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Nudging and rectifying: the use of fiscal instruments for regulatory purposes*

Published online by Cambridge University Press:  02 January 2018

Anthony Ogus
Anthony Ogus*
Affiliation:
University of Manchester; University of Maastricht
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Abstract

The paper explores two fiscal devices which, while falling short of the ideal which economists have advocated, may induce behavioural change and thus operate effectively as regulatory instruments: the ‘nudging’ tax, which is calculated according to what level of payment is likely to reduce undesired activity; and the ‘rectificatory’ tax, which relates the sum payable to part of the harm caused by the activity. The former has been widely used, and with some success, but there is tension between its regulatory and revenue-raising functions. The latter seems better designed to meet goals of corrective justice than to modify conduct in an economically appropriated way.

Type
Research Article
Information
Legal Studies , Volume 19 , Issue 2 , June 1999 , pp. 245 - 266
Copyright
Copyright © Society of Legal Scholars 1999

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Footnotes

*

I am much indebted to Jamie Bell for his very valuable research assistance and for his comments on a draft of this paper. I also wish to acknowledge the helpful suggestions of referees.

References

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4. The OECD Report on Regulatory Reform (Paris: OECD, 1997).

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23. A Ogus ‘Corrective Taxes and Financial Impositions as Regulatory Instruments (1998) 61 MLR 767.

24. Similar, but not identical, classifications are made in D E James, H M A Jansen and J B Opschoor Economic Approaches to Environmental Problems (Amsterdam: Elsevier, 1978) pp 216–221; S Smith ‘Taxation and the Environment: a Survey (1992) 13(4) Fiscal Studies 21, 22–23.

25. Note that the smoker might be unaware of the costs to himself from consumption and will therefore purchase and consume more of the product that he would have done with full information. Taxes can therefore correct market failure arising from information asymmetry as well as externalities: W K Viscusi ‘Promoting Smokers Welfare with Responsible Taxation (1994) 47 Nat Tax J 547; J O'Hagan ’The Rationale for Special Taxes on Alcohol: A Critique (1983) British Tax Rev 370, 378–380.

26. The divergence between social cost and private cost will not occur if, as some evidence suggests, because of early deaths smokers consume less health care: G Stoddart, R Labelle, M Barer and R Evans ‘Tobacco Taxes and Health Care Costs - Do Canadian Smokers Pay Their Way? (1986) 5 J Health Economics 63.

27. Ogus n 2 above, p 19.

28. Ogus n 23 above, pp 770-771.

29. T A Barthold ‘Issues in the Design of Environmental Excise Taxes (1994) 8 J Economic Perspectives 133.

30. W J Baumol and W E Oates ‘The Use of Standards and Prices for Protection of the Environment (1971) 73 Swedish J Economics 42, 43–44; T A Barthold ’Issues in the Design of Environmental Excise Taxes (1994) 8 J Economic Perspectives 133.

31. See, generally, Ogus n 2 above, pp 156–158.

32. Ogus n 2 above, pp 158–159.

33. Above n 30.

34. Above n 30, p 44.

35. Above n 30, p 47. See also Smith above n 24, pp 32–37. It is not always appreciated that Pigou himself recognised (and favoured) such compromises: A Study in Public Finance above n 12, p 99.

36. See generally on such effects, S James and C Nodes The Economics of Taxation (New York: Prentice Hall, 5th edn, 1996) ch 4.

37. B E V Sabine A Short History of Taxation (London: Butterworths, 1980) p 99.

38. James and Nodes above n 36, pp 23–25.

39. J A Kay and M A King The British Tax System (Oxford; Oxford University Press, 1980) p 17. See also Kay's observation that ‘most fiscal activity is accounted for by objectives other than the government need for revenue: above n 19, p 218.

40. S Poddar ‘Taxation and Regulation in R M Bird and J M Mintz (eds) Taxation to 2000 and Beyond (Toronto: Canadian Tax Foundation, 1992) p 72.

41. For a critical overview, see A Peacock and G K Shaw Economic Theory of Fiscal Policy (New York: St Martins, 2nd edn, 1976).

