The hum-along American economy grew at an inflation-adjusted 2.8% in the first quarter of this year. With unemployment continuing at a healthy 4%, America continues to defy forecasts of an imminent recession.
Europe, which exhibited signs of a pending recession this past winter, has also avoided a real downturn. However, unlike the U.S. economy, the EU is stuck on a long-term track of economic stagnation. The ECB’s rate cut last week may make a marginal difference for the better, but all in all, Europe needs a structural economic renovation.
This comprehensive overhaul, which would have to be centered around the economic role of government, is not going to come as long as Europe’s political leadership is more focused on chasing climate ghosts than on economic growth and prosperity. The deeper Europe sinks itself into the ‘green transition,’ the more its taxes, regulations, and government spending will stop the economy from growing—instead of helping it.
One of the best examples of ill-conceived tax ideas, among the plethora of its peers, is the proposal for a distance-based tax on passenger vehicles. It has been lurking around the outskirts of the tax policy discourse for some time; the advent of fuel-efficiency regulations in both America and Europe back in the 1970s and 1980s put the spotlight on the unintended consequence of lower revenue from fuel taxes.
With the emergence of electric vehicles, the distance-based tax has gained more interest in recent years as a replacement for fuel-based taxation. One of the rationales behind this shift in taxation is that the distance-based tax, like the fuel tax, is supposed to collect more revenue from drivers the longer distances they drive. The difference is that there is no ‘leakage’ of revenue because of fuel efficiency: with a distance-dependent tax, you pay per mile or kilometer, plain and simple.
Viewed from the 30,000ft level, this tax seems like a formidable idea: simple, transparent, and reliable. Upon closer look, though, the tax comes with a number of flaws that have not been given nearly the attention they deserve. Let me put the spotlight on two of those flaws: the architecture of the tax itself, and the ‘tax environment’ in which it would operate.
The tax architecture, applied to the distance tax, was recently discussed by William Todts in Euractiv. Todts is the executive director of Transportation Environment, a lobby organization in Brussels with a growing presence in EU member state capitals. He is also a columnist with Euractiv, where he tries his best to protect governments from losing tax revenue when people buy more electric vehicles. In a carefully crafted logical somersault back on May 22nd, Todts explained:
One of the most popular but least successful ideas in transport economics is the idea that cars should pay per kilometre travelled. The appeal of such smart tolls is that they encourage more environmentally conscious travel, and can be used to battle congestion.
In my experience, the popularity of this idea is inversely related to people’s understanding of how the tax actually would work. The more people learn about it, the less they like it. One reason for this is the collection method of the tax: in order to accurately tax every driver for every mile or kilometer he drives, the government that collects the tax revenue would need to place a transponder in every vehicle. The transponder then records, with very high precision, every move the vehicle makes.
From a privacy viewpoint, this is an alarming government incursion into the lives of individual citizens. It is one step away from having a drone fly over your head to video record you wherever you go. Unsurprisingly, though, William Todts does not even mention this aspect of the tax in his article. This may be attributable to the attitude that Europeans in general have toward their government: where Americans intrinsically distrust government and err on the side of privacy, Europeans tend to live by the credo that he who has nothing to hide has nothing to worry about.
The problem with this credo is that it depends on who defines ‘nothing to hide.’ It certainly is not the person being monitored by the government in real time when he is out driving.
There are numerous nefarious aspects to this highly intrusive tax, one being the simple fact that all government systems can be hacked. However, it does not take a crafty computer wizard to expose the individual taxpayer to harm; all that is needed is one corrupt government official who understands the market value of the information collected alongside the revenue from the distance-based tax.
In addition to the deeply immoral aspects of this invasive tax, there is one important economic aspect to it that its proponents ignore. When a government uses tax collection methods that lead to them losing the trust and support of the taxpayers—as is inevitably the case with this immoral tax—the overall morale among taxpayers takes a beating. Over time, individuals and businesses increasingly take tax evasion into account when they plan their economic activities.
In addition to the erosion of tax morale and, eventually, tax revenue, the distance-based tax would add complexity to an already complex tax system. It comes with its own set of incentives, aiming to encourage ‘environmentally conscious’ driving while discouraging driving in general. Since the tax is so directly related to individual behavior (hence the need for the invasive collection method) the incentives are also very direct and upfront.
This puts the tax at odds with other taxes and regulations. To give one example, which I recently had personal experience with: urban low emissions zones, LEZs. While visiting a European country, I rented a car that happened to be a plug-in hybrid. When I drove into the city that I was visiting, the map on the navigation system marked a certain part of the city as an LEZ. When I crossed the limit into that zone, the vehicle automatically switched driving mode from its internal combustion engine to electric propulsion.
There was a way to switch the engine back to the gasoline-powered drivetrain, but that function was disabled while I was within the LEZ.
On one occasion, my battery level was so low that the car kept running on gasoline even as I crossed into the LEZ. I was not charged for this apparently egregious environmental transgression, probably because this particular zone is new and still in its run-in phase. However, one of the intentions behind these zones is to collect fines or taxes on green sinners.
Suppose, now, that the fine had been in place and that I also had been forced to pay a distance-based tax on my car. Suppose also that I am going from point A on the south side of the LEZ to point B on the north side, and that I am one of those millions upon millions of people who cannot afford a fancy electric vehicle.
The idea behind the zone-based tax is to incentivize me to take another route than the shortest one, which cuts right through the LEZ. The higher the zone tax, the stronger my incentive to take a long detour. By contrast, the idea behind the distance-based tax is to incentivize me to take the shortest route from point A to point B.
The clash between the incentives—banal as it may seem—is a simple illustration of the systemic problems that emerge when taxes are used as tools to further politically correct behavior. The more precise the taxes are in their ‘encouragement’ of behavior, the sharper the clashes between those incentives.
For every layer of behavior-targeting taxes we add, the more of these clashes we see. Eventually, there comes a point where these taxes lose all their ideological purpose. All that is left then is the collection of revenue, which—ironically—was not even the purpose of the tax to begin with.
The only part of the distance tax that has merit to it is that we need taxes to fund our highways. Unlike so many other things our governments do, building and maintaining highways is an essential tax-paid function. However, there is a simple way that this funding can be secured with a minimum of tax complexity to it—without the slightest intrusion into the privacy of the taxpayer.
I will discuss that tax in a follow-up article. Stay tuned.
