enters the economy. Thereafter there is no government involvement.

The is central to the concept. Primary energy is raw, unprocessed energy emerging from the ground. It enters the economy through a comparatively small number of enterprises like oil, gas and coal companies, and as imports. There are probably less than fifty points of entry for the whole of the UK, thus monitoring of taxation would be cheap, and utterly simple. At one fell swoop the cumbersome present methods, which presently absorb 4.5% of tax raised; fill 10,700 pages of legislation and absorb the minds of many clever people, are done away with. Unitax can be monitored by a handful of excise officials.

Six major advantages accrue from such a taxation system.

• a. It sends the right signal to energy users.
• b. It makes labour cheaper and easier to hire.
• c. It sets a higher value on diminishing and vital resources.
• d. It is cheaper to administer.
• e. It offers a simple, fast way for government to control the economy and raise tax.
• f. It can make exports more competitive.

UNITAX - AN EXAMPLE

In this example from 1990, minor taxes have been omitted. The government raised £141billion in "labour taxes." The country consumed 9492 million giga-joules (i.e. peta-joules) equal to 215.7million tonnes of oil equivalent of primary energy. The solar energy captured by agriculture and forestry is not counted here as it is renewable energy. Thus the Unitax would have been:
£141billion divided by 9492 million GJ which equals £14.85 per GJ of primary energy.

This makes primary energy about 70% of the price of premium grade petrol, but about five times more expensive than domestic gas. This is indeed a radical shift in price. Let's imagine it is introduced step by step as in Table 1 following:

The primary energy supplier collects the tax and passes it to the exchequer. For each GJ of primary energy supplied to the refiner, the invoice will carry a tax statement of £14.85, say £15.00 for simplicity.

Since the tax is caloric, it makes no difference if the energy derives from coal, oil, gas or whatever. However, secondary fuel sources like electricity are not so taxed. The tax element in electricity is built in through the fuels used by electricity generators. Primary energy has to be refined. The refiner sells it as marketable fuels, such as petrol, domestic gas, diesel fuel and so on. Let us track this tax from source to consumer for the case of crude oil from the North Sea.

Suppose an oil platform in the North Sea extracts one million tonnes a year.

Oil has a calorific value of 41.8 GJ per tonne, so the tax would be (1 Mt x 41.8GJ/t x £15.00) = £627million plus any royalty or petroleum revenue tax that government also chose to levy. Again for simplicity, let us ignore that.

In a Unitaxed environment they may not be appropriate. Thus the primary producer seeks to recover the tax element of £627million from the refiner who is also paying the international price of the crude. Taking an average price for oil of £1.5 per GJ, the total cost of the oil to the refiner is now about £690million. There is now an awful lot of money wrapped up in that oil, and the refiner will seek the highest possible efficiency. Typically a refiner would dissipate 5-6% of the energy in the oil during refining. Now, with a huge incentive to efficiency this will be cut, say to 4%. This reduces the 1million tonnes to 960,000 tonnes which amount, however, must carry the original tax plus the producer's cost plus refining cost. At a rough estimate fuels would reach the market at a price of about £18.00 per GJ. This is now not much below the current price of petrol. This now is the price that must be paid on all fuel by all fuel users; farmers, fishermen, manufacturers, and citizens. So how would this affect the manufacturer? Table 2 analyses a typical average intensity manufacturer.

The manufacturer's selling price is now £870,000 more, but the cost to the consumer is £264,000 more, a rise of 6%. An efficiency gain in the use of fuel of 2% could cut that back to zero. It can be expected that some management costs will fall since the manufacturer need employ fewer wages clerks.

EXPORTERS AND IMPORTERS The manufacturer's costs may now exceed those in equivalent international markets, especially in the energy intensive industries. Within the country it is a level playing field.

How is it placed with regard to foreign competitors? It turns out that it puts it at a distinct advantage! Under the Unitax concept exporters would have their Unitax rebated on the energy embodied in the exported goods, in the above case by £1.5million making it 28% cheaper. Importers would bear a Unitax based on their embodied energy: thus the level playing field. In 1990 on a UK-wide basis the government would have had to rebate exporters £42billion, but it would have charged a duty on imports substantially more than £42billion. Thus any imbalance in international payments is to some extent recouped so far as government finances are concerned.