42. For differences between positive and negative use of fiscal devices, see: L H Summers ‘The Case for Corrective Taxation (1991) 44 Nat Tax J 289; Poddar above n 40, pp 87–92.

43. Relief on capital transfer tax for woodland areas was introduced by the Inheritance Act 1984.

44. Energy Conservation Act 1981, s 16.

45. Below n 131.

46. DTI Spectrum Management in the 21st Century (Cm 3252) (London: Stationery Office, 1998) 3.3–3.7.

47. Wireless Telegraphy Act 1998, s 2(2)(c).

48. Spectrum Management above n 46, 7.5.

49. Above n 46, 7.3. For this reason, the government prefers an auctioning system. Nevertheless it considered the latter inappropriate for services where spectrum pressures are greatest: ibid, 7.6.

50. See especially the Chancellor of the Exchequer's 1974 Budget speech: 871 HC Official Report (5th series) (26 March 1974).

51. Finance Act 1987, s I.

52. Road Traffic Act 1991, Sch 6.

53. Finance Act 1972, s 12(2) and Sch 4, Group 17, added by the Value Added Tax (Young Children's Clothing and Footwear) Order 1973, SI 1973/387.

54. Eg Railways Act 1993, s 130, and see the Railways (Penalty Fares) Regulations 1994, SI 1994/576.

55. Environmental Protection Act 1991, s 88.

56. Dogs (Fouling of Land) Act 1996, s 4.

57. Road Traffic Act 1991, s 64.

58. See Commission of the European Communities Systems Of Administrative and Penal Sanctions in the Member States of the European Communities (Brussels: European Commission, 1994) which contains a valuable study on the use of administrative penalties in European legal systems.

59. J A Pechman Federal Tax Policy (Washington: Brookings Institute, 5th edn, 1987) pp 198–199; M Crain, T Deaton, R Holcombe and R Tollison ‘Rational Choice and the Taxation of Sin (1977) 8 J Public Economics 239.

60. Kay above n 19, p 223.

61. Betting and Gaming Duties Act 1981.

62. Alcoholic Liquor Duties Act 1979.

63. Tobacco Products Duties Act 1979.

64. New Roads and Street Works Act 1991, s 74.

65. Smith above n 24, pp 34–37.

66. Noise at Work Regulations 1989, SI 1989/1790, regs 8–9.

67. See the distinction drawn in Ogus above n 2, ch 8, between ‘target and ’performance standards.

68. S Shavell ‘The Optimal Structure of Law Enforcement (1993) 36 J Law and Economics 255.

69. S Cnossen Excise Systems: A Global Study of the Selective Taxation of Goods and Services (Baltimore: John Hopkins University Press, 1977) pp 99–102.

70. S Smith Green Taxes and Charges: Policy and Practice in Britain and Germany (London: Institute for Fiscal Studies, 1995) pp 19–20.

71. Taxing the packaging of a product, when the harm arises only when the package is disposed of, is a classic example: cf DE Consultation Paper Producer Responsibility for Packaging Waste (London: HMSO, 1995).

72. Holtermann above n 11 at 6.

73. DTI/DE Economic Instruments above n 5; Smith above n 70, pp 65–69.

74. Economics of Welfare above n 12, p 193.

75. Potentially also road accidents, in so far as increased road usage generates an increased number of accidents: Jansson above n 17.

76. E Verhoef The Economics of Regulating Road Transport (Cheltenham: Edward Elgar, 1997) ch 3.

77. As to which there is a huge literature. See eg D J Pyle Economics of Crime and Law Enforcement (New York: St Martin's Press, 1983).

78. Cnossen above n 69, pp 69–70.

79. DETR above n 5, p 21.

80. O'Hagan above n 25; J A Johnson ‘Comment: The Case of Alcoholic Beverages in R M Bird and J M Mintz (eds) Taxation to 2000 and Beyond (Toronto: Canadian Tax Foundation, 1992). But for an American study which shows that heavy drinkers were responsive to tax changes, see P J Cook and G Tauchen ’The Effects of Liqor Taxes on Heavy Drinking (1982) 13 Bell J Economics 379.

