SOME OF THE GIRLS at my college claimed to disapprove of premarital sex. It was the first of many occasions on which I have hoped that those making a show of their morality were insincere. I do not like hypocrisy but I prefer it to celibacy.

And I certainly prefer it to lunacy. Which is why I hope that David Cameron’s use of Zac Goldsmith as a policy adviser is aimed at nothing more than giving off the green glow of clover. Because actually taking his advice would give off the green glow of a radioactive brain.

In a recent interview, Mr Goldsmith revealed his favoured tax policy: “We should stop taxing good things, such as employment, and start taxing bad things, such as the over-consumption of energy.” This is also the thrust of Liberal Democrat tax policy.

This gets tax policy exactly the wrong way around. Good things are precisely what we should tax, because that is the only way to avoid the harmful effects of taxation.

Here’s why. “Consumer surplus” is created whenever you buy something for less than you are willing to pay. Suppose you would gladly spend up to £10 on the chocolate cake sold by your local baker. If he sells it for £8, then you benefit by £2 when you buy it. Your consumer surplus is £2.

If the Government imposes a £1 cake tax, pushing the price of your local chocolate cake up to £9, then you will still buy it, since it still costs less than £10. The tax reduces your consumer surplus from £2 to £1. But your loss is someone else’s gain. The Government will transfer that £1 to someone else via its spending on pensions, education, and so on. Altogether, the tax does no harm.

But what if the Government imposed a £3 cake tax, thereby pushing the price of your local chocolate cake up to £11? Since its price has gone over your £10 maximum, you will no longer be willing to buy it. Now the tax has cost you £2 (that was your benefit before the tax). But your loss is not offset by a gain to anyone else. You have bought no cake and so paid no tax for redistribution. Altogether, the tax makes the world poorer by £2.

Taxes are harmful when people avoid them. This is the basis of Ramsey’s Principle, named after Frank Ramsey, the Cambridge philosopher of the 1920s, that we should tax things to which people are price insensitive. Compare eating cake and breathing. As the price of these activities rises, most people will cut back on cake before they cut back on breathing. They are more sensitive to the price of cake than to the price of breathing. So a poll tax, which is effectively a tax on breathing, would do less harm than a cake tax.

Cake is good but breathing is better. The better it is, the better to tax it. That is why we do not currently tax employment, which only protestants believe to be a good thing, but instead tax its principal benefit: namely, income. Research has shown that income tax conforms to Ramsey’s Principle. People continue to create income even when it is taxed. (High top rates are the exception.) Income tax also has the benefit of linking your tax bill with your ability to pay it — an advantage lacked by poll taxes and by Mr Goldsmith’s energy tax.

Whereas Ramsey’s Principle aims at avoiding tax avoidance, Goldsmith’s Principle positively seeks it. He wants to tax the over-consumption of energy in the hope that people will stop over-consuming energy. But even someone who knows nothing of tax theory will noticed one little snag. If this tax had its intended consequence, and people stopped over-consuming energy, they would also stop paying the tax. Then how would Goldsmith’s Tory government or Ming’s Liberals fund their billions of spending commitments?

Goldsmith’s moral tax principle is ridiculous. Nevertheless, there is a good reason to tax energy consumption. No one owns the air. This means we are not charged for the damage we do to it by the way we consume energy. The cost of each individual’s energy consumption does not fall fully on that individual. That we all consume the same air, whether or not we damaged it ourselves through energy consumption, is in effect a subsidy to those who consume energy. And subsidies cause waste: they encourage consumption even when its real, full (unsubsidised) cost exceeds its total benefit.

Privatising the air is the ideal solution. Alas, it is difficult to arrange. So tax is required to lift the price of energy to cover its full cost. But how much tax? What is the value of the free-air subsidy on consuming, for example, a litre of petrol?

That is a difficult question. We need to know not only how much environmental damage it does, but also how much that damage is worth: that is, what people would willingly pay to avoid it. Neither question has been answered. For all we know, the tax on petrol — which makes up about 70 per cent of its UK price — may already exceed the value of the free-air subsidy. If so, it will be causing the under-consumption of petrol.

This possibility ought to concern moralists. Under-consumption is as great an evil as over-consumption. But I doubt it does, because moralists rarely equate the value of something with how much people actually value it. They tend to have a notion of right and wrong that is both more ineffable and more absolute. This is what makes moralists — with their lists of “good things” that must be compelled or subsidised and “bad things” that must be banned or taxed — simultaneously absurd and alarming.

Jamie Whyte is a philosopher

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