UNITAX FROM A PERSONAL POINT OF VIEW

All costs finally fall upon the consumer. However take home pay is now higher. Consumer choice is wider. One can save by choosing less energy intensive goods - say fresh vegetables over frozen. The most glaring drawback is the high cost of home heating. Electricity prices rise 270%! However bad that looks at first sight, the net impact on households is very small. Moreover there is tremendous incentive to use fuels wisely, there will be strong motivation to invest in house insulation, fuel-efficient furnaces and cars, and in renewable energy systems. This is good for the home-owner and good for the country. Unitax sends the right signal.

OBJECTIONS

£50 a week to heat an average home! Electricity prices through the roof! The public will be outraged. But consider this. Something has to be done. There are always problems with new ideas. There are three in particular.

First and most important is that Unitax would militate against the poor, since no-one can live without heat and light, at least in a temperate winter climate. This means that some sort of support system must be devised, as is the case with present taxation. One proposal is to have a citizen's wage.(7) It cannot be beyond our wit to sort this out. Then it is pointed out that since the tax will drive people to be more energy efficient, energy use will fall, so that the tax will tend to erode its own base. Indeed it will, and it will mean that tax per energy unit will rise until it reaches some stable value, but it will not affect the amount of tax raised.

A common objection to Unitax is that it would be impossible to estimate the "embodied energy" of imports.

Anybody familiar with the techniques of energy analysis knows this is not so. Experience will produce a set of tables that the excise officers can use to calculate both rebate and tax. It will be significantly less complicated than the present system, where (in the UK) there are over 1400 pages of instructions on tariffs and other regulations. It will be up to the exporter and the importer to argue the case and produce evidence. One can imagine that the UK exporter will try to demonstrate the highest possible embodied energy use, and the UK importer the lowest. On the principle of competition, the exporter will be encouraged to reduce energy use in order to compete with the importer in the home market.

ELECTRICITY

The tax on electricity arises from the original tax on the fuels used to generate it. This puts renewable energy sources like hydro-electricity or direct solar power at tremendous advantage. It will encourage investment in sustainable energy. Nuclear power however stands at some disadvantage unless it re-processes its spent fuel. The tax element in electricity is now extremely sensitive to the efficiency of resource use. The difference between producing electricity at 45% thermal efficiency in the latest plants and the 30% that has been common in recent times, can make as much as 8 pence a kilowatt hour difference in price. Unitax makes it much more attractive to develop combined heat and power systems. These make use of heat both for producing electricity and heating homes, but are capital intensive, and have not been popular in the UK for that reason. With Unitax the economics of conbined heat and power are unassailable.

IMPLEMENTATION

Because of its revolutionary nature, implementation of Unitax must be phased in over a decade or so to allow producers and consumers to adjust to new ways. Value added tax is the obvious candidate for substitution. Certain other taxes might be retained. Though the times are ripe for a tax like Unitax, it will take many years before such an idea can penetrate UK society and political circles. Still, we must start somewhere.

Notes:

1. Malcolm Slessor was professor of Energy Studies at Strathclyde University and is a member of the Resource Use Institute. return

2. Institute for Social Inventions, 1990 award made jointly to the author and Farel Bradbury the original architect of Unitax. (See F. Bradbury, The resource economics proposition, Resource Use Institute, 1994, ISBN 1-872579-051) return

3. One prominent Cambridge econometrician wrote to Bradbury saying "As an economist I do not regard energy as especially different from transport, telecoms or computing power." return

4. Unitax Association, 50 New Road, Great Baddow, Chelmsford, Essex, CM2. return

5. J. Porrit, The Director, July 1990. return

6. Table 16.l in M Slessor, J. King and D. Crane, The Management of Greed, (Edinburgh: RUI Publishing, 1997) ISBN 1-872579-07 8 return

7. A citizen's wage or basic income has been proposed by Bradbury and many others. return