81. In Britain, there is evidence of greater elasticity of demand from smokers of lower socio-economic classes: J L Townsend ‘Cigarette Tax, Economic Welfare and Social Class Patterns of Smoking (1987) 19 Applied Economics 335.

82. For a contrary view, see C N Mitchell The Drug Solution: Regulating Drugs According to Principles of Justice, Efficiency and Democracy (Ottawa: Carleton University Press, 1990).

83. Smith above n 70, p 101.

84. Above n 70, pp 103–104.

85. Above n 51.

86. Tobacco Products Duty Act 1979, s 3.

87. Finance Act 1988, s 1 and Sch 1.

88. See eg the Budget speech of Kenneth Clarke, 286 HC Official Report (6th series) col 168 (26 November 1996).

89. Smith above n 24, p 25.

90. A de Savomin Lohman ‘Incentive Charges in Environmental Policies: Why Are They White Ravens? in M Faure, J Vervaele, and A Weale (eds) Environmental Standards in the European Union in an Interdisciplinary Framework (Antwerp: Maklu, 1994) p 121. For other arguments relating to the iterative approach, see Ogus above n 23, pp 779, 785.

91. Poddar above n 40, p 76. In 1996 the Chancellor of the Exchequer, Kenneth Clarke, decided not to increase the duty on hand-rolling tobacco in line with that of other types of tobacco on the ground that ‘hand-rolling tobacco is proving to be by far the easiest tobacco product to smuggle…: 286 HC official Report (6th series) col 168 (26 November 1996). See also the comments of his successor, Gordon Brown, on alcohol duty in the 1997 July Budget Speech: 297 HC Official Report (6th series) col 312 (2 July 1997).

92. The recommendation in Donaldson Royal Commission Report on Safer Ships, Cleaner Seas that charges should not be imposed for on-shore dumping facilities was based on the prediction that the imposition would lead to more off-shore dumping and ballasting by ships wishing to avoid payment: (Cm 2560) (1994) recommendation 27 and para 9.64. See also Landfill Costs and Prices: Correcting Possible Market Distortions (London: HMSO, 1993), though available evidence on the degree of illegal tipping consequent on the introduction of the landfill tax is ambivalent: ENDS Report 276 (January 1998) p 22.

93. Viscusi above n 25, p 555.

94. IM Dobbs ‘Litter and Waste Management: Disposal Taxes Versus User Fees (1991) 24 Can J Econ 221.

95. A New Deal for Transport above n 9, para 4.100.

96. For technical analysis, see Verhoef above n 76, ch 4.

97. A Glazer and E Niskanen ‘Parking Fees and Congestion (1992) 23 Regional Science and Urban Economics 123.

98. E Crooks Alcohol Consumption and Taxation (London: Institute for Fiscal Studies, 1989) p 25.

99. I Crawford and S Tanner ‘Bringing it all back home: alcohol taxation and cross-border shopping (1995) 16(2) Fiscal Studies 94, 96.

100. OECD Report Environmental Taxes and Green Tux Reform (Paris: OECD, 1997) P44.

101. Cf M Baldassarri and P Roberti (eds) Fiscal Problems in the Single-Market Europe (Basingstoke: Macmillan Press, 1994).

102. OECD Report above n 100, pp 44–50. A 1997 econometric study of the impact of seven possible environmental taxes concluded that they would not damage industrial competitiveness: ENDS Report No 276 (January 1998) p 3.

103. Crawford and Tanner above n 99.

104. Empirical evidence suggests that regulatory costs tend to be overshadowed by other variables (eg labour costs and infrastructure) in determining the location of enterprise: W Oates ‘Environment and Taxation: The Case of the United States in OECD Environment and Taxation: The Cases of the Netherlands, Sweden and the United States (Paris: OECD, 1994) pp 126–127.

105. See esp Kay above n 19, p 219; M Trebilcock ‘Comment: Regulation by Taxation in Bird and Mintz above n 40, p 97.

106. In a parliamentary debate on the levying of a packing charge, the Danish Minister of the Environment openly admitted that the charge was for revenue-raising purposes only: M Werge Applying Economic Instruments to Packaging: Case Study on Denmark (Paris: OECD, 1991).

