Three Big Ideas #7
VAT reform, taxing aviation, and the progress studies movement
Welcome to our weekly Three Big Ideas roundup, in which we serve up a curated selection of ideas (and our takes on them) in entrepreneurship, innovation, science and technology, handpicked by the team – and today, with a guest contribution!
🧮 Shivani H Menon, Deputy Head of Research, Onward
In Onward’s latest report, The British Entrepreneur, we found that high costs were clobbering two groups of business owners in particular – those contemplating growth, and those currently growing. One cost they are especially worried about is the abrupt hike in their tax bills from VAT when they start turning over £90,000 and above.
Tax exemptions for small businesses are normally welcome. But the VAT threshold is disincentivising growth for businesses whose turnover is approaching the threshold. Nearly 26,000 businesses are hiring fewer employees or refusing additional work to avoid paying a higher VAT rate.
There is a natural tendency among politicians to deal with this problem by simply increasing the threshold further. Earlier this year the threshold was raised from £85,000 to £90,000. Reform UK in their election manifesto even pledged to increase it to £150,000.
But there are two major issues with this approach. Britain already has the highest VAT threshold in the world, and any further increase will cost the Treasury nearly £50 million for every £1,000 increase in the threshold. Second, increasing the threshold would not do away with the cliff-edge, it would only shift the point at which SMEs begin artificially limiting their growth.
Counterintuitively, the only approach to reform VAT in a way that eliminates the cliff-edge is to lower the threshold dramatically and introduce a tapered rate that sees businesses with the lowest turnover pay the least VAT. The threshold could be reduced to £30,000 at a 1% VAT rate, increasing gradually until it reaches a rate of 20% for businesses turning over £140,000 or more.
Tapered VAT isn’t a perfect alternative, nor is it without its own administrative burdens. But coupled with the digital VAT filing system and provisions for more frequent filing for those businesses that see their turnover change frequently, it is the only way to encourage long-term growth among businesses currently choked by the threshold.
🛫 Eamonn Ives, Research Director
Above, Shivani outlined a proposal to make part of our tax system smarter. In my Three Big Ideas this week, I want to look at one that would do the opposite. Specifically, the suggestion from a group called the Stay Grounded Network and the left-wing think tank the New Economics Foundation to introduce a ‘frequent flyer levy’. As the name of the tax implies, they think extra charges should be slapped on passengers who fly multiple times a year. They argue this is necessary to curb aviation’s contribution to climate change, because higher prices would mean fewer flights being taken and less fuel being burnt.
I’ll park my concerns about the ability to roll this out in practice for now (anyone who has used British Airways’ website lately will know further complexity to booking tickets is the last thing we need), as well as the equity issues (what about immigrants who may need to fly back and forth to see family?), and the impact on business productivity, and so forth. What I want to focus on here is the necessity of this ‘solution’ in the first place.
Already, the aviation industry is covered by the UK Emissions Trading System, which is a cap and trade scheme that puts a price on each tonne of carbon produced by a company subject to it. Ultimately, if we want to tax airline emissions – as indeed I believe we should! – this is the way to do it. Not only does it more accurately price the pollution generated by individual carriers, it also creates an incentive for them to reduce the carbon they emit in the first place. If they invest in cleaner engines or lighter planes or use less polluting fuels, they can reduce their tax liability. A frequent flyer levy does not have that same pressure to decarbonise factored into every single ticket purchase, because the tax incidence is borne by the consumer alone.
As the world heats up, it’s understandable to want to reach for every tool we have to tackle pollution at its source. Thankfully, we already have a perfectly sound one in place for aviation emissions – and it means a frequent flyer levy is an idea best left behind on the tarmac.
🚀 Anastasia Bektimirova, Researcher
In your social media feeds over the weekend, you might have spotted some British policy folks cruising in self-driving cars. No, Wayve didn’t roll out its car fleet on the streets of London overnight. Excited posts were coming from the Bay Area, as some of the finest minds from the “progress studies” community, and their supporters, descended on Berkeley for The Roots of Progress Institute’s inaugural conference.
The term “progress studies” was coined by Tyler Cowen and Patrick Collison in their 2019 Atlantic essay. In addition to its core discussion on the need to study and understand the causes of material and civilisational progress, it made an important point: the goal should be to direct action towards progress, not merely to understand its drivers. This is what makes progress studies less of a new academic field and more of a movement. And indeed, most of the content emerging from the progress studies group has a problem-solution angle to it, and proposes to shake things up with more boldness than a regular policy think tank.
But as some from the progress studies community begin to realise, while enthusiasm is something to celebrate, innovative ideas are destined to face the harsh realities of implementation, tied with political will and fiscal constraints of the government departments. Just as not all of the fruits of science will make it from the lab into the real world, some policy ideas are destined to never make it onto the statute book.
One doesn’t need the Californian sun to brainstorm the future from sofas. The UK is no stranger to hosting summits and conferences around science, technology and innovation, more pro-progress groups are beginning to form, and I regularly come across some hackathon taking place. We need to realise what our unique strengths are, double down on them, and not shy away from being loud. Our proximity to Europe, while also having the biggest concentration of top universities and talent of anywhere on the continent, is one such strength to leverage. And we should do so in more publicly open and innovative ways, similar to what, for example, my colleague Anton Howes proposed as a New Great Exhibition. If someone is keen to take an eleven-hour flight for a two-day conference stateside, they're probably just as happy to take a short trip across the English Channel too.
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