China bans its airlines from paying EU carbon tax
On 1st January this year, the EU introduced an Emissions Trading Scheme (ETS) which levies a charge on flights in EU airspace based on carbon emissions. They estimate that this will add between 2 and 12 euros to flight tickets. Airlines are required to purchase emissions permits, like utilities and heavy industry in the EU, and airlines that do not comply face fines of 100 euros for each tonne of carbon dioxide emitted for which they have not surrendered allowances. In the case of persistent offenders, the EU has the right to ban airlines from its airports.
read more...»Unit 3 Micro: Video Resources on Carbon Taxation
The crucial issue of how best to tackle climate change and make significant progress towards a low-carbon economy is one that gives students tremendous opportunities to hone their analysis and evaluation skills. A few weeks ago the Australian government was successful in getting through the Senate proposals for a new carbon tax and in this blog we link to some excellent video reports on the background to this decision.
read more...»Petrol, tax, and the downward sloping demand curve.
Nearly every country has a tax on petrol, although the amount varies widely. And given that the landed price of petrol is quite similar (see the graph below), it can be seen what effect the tax has on quantity demanded. The results are very much in line what economic theory would predict and there are also clear implications for countries that want to reduce petrol consumption.
read more...»Unit 1 Micro: Prezi on the Economics of Negative Externalities
This blog provides a link to a constantly updated revision Prezi on negative externalities and market failure - designed for students taking AS Microeconomics Unit 1 and those studying externalities for the IB Diploma. The Prezi contains lots of short news videos on examples of externalities. Click on the link below to access the Prezi.
read more...»Unit 2 Macro: Should the EU introduce a Tobin Tax?
AS Economics student Freddie Bickford-Smith looks at some of the argument surrounding proposals to introduce a financial transactions tax in the EU. I will post another essay on this topic from a fellow student, offering an alternative perspective from that developed here!
Following the financial crisis of the past few years, and the amassing of blame on the financial sector for it, it has come to the attention of many - including the European Commission - that there must be a way of rectifying the situation, and promoting greater economic stability.
One popular suggestion is the ‘Tobin Tax’, an idea proposed by Professor James Tobin (the Nobel prize-winning American economist) for a tax on worldwide financial transactions
read more...»Unit 1 Micro: Has the time come for a Tobin Tax?
This week I am setting my AS micro students a question on proposals for a Tobin Tax - partly because it is hugely topical and also as a way of developing their evaluation skills on paper and coming to a reasoned final conclusion. Here are some of the links to suggested reading and some video shorts on this topic:
read more...»AS Micro: Fast Food, Fat Profits - Obesity in the USA
Healthcare costs related to obesity-linked illnesses such as diabetes, heart disease and high cholesterol are soaring. Should the government intervene in the market in order to combat the growing costs of obesity? This Fault Lines report from AlJazeeraEnglish provides a stark overview of the obesity crisis in the United States. Two out of every three Americans are overweight, one out of every three is obese. One in three are expected to have diabetes by 2050. Minorities have been even more profoundly affected.
The free market may fail to take into account the negative externalities of consumption because the social cost exceeds the private cost. Consumers too may experience imperfect information about the long term costs to themselves of consuming products deemed to be de-merit goods. There is a huge debate at the moment about the root causes of obesity and the social costs that arise from increasing levels of obesity. A report published in June 2007 said that obesity could be a factor that bankrupted the National Health Service in the years to come.
Key AS Micro Terms: Taxes and Subsidies
Here are some key terms relating to taxes and subsidies - two key forms of government intervention. We have also linked to recent blogs on these concepts.
read more...»High taxes stimulate rise in smuggling of cigarettes
One of the unintended consequences of the steep rise in the real price of cigarettes in the UK is the strong incentive to bring contraband cigarettes into the UK from elsewhere in the EU single market.