107. Smith above n 70, pp 85-88.

108. OECD Report above n 100, p 30.

109. B M Mitnick The Political Economy of Regulation: Creating, Designing and Removing Regulatory Forms (New York: Columbia University Press, 1980) p 389.

110. Eg S Kelman What Price Incentives? Economics and the Environment (Boston: Auburn House, 1981) pp 84–86.

111. ‘Effluent charges… suffer a crippling political disadvantage as compared to traditional regulatory policies because of the distributional impacts on both capital and labour: D Dewees ’Regulating Environmental Quality in D Dewees (ed) The Regulation of Quality: Products, Services, Workplaces and the Environment (Scarborough: Butterworths, 1983), p 169.

112. Ogus above n 23, p 775; on the distinction between economic efficiency and distributional justice, see Ogus above n 2, pp 46–51.

113. Cnossen above n 69, p 2.

114. Smith above n 70, pp 83–84.

115. Cnossen above n 69, ch 4.

116. Verhoef above n 76, chs 10–11.

117. There is little empirical evidence on the distributional consequences cf OECD above n 100, pp 37–40.

118. Smith above n 24, pp 49–50.

119. Verhoef above n 76, ch 9.

120. W Oates ‘Pollution Charges as a Source of Public Revenues in H Giersch (ed) Economic Evolution and Environmental Concerns (Berlin: Springer Verlag, 1991). That the tax might increase profits and employment, as well as reduce environmental damage, has led to the claim that it generates a ’triple dividend: A L Bovenberg and F van der Ploeg Consequences of Environmental Tax Reform for Unemployment and Welfare (1998) 12 Environmental and Resource Economics 137.

121. Finance Act 1996, s 39. ‘I want to raise a tax on polluters to make further cuts in the tax on jobs: Kenneth Clarke, Chancellor of the Exchequer, 250 HC Official Report (6th series) col 1098 (29 November 1994). For other OECD countries, see OECD report above n 100, p 35, and further on the landfill tax below (nn 154-163 and associated text).

122. Oates above n 104, pp 128-129.

123. G Mulgan and R Murray Reconnecting Taxation (London: Demos, 1993) pp 20–25.

124. Not generally recoverable in a negligence claim: M Brazier Street on Torts (London: Butterworths, 9th edn, 1993) pp 206–217.

125. Ogus above n 2, p 27.

126. See generally M Sproule-Jones ‘User Fees in M Maslove (ed) Tares as Instruments of Public Policy (Toronto: University of Toronto Press, 1984); R E Wagner (ed) Charging for Government: User Charges and Earmarked Taxes in Principle and Practice (London: Routledge, 1991); R M Bird and T Tsiopolous ’User Charges for Public Services: Potentials and Problems (1996) University of Toronto Centre for the Study of State and Market, Working Paper #25.

127. Cf Seldon above n11.

128. Since special legislative powers may be required for the levying of taxes but not user fees, the distinction may have constitutional significance. See Skinner v Mid-America Pipeline 109 S Ct 1726 (1989).

129. Sproule-Jones above n 126; B Yandle ‘User Charges, Rent Seeking and Public Choice in Wagner above n 126, pp 48–49.

130. On the incentive structure of tort law, see W Landes and R A Posner The Economic Structure of Tort Law (Cambridge MA: Harvard University Press, 1987); and of user fees, R M Bud Charging for Public Services (Toronto: Canadian Tax Foundation, 1976).

131. For examples, see: Wireless Telegraphy Act 1949, s 2; Environmental Protection Act 1990, s 41; and Food Safety Act 1990, s 45. For details of a typical charging scheme, see the Food (Control of Irradiation) Regulations 1990, SI 1990/2490, Sch 1, Pt VI.

132. See eg the Genetically Modified Organisms (Deliberate Release) Fees and Charges Scheme 1995 and more generally the Environment Act 1995, s 41. The Food Safety Act 1990, s 45 creates an analogous scheme.

133. See generally: DE Cost Recovery Charging for Integrated Pollution Control (1989); HMIP Pollution Regulation Cost Recovery Charges (1990); and, for a detailed example, DETR Economic Instruments above n 5, p 24.

