The trick is not to start by looking at the existing tax system, but to go back to first principles. The ideal source of revenue for any government is some form of economic rent. Economic rents accrue to those in a position to charge a price for their goods and services which is above the cost of production.
Natural resources are a common source of economic rent. The classic modern example is oil, which bubbles out of the Saudi Arabian desert at almost no cost, and can be sold round the world for $24 per barrel. If you tax oil (and most governments do) you can, with very little effect on economic activity, extract some of the rent which would otherwise accrue to the producers. Britain's North Sea oil provided a large revenue stream for the government for many years.
The most important natural resource of all is land. Economic rents abound in this area - think of building land in the City of London and farmland in flat and fertile Lincolnshire. However, it is not easy for any government to capture the rents from these tempting targets, because land has long been a tradeable capital asset. If the current owners have bought the land at a price which reflects its likely yield, they are not sitting on a fat stream of economic rent, merely getting a normal return on their investment.
Things would be very different if land were all owned by the state and put out to auction on a rental contract every five years. We could still enjoy all the benefits of the free market. The land would go to the highest bidder - ie, to whomever could extract the most value from it - but the rents would accrue to government and pass back to the people in lower taxes.
There may have been a good moment for the nationalisation of land at about the time of the Domesday Book, but the opportunity was missed then and taxing land is not the solution to Mr Blair's problem today. However, there are other assets currently owned and administered by the state which could be brought into the market economy. The aim would be to ensure that they are, like land, used by those prepared to pay most for them. The benefits are twofold. First, it would guarantee the most efficient use of scarce resources; and second, the government would acquire a new source of revenue.
So what are these assets that are owned by the state, are currently free, and yet have great value which could be extracted to the benefit of the taxpayer? Three examples leap to mind: roads, airport take-off and landing slots, and the radio spectrum.
The roads are the most glaring example. The traffic jams which choke our cities in the morning and evening rush hours (and those which choke some city centres all day long) provide the clearest possible evidence of excess demand. A valuable resource is allocated on a first-come, first- served basis. What we have is a system of rationing by queuing rather than by price. More people want to use their cars than the roads can accommodate, and in the absence of a price mechanism, the excess demand is choked off by allowing journeys to become so slow that marginal users opt to walk, cycle or use public transport.
This is an extraordinarily inefficient solution: in most markets a balance between supply and demand for valuable resources is achieved by pricing the resource at a level which reflects its value. In the market for road space, the value has been degraded down to the level implied by the zero price. The practical result is that the roads are full and there is no mechanism whereby people can buy road space for really important journeys - eg, the ambulance on a mercy dash. By introducing road pricing the government would simultaneously ensure the more efficient use of road space and create an important new source of revenue.
These days the rush hour embraces all modes of transport, including air. Business travellers want morning flights and evening flights that allow them to make flying visits to distant locations within a working day. Accordingly, there is enormous pressure on take-off and landing capacity in most large airports at the beginning and end of the working day. A take-off slot at 8 o'clock in the morning has much greater value than a slot at noon.
At present the ownership of slots lies uneasily between the airports, who own the land, and the airlines, who provide the service. But if a market were established popular slots would command large rents that would make them another suitable target for taxation.
Roads and airlines are both communications networks which face excess demand at certain times of day. Selling or taxing the right to use the network at peak times raises revenue and encourages the more efficient use of the network. Similar considerations apply to the radio spectrum, which is another communications network with finite capacity.
Each frequency band on the radio spectrum is a pathway which is of considerable value to the communications industry. There are many competing uses for these pathways - the defence industry is one heavy user, the broadcasting industry another and the telecommunications industry a rapidly growing third. How are the frequencies allocated between the competing claims of the different industries? The answer, astonishingly, after 17 years of rule by the Conservative governments that invented privatisation, is by administrative fiat.
The spectrum, though an immensely valuable resource, is "free" and a bunch of civil servants decide who should get what. By and large this means that the rights to the frequency bands are grandfathered (if you had one last time, you get it next time) and an incredibly high proportion is allocated to defence. That this quaint system should survive into the world of mobile telephony and digital transmission of broadcasting signals, which have transformed the demand for scarce frequencies, is one of the great missed opportunities of our time. By putting the frequencies up for auction on a regular basis the government would both ensure their efficient allocation and create a new stream of revenue, tapping into the rents being created by two of the most dynamic industries in the modern economy.
One of the great principles of taxation is: don't tax goods (like work or thrift), tax bads (like congestion or pollution). An even better principle is: don't tax, charge. By taxing or charging for the use of overloaded networks Mr Blair and Mr Brown could find some new money to pay for their ambitious plans for the nation's education and training. In the process they would also ensure that some of our most important national resources are more efficiently used. They should grasp the nettle.
Bill Robinson is a director of the consultancy London Economics.Reuse content