This Guardian article reports on the expected rise in smuggling as cigarette duties reach fresh highs in 2011. The average price of a pack of 20 cigarettes reached £6.29 in the UK last summer, compared with £2.80 in Spain and £1.57 in Poland.
EU Economics: Hopes for a low carbon future in Europe
With EU carbon emissions market has closed since the middle of January after hackers stole €30m of permits the economics of a EU wide carbon tax has been given fresh prominence in recent weeks. Charles Hart evaluates the arguments for and against a tax on emissions in this super applied micro essay. After the essay there are some links to recent blog posts and other resources on carbon trading and carbon taxation.
read more...»Economics Q&A: Will the rise in VAT harm the UK’s economic performance?
On January 4th 2011, the standard rate of value added tax (VAT) jumped from 17.5% to 20%. For the first time, the UK VAT rate is now the same as the basic rate of income tax! Prime Minister David Cameron has stated publicly that the rise in VAT is likely to be permanent rather than temporary. The UK economy will thus have to adjust to this higher rate but what are some of the possible macroeconomic consequences?
read more...»Scotland nudges towards minimum alcohol price
Here is a good 5-minute discussion here of the 45p a unit minimum alcohol price proposed in Scotland.
It offers a good application of some of the main AS micro topics - since it is targeting consumers for whom alcohol is a problem, the highly price inelastic demand for alcohol will probably mean the 45p minimum price is not a huge disincentive.
Paradoxically, since minimum prices only work if the free market equilibrium price is currenly below the minimum price, what it may actually cause is a shift towards higher strength alcohols that are already above the 45p a unit! There’s the law of unintended consequences for you!
Greece smoking ban
A new law has come into force this week in Greece banning smoking in enclosed public spaces and tobacco advertising.
It is estimated that more than 40% of Greek adults smoke - well above the EU’s average of 29% - which is perhaps why at a time of fiscal austerity, it is surprising/impressive that the Greek government have pursued this policy. Cigarettes bring in a significant amount of tax revenue (either via indirect or corporation taxes) which will be lost. But then maybe it will save a lot more money via its health bill. (or maybe they are just hoping people will flaunt the rules and collect fines!).
Having said this, this latest attempt to stop smokers, is its 4th attempt in a decade - following a tobacco ban in public places on July 1 of this year too. The demand for habit-forming goods is too inelastic to go away overnight…
Economics of the EU Revision - Carbon Taxes
Revision notes on carbon taxation in an EU context
read more...»The cutting begins…
The first round of government spending cuts were announced earlier today amounting to £6.2 billion. Whilst this is not “austerity” of the sort that Greece has been talking about recently, they are genuine cuts, albeit further measures are still required to tackle the huge black hole in the public purse.
read more...»Fair trade debate
A hat tip to Harriet Thompson for this heads up - a debate at the Economist on “This house believes that making trade fairer is more important than making it freer.”
Tax revenue goes up in smoke
One of the disadvantages of indirect taxes, particularly the so-called ‘sin taxes’ levied on tobacco and alcohol, is that they can give rise to a black market in the goods in order to avoid the tax, and this is a source of government failure. An article in The Times highlights this in the market for cigarettes. To quote the article “According to estimates by HM Revenue & Customs, up to 54 per cent of handrolling tobacco and 17 per cent of cigarettes consumed in the UK are smuggled, costing the Treasury £3 billion in lost tax revenue in 2007-08 alone.” With the current fiscal deficit, the treasury needs that revenue!
Tit-for-tat protectionism
More protectionism trade wars over the New Year, as the U.S slapped China with another trade penalty hitting Beijing with anti-dumping duties on $91m of steel grate imports. Most Chinese producers of steel grating will now face anti-dumping duties of 145 per cent, which they will have to pay as a cash deposit or bond upon arrival to the US. That rate represents how far below market value the US says China is selling its steel.
read more...»The £4bn tax loss from counterfeit ciggies
A good investigation here into the rapid growth of the counterfeit cigarette market in the UK…
read more...»Internalise that externality
Another Pigouvian tax introduced - this time for cigarette litter.
read more...»Taxing time for pubs
Planned increases in beer duty are likely to accelerate the pace of pub closures and lost jobs as we head into 2010. This is a good two minute BBC news video on the implications for smaller independent pubs of the recent hike in beer duty.
