Carbon tax shifting
Statements like this drive me nuts. This quote is from an otherwise excellent article in The Tyee by Matt Price of Environmental Defence, speculating on the meat for the climate change action bones, expected from BC Premier Gordon Campbell later this week. Price falls into the same simplistic trap a lot of environmentalists get stuck in:
On the revenue side, we need bold innovation to shift taxes away from the things we want — such as income — and onto the thing that in this case we don’t want: carbon. This must also be done in a way that does not penalize low-income citizens.
I’ve railed against this “tax shifting” argument before. People who expound it simply do not understand the economic concept of elasticities, nor the public finance concept of a revenue base. Yes, we should tax carbon, and on a growing schedule that would take carbon prices above $100 per tonne as soon as possible. But using the proceeds to provide income tax cuts is problematic, because a carbon tax will be regressive â€“ the people most adversely affected by a carbon tax are the poor. And they pay very little income tax.
A better strategy would be to use the proceeds for income transfers to low income households (perhaps through refundable tax credits, piggybacking on the GST credit), and to finance services like expanded public transit and subsidize home retrofits and other investments that will reduce our GHG emissions. This would make much more sense given Price’s desire not to penalize low-income citizens, and if anything would give them more options.
The notion that income tax cuts are going to lead to more income is buying into a very conservative line of thought. At prevailing tax levels there is little reason to believe there will be any behavioural response (in terms of work effort or new investment) from income tax cuts. The elasticity is near-zero, and that is why income is a good revenue base for financing public services.
A carbon tax can make the price of emitting CO2 better reflect the external costs of its production, and that is a good thing. But it is not a solid revenue base, as the whole point is to get users to emit less. This would be like financing health care through tobacco taxes. If the tax works, it will eventually reduce revenues available, and it is not a good idea for policy makers to have to choose between a level of tax that maximizes revenue and one that changes behaviour.