(Tax) Breaking the Subsidy Debate

‘Our government is in thrall to private sector greed – supporting the privileged and the polluters to the detriment of everyone else and at the country’s expense. Think about the £14 billion in subsidies the government gave to oil and gas companies between 2016 and 2020. Or the almost £2 billion spent annually on handouts to private schools.’

This is the narrative spun by some tax commentators and outlets like the Ethical Consumer and Paid to Pollute, and given by the mainstream media. It is based on an accounting slip which harmfully misrepresents UK realities. 

A scan of the UK tax code bores a hole in this characterisation. Before the Government’s most recent changes, the overall tax rate paid on oil and gas company profits was 75%. Now, after these changes, it is 78%. Britain’s inheritance tax rate is one of the highest in the world, more than 3 times the global average. A managed decline Budget last October saw hikes to Employers NI contributions, CGT and the removal of IHT exemptions for farmers. 

This does not suggest a government that favours corporate or entrenched interests. But why then these subsidies? 

Well let’s take a look at how they have been classified as subsidies in the first place. Starting with private school fees, the argument is that by creating an exemption from VAT, the government’s forgoing of revenue means that this is ‘tax expenditure.’ This term was coined in 1967 by Stanley Surrey to denote policies by Congress that granted tax breaks favouring specific constituencies or interest groups for political purposes. These tax breaks were increasingly used in lieu of direct subsidy but functioned the same way.

Education is different. The product of education has never been taxed - this was formalised into a carve-out from tax by the European Union, adopted in the 1990s. Education is an investment in human capital which is taxed, like all capital, only once it generates future returns. Private education also relieves the state from its obligation, saving taxpayer funds. If migration of students from the private to state sector is higher than 25% after the imposition of VAT, the provision’s removal would actually be directly costing the state £2.5 billion – that’s not what happens when you remove a subsidy. 

‘Tax expenditure’ is not an obsolete concept. Measures such as the Seed Enterprise Investment Scheme (SEIS), which give investors in early-stage startups an exemption from Capital Gains Tax, could be classified a form of tax expenditure because it runs against the otherwise prevailing precedent of taxing the value of realized asset appreciation. Afterall, the Subsidy Control Act 2022 explains that ‘the forgoing of revenue that is otherwise due’ is a form of financial assistance, and thus subsidy.

But we should be economical when using this term. We do not tend to consider the very idea of a progressive tax system (flawed though it may be) as subsidy. Anyone paying the basic rate of income tax of 20% is not generally considered to be receiving an 80% tax subsidy. Such an argument assumes an entitlement of the state to one’s entire earnings. 

The case with fossil fuels is slightly different in that it is even less rooted in reality. Under tax policy recently scrapped by Rachel Reeves, the money invested by fossil fuel companies into new oil field exploration was exempted from tax as part of the normal operation of R&D tax credits. These credits apply to all other sectors of the economy, existing to encourage investment - once again, you cannot tax funds before they have generated a return. Likewise the tax exemption for the decommissioning of old fossil fuel installations, which generate worse levels of emissions, ensures firms aren’t being taxed on a loss-making activity, while encouraging an activity that creates positive externalities for the environment. 

Using misleading and incendiary language about ‘fossil fuel subsidies’ simply serves to confuse the dialogue and detract from the serious questions we face. Reconciling rapid decarbonisation with improved national energy security, while not breaking the bank, is a steep task, requiring significant public buy-in. The same can be said for education reform, which is so vital to the UK’s productivity puzzle. It doesn’t help to have people radicalised by spurious and adulterated rhetoric.