134. See Environment Act 1995, s 42(3).

135. This Common Inheritance above n 5, Annex A, A13.

136. DETR Economic Instruments above n 5, p 17. Administrative costs would still be incurred even if the level of activity was optimal: D E James, H M A Jansen and J B Opschoor Economic Approaches to Environmental Problems (Amsterdam: Elsevier, 1978) p 220.

137. On the propensity of public officials to maximise departmental budgets, see W Niskanen Bureaucracy and Representative Government (Chicago: Aldine Atherton, 1971).

138. The Policyholders Protection Act 1975, ss 16, 21; the Banking Act 1987, s 50; and the Building Societies Act 1986, ss 24–30, respectively.

139. Merchant Shipping Act 1995, Sch 4.

140. See the Donaldson Report above n 92, paras 22.36–22.43. See also on nuclear installations, M Faure ‘Economic Models of Compensation for Damages Caused by Nuclear Accidents: Some Lessons for the Revision of the Paris and Vienna Conventions (1995) 2 European J Law and Economics 21.

141. Thus, because it is partially based on employer contributions, including the industrial injuries compensation scheme operative under Social Security Contributions and Benefits Act 1992, Pt V: see A Ogus, E Barendt and N Wikeley Law of Social Security (London: Butterworths, 4th edn, 1995) ch 7.

142. Eg the schemes administered by the Glass and Glazing Federation and the Association of British Travel Agents: B W Harvey and D L Parry The Law of Consumer Protection and Fair Trading (London: Butterworths, 4th edn, 1992) pp 330, 334.

143. S E Gaines and R D Westin ‘Introduction and Overview in S E Gaines and R D Westin (eds) Taxation for Environmental Protection (New York: Quorum Books, 1991) p 9.

144. Smith above n 16; J Phillips ‘Economic Deterrence and the Prevention of Industrial Accidents (1976) Industrial W 148.

145. Under the Policyholders Protection Act 1975, s 1 (3), the change is variable according to the net value of premiums; under the Banking Act 1987, s 50, it reflects the companies deposit base.

146. See, on insurance, J Finsinger ‘The Basic Arguments Relating to Public Guarantee Funds for Insurance in H Cousy (ed) Essays in Law and Economics Ill: Financial Markets and Insurance (Antwerp: Maklu, 1996) ch 11; on major environmental hazards, T H Tietenberg ’Indivisible Toxic Torts: The Economics of Joint and Several Liability (1989) 65 Land Economics 305; and, on nuclear accidents, Faure above n 140.

147. Building Societies Act 1986, ss 24–30.

148. P Burrows The Economic Theory of Pollution Control (Oxford: Martin Robertson, 1979) pp 140–142.

149. Environmental Protection Act 1990, s 41.

150. See DETR Economic Instruments above n 5, pp 26. 33.

151. Above n 5, p 27.

152. James et al above n 136, p 220.

153. Eg Environmental Protection Act 1990, ss 59 and 81.

154. Finance Act 1996, Pt III.

155. Cf D N Beede and D E Bloom Economics of the Generation and Management of Municipal Solid Waste (Cambridge MA: National Bureau of Economic Research, 1995); Less Waste above n 5.

156. A target of 25% of recycling of household waste has been set for 2000. In 1998 only 7.5% had been reached: Less Waste above n 5, para 4.1.

157. Above n 65 and associated text.

158. For details of materials so qualifying, see Landfill Tax (Qualifying Material) Order 1996, SI 1996/1528.

159. DTI/DE Economic Instruments above n 5, pp 52–62.

160. Landfill Costs above n 92, p iii.

161. Smith above n 70, pp 57–59.

162. DTI/DE Economic Instruments above n 5, pp 39–40.

163. See ENDS Report 276, January 1998, pp 20–23.

164. For a survey of the empirical studies of pollution taxes, see Smith above n 24, pp 40–44.

165. R W Hahn ‘Economic Prescriptions for Environmental Problems: Not Exactly What The Doctor Ordered (1989) 3 J Economic Perspectives 95.