U.S. Government Demands Congestion Subsidy
The government of London enacted a congestion charge on cars that enter the city center area. This fee has indeed reduced traffic congestion, but U.S. diplomats refuse to pay it
May 1, 2006
Fred Foldvary, Ph.D.

An article in the Progress Report tells us, “Wimpy Diplomats Seek Immunity From London User Fee.” The government of London enacted a congestion charge on cars that enter the city center area. This fee has indeed reduced traffic congestion. But U.S. diplomats refuse to pay it.

The 1961 Vienna Convention exempted embassies from taxation, and the U.S. government claims this charge is a tax. The government of London - Mr. Livingstone, I presume? - claims this is a fee, not a tax.

As the Progress Report comment states, “Congestion imposes economic, social and health burdens on others without their consent.” When streets and highways are crowded, each additional car imposes greater congestion on the other cars, making them slow down even more. The congestion charge is compensation to society for creating a negative external effect, similar to a pollution levy. The optimal congestion fee should be just high enough to eliminate the congestion, so that the traffic can flow smoothly.

The word “tax” has two applications. One is a tax in form, in which a payment is made to a government. The other is a tax in substance, which is an arbitrary payment imposed on the taxed person and his wealth, with no direct relation to any service, benefit, or penalty.

If you park in the street and put money into a city’s meter, this is a tax in form, as a payment to government, but it is not a tax in substance, as it is a payment for a service, a rental to use street space. The same payment would be made to the owner of a private street.

Suppose that the streets of central London were owned by a private company. It would charge user fees to use the streets. This would not be a tax, as it would be paid to a private firm. Would the U.S. embassy be justified in refusing to pay? No more than if embassy officials ate in a restaurant and then refused to pay. Perhaps they want to be able to enter the shop of the British Museum and take what they want without payment, since the British Museum is owned by the British government. I say!

Indeed, that is what the London administration should do. They should create a London Civic Association, owned by real estate owners of central London, and transfer the streets to the LCA. The LCA would be a nonprofit private contractual organization serving its members with street services. It would have the same charge for the streets as the London administration now has, but it would be a fee paid to a private community, and so not a tax.

Now the U.S. embassy would have to pay it, just like they have to pay for fish and chips. The LCA would use the funds to maintain the streets, lights, and other city facilities. Indeed, the government of London could go further and transfer policing, fire protection, parks, and other services to the London Civic Association. The LCA would finance these services with monthly assessments on the members based on the site value of their real estate.

Suppose some bloke in London does not wish to have his land be part of the LCA. No problem, mate, the land would fall under the direct authority of the government of London, and pay the usual taxes, but would be denied police and fire-protection services by the LCA.

The U.S. has joined Angola, Sudan, and Nigeria as rogue states which have refused to pay the congestion fee. The U.S. chiefs should be especially ashamed of their intransigence as the United Kingdom has been a staunch ally in the Iraq war and foreign policy in general, and is this the proper way to treat one of America’s best friends?

Privatization of the streets of London would be worthwhile even if the U.S. and other refuseniks paid the congestion fee. It would shift the public finance of London from taxes on production to taps on the site values. Tenant workers would no longer be double charged for city services, as they now pay both taxes and higher rentals because of the city services. Landowners as members of the LCA would no longer be subsidized, as the higher rental and land value received from the city services would be returned to pay for them. And housing would be more affordable, as land values would not be so pumped up by the civic services.

As it now stand, the U.S. embassy in London gets a double subsidy. Not paying a location value charge, the embassy gets gratis city services. And by not paying a congestion fee, the embassy staff benefits from being able to drive without delays in the city. The U.S. government demands a congestion subsidy, and why should the residents of London have to subsidize the U.S. government? I say, it’s rather rude of the U.S. embassy to demand subsidies.

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Fred Foldvary, Ph.D.

FRED E. FOLDVARY, Ph.D., (May 11, 1946 — June 5, 2021) was an economist who wrote weekly editorials for Progress.org since 1997. Foldvary’s commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary’s areas of research included public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.