Who pays the carbon tax?

Patrick Brethour in the Globe and Mail writes:

Consumers will pay about one-third of the new carbon tax, but will receive close to two-thirds of tax rebates, totalling $338-million in the 2008-09 budget year. B.C. businesses, which will pay two-thirds of the new tax, will receive only about half of that money back from reduced corporate and small-business income taxes.

The difference goes into the pockets of consumers, a gap that adds up to more than $100-million in the first year of the carbon tax and grows to around $250-million in the following two years.

In effect, businesses are shielding consumers from the full effects of the carbon tax.

I found this odd as no reference to such a split appears in the actual budget. So I called a colleague at the BC Ministry of Finance, who told me that this is what they told reporters in the lock-up based on some back-of-the-envelope calculations.

When I pressed he noted that this does not take into account at all the extent to which businesses will pass the cost on to others. Technically speaking, businesses can pass the cost of a tax forward to consumers through higher prices, “backwards” to workers through lower wages, or absorb it in lower profits. The tax incidence literature generally presumes that taxes show up in lower wages, though personally I suspect that they show up in higher consumer prices. Empirically, no one really knows.

So it seems very likely that most of the carbon tax attributed to business by Brethour would in fact not be paid by business through lower profits (or not much anyway). There may be a few exceptions for companies that are almost exclusively exporters or who have to contend with unusual market structures on the labour and/or product sides. But the notion that business will bear two-thirds of the tax while getting back only one-third of the recycled revenues strikes me as incorrect – the reality will be the opposite with business getting back more in tax cuts than they pay in the carbon tax.

One comment

  • I think that it’s pretty safe to suppose that businesses will pass only pretty much all of the tax. And if there are sectors that don’t pay the tax and which are competing for the same workers, then not a lot will be passed on to workers, either.

    Eventually, consumers will have to pay the tax, in one form or another.

Leave a Reply

Your email address will not be published. Required fields are marked *