UK broadband in the slow lane
The relatively slow speed of the average broadband connections for most UK businesses and households will act as a contsraint on future competitiveness and growth. This report from BBC news finds that a study of the global state of broadband has put the UK 25th out of 66 countries in terms of the quality and reach of its networks. Rory Cellan Jones follows up the report with his own observations
“Britain has done well in the first broadband wave, using a pretty efficient copper network and DSL technology to get homes across most of the country connected. But other countries are moving forward more rapidly to build next generation networks using cable and fibre-optics.”
Investment in broadband can have significant demand and supply-side effects - the real consequences of under-investment will become more painful and obvious as time goes on - but who should pay for the extra capital spending needed? Will the new broadband tax make any noticeable difference?
Obama treads a difficult path with Chinese tyre tariffs
One aspect of the global trade recession in 2008-09 has been the resurgence of protectionist tendencies as countries have lined up to introduce fresh barriers to trade in goods and services. The pressures for import protectionism in the form of tariffs, quotas and other barriers is largely driven by politics and there is a new example to dissect with the news that the US government is to raise the import tariff on low-grade Chinese tyres following a petition filed by the United Steelworkers trade union, which represents workers at many US tyre factories. Chinese exporters will be subject to 35% import tariffs (taking effect on September 26th) which will decline to 30% in the second year and 25% in the third.
read more...»Government legislation week
In time for the start of term, there is lots of legislation coming into force this week. There’s the third rise in petrol duty in nine months, starting today, with the return of VAT to 17.5% at the end of year to come – is this the price of going green, or the price of a budget deficit?
read more...»Economics Snapshot - The Impact of Tax and Benefits on Inequality
Progressive income tax and cash welfare benefits help to reduce the gap between the richest and poorest households in the UK. In 2007/08, original income (before taxes and benefits) of the top fifth of households in the UK was £72,600. This is approximately 16 times as great as the figure of £4,700 for the bottom fifth. After taking account of all taxes and benefits, the top fifth had an average final income of £52,400 per year compared with £14,300 for the bottom fifth of households, a ratio of four to one.
The latest figures for the impact of tax and benefits on the UK income distribution reveal the importance of cash benefits such as Income Support, Pension Credit, Child Benefit, Incapacity Benefit and Retirement Pension as a means of redistribution. play a major role in reducing income inequality. Of the total amount of cash benefits received, the bottom two quintile groups together receive 57 per cent. Cash benefits represent around 58 per cent of gross income for the bottom quintile group and 36 per cent for the second quintile group, falling to 2 per cent for the top fifth of households.
Direct taxation, with the exception of Council tax and Northern Ireland rates, is progressive; that is households at the lower end of the income distribution pay smaller proportion of their income in direct tax compared with higher income households. As a proportion of their gross incomes, households in the bottom quintile group pay an average of 11 per cent in direct taxes compared with 25 per cent for those in the top quintile group.
In contrast indirect taxes are found to have a regressive effect on the final distribution of income. Overall the latest figures from the ONS find that income inequality in the UK in 2007-08 was little changed from the year before. This BBC news article provides more background.
Air passenger duty - a tax too far?
Airlines and trades unions representing those employed in the aviation industry are lobbying the British government for a rethink about the proposed increases in air passenger duty (APD).
