Taxation – Fixing a hole where the rain gets in

Keynesian economics is easily caricatured: to stimulate the economy,chard Baron. you should pay some people to dig holes in the ground and others to fill them in again.

The government has a similar idea. There is already a tax on filling in holes – the landfill tax. Now it is considering a tax on digging them.

The aggregates tax would apply to gravel, sand and stone for crushing, but not to big blocks of stone.

It is not yet government policy, but it must be thinking seriously about it, because Customs & Excise has published a consultation paper on how it might work in detail. I welcome this approach – finding out whether something will really be practical before taking a decision – but the detail also shows that the reasons for an aggregates tax really need to be thought through a good deal more clearly.

Blot on the landscape

It is supposed to be an environmental tax. So what is this environmental damage it is supposed to be valuing? A big hole in the landscape can certainly be ugly, but what if a gravel pit is turned into a nice lake? Even better, use it for landfill, grass over the hole when it is full and one form of environmental damage can be corrected by another.

Correcting the damage is not, of course, always so easy. It would be impractical for many quarries to be turned into lakes, and some landfill sites have unstable surfaces or contain dangerous chemicals. But if the hole in the ground is the environmental damage, why should the quarrying of big blocks of stone be exempt?

The answer is that you do not always need to use new aggregates: you can sometimes recycle instead. When buildings are demolished, they generate a lot of rubble. That could be used for new construction in place of freshly quarried aggregates, and is more likely to be used if quarried aggregates are made more expensive by putting a tax on them. There is no point in hoping that big blocks of stone will be recycled, first because they are rarely left intact when a building is demolished, and second because they will be the wrong size or shape for new buildings. Taxing a type of quarrying that could not be replaced by recycling would only hinder the national building programme.

So we have a tax justified by the environmental damage of digging holes, but that attacks only one kind of hole-digging, the sort that can be replaced by recycling. Other types are exempt. Does this policy add up?

It can only add up on one condition: that people will not switch from digging up aggregates to digging up big blocks of stone. If they can make the switch without it costing too much, they will do so and leave lots of horrible holes. The extra cost would be in using blocks instead of aggregates, building elegant stone houses instead of ugly concrete ones.

The government is probably safe on that one. Aggregates and blocks of stone do have quite different uses in building, and blocks will only rarely be a cheap enough substitute for rubble.

There is another oddity in the government’s initial thoughts. Aggregates extracted from deep mines, rather than surface quarries, would also be taxed. This is despite the fact that deep mines do not scar the landscape.

The government’s argument is that exempting deep mines would discriminate in their favour. But if the tax is environmental, we should discriminate in their favour.

Recycling paths

It is no answer to say that the aim is to encourage recycling. The difficulty of recycling blocks of stone justifies exemption. Recycling aggregates is not the reason for such a tax, merely a reason why it can be imposed without impeding construction too much. Recycling would only be a reason for such a tax if we were running out of aggregates – and I don’t think we are.

The lesson from the aggregates tax proposal is that if environmental taxes are to be imposed we must be clear about the reasons behind them, and they must be justified by these reasons. There will be plenty of environmental tax suggestions over the next few years. We must never accept anything less than impeccable logic. And sound evidence is always nice too.

Richard Baron is deputy head of the policy unit at the Institute of Directors.

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