The duty is currently £10 for short-haul flights and £40 for longer journeys, costs which airlines pass on to passengers. Under the government’s plans, the tax will rise to £85 for Australia and £60 to the US by November next year. The revised APD will be based on four bands set at intervals of 2,000 miles from London. This BBC news article provides a useful background on some of the key economic and social arguments relating to the duty and the views of different stakeholders.
read more...»Two VAT Stories - Sports Goods and Restaurants
Changing the rate of value added tax (VAT applied to a product should bring about a change in the retail price of a good or service to the consumer. The current rate of VAT in the UK is 15% following a temporary cut from 17.5% in November 2008. Today the Public Health Commission has started to lobby for a reduction in VAT to the min rate allowed under EU law - 5% - for products such as sports equipment. The justification is that lower prices will increase the affordability of leisure products and help encourage more people to follow a healthy life style. As always a reduction in an ad valorem tax will have a great impact on the price of more expensive equipment - for example the £1000+ cost of a concept 2 rower compared to an entry level tennis racket. The arguments are raised in this BBC news article.
Across the Channel the cost of eating out will fall as a result of a cut in VAT by the French government. Value-added tax (VAT) has been reduced from 19.6% to 5.5%, in an attempt to increase consumer spending and create thousands of jobs.
On a different matter I didn’t realise until last week that VAT is applied to razor blades - one reason (but not the main one) behind the scandalously high prices that the likes of Gillette and Wilkinson Sword charge for their cartridges.
One and Five keeps Bingo alive
An increase in the tax on the profits of bingo companies was the subject of a demonstration in London today. The new tax will be 22% up from the previous level of 15% and campaigners argue that this will lead bingo companies to raise admission prices or perhaps cut prize money on offer. The bingo industry has already come under pressure from the smoking ban and changes in gambling laws which have limited the types of fruit machines allowed on their premises. For hundreds of thousands of elderly people bingo is a regular pastime, indeed it is part of the social fabric of many less affluent areas. But the demand for bingo halls has declined over the years - an example perhaps of a service which has a negative income elasticity of demand. The Bingo Association is fighting to have the tax hike reversed but unless there is a change of government, they are unlikely to strike lucky.
The tax rise does seem inequitable especially as bookmakers, the football pools and casinos pay a gross profits tax of 15 per cent - surely bingo is at the softer end of the gambling industry?
Passing the burden - Sainsbury’s and their suppliers
AS micro students grappling with their revision on government intervention will come across the issue of who ends up paying for an indirect tax. The conventional view is that a supplier faced with an excise duty or other tax can consider passing it on by raising the final price to the consumer. Price elasticity of demand and supply come into play in deciding who eventually bears the burden of an indirect tax.
Here is a slight twist. Sainsbury’s has written an email to their suppliers of alcholic refreshment more or less insisting that they aborb the recent hike in duty announced in Darling’s budget. According to a report in the Daily Telegraph:
“Duty – April 2009” sent to its beer and cider suppliers prior to the Budget, J Sainsbury said that it would be “replacing” any lines on June 1 “that we cannot maintain margin on” following the announcement of an increase.”
In effect - they are telling them to aborb the tax or risk being delisted by the supermarket. Given Sainsbury’s monopsony power it is clear where the balance of influence lies in the relationship. Is Sainsbury’s decision asymmetric? Did they pass on the 2,5% decrease in VAT to their drinks department customers last Autumn?
Q&A: Which indirect taxes give the government to most revenue?
Which indirect taxes give the government to most revenue?
For the UK government value added tax provides the biggest source of revenue. In November 2008, VAT was cut from 17.5% to 15% on a temporary basis in a move by the government designed to stimulate consumer spending – the decision was said to be worth around £12 billion of lost tax revenue for the UK Treasury.
There are many other indirect taxes and our chart below highlights six of them. As you can see the flow of tax revenue from indirect taxes on tobacco provides a very important source of money for the UK government. Together these six indirect taxes add nearly £20 billion annually into the government’s coffers.
In a recession where consumer spending is falling and where there is a chance of a period of persistent price deflation, the UK government will see a fall in revenue from indirect taxes.
