Home > Carbon Tax, Economic Fundamentalism > The Lie of Revenue Neutrality

The Lie of Revenue Neutrality

June 27th, 2008

A little less than a year ago John Palmer at EclecEcon had a post on the three most important concepts in economics. While some fools were arguing utility theory and the theory of perfect competition, he argued for opportunity cost. Opportunity cost isn’t just basic, econ 101 stuff, it is econ 101, day 1, page 1. It works this way: every time you engage in economic activity (i.e. buy something), you make a choice. I buy this litre of gas or that litre of milk, for instance. It’s so simple, and so often misunderstood.

Why misunderstood? An example: when Stéphane Dion says we want to make polluting pay, that’s opportunity cost. When he says he will return the money to you through the tax system, that’s misunderstanding opportunity cost. Here’s why: if it costs more to heat your house you have two choices: run the furnace less (i.e. turn down the heat) or sacrifice other economic activity to accommodate the extra cost (before the clever among you cite the obvious problem with this case, savings and leisure time both count as “economic activity”). If you’re public policy objective is reducing carbon producing activity, this will effectively work. It is that choice between competing economic activities that will give you incentive to reduce. However, if you give back the extra you took at the thermostat, you have eliminated the incentive. Revenue neutral means, or is intended to mean, opportunity cost = zero. But with zero opportunity cost, there is zero incentive to reduce.

I have cited before others problems with both a carbon tax as it is being sold, and with the concept of revenue neutral: the real level of taxation required to be effective; revenue neutral means neutral for the government; what happens to the tax when it effectively works amd government revenues decline?

But the truth is the main reason revenue neutral is bad policy is opportunity cost. Revenue neutral means zero opportunity cost, and without opportunity cost Dion’s tax shift is simply for the sake of shifting taxes. Or as Stephen Harper would put it, it’s crazy economics.

Carbon Tax, Economic Fundamentalism

  1. Ardvark
    June 27th, 2008 at 11:12 | #1

    As written, it is IMPOSSIBLE for Dion’s carbon tax to be revenue neutral.

    Dion has promised that ALL of the money collected would go back to the taxpayer, even stating that this would be written into law.
    But if that is the case than someone had better ask Dion to explain to us just who is going to have to pay for the increased costs caused by his carbon tax on the federal governments OWN bills.
    Something does not add up.

    All of those fancy federal office buildings will still need heat and power to function, civil servants will still be flying, the military and police will still be doing what they do, etc. It is a very long list but you get the idea.

  2. Brian
    June 27th, 2008 at 11:32 | #2

    My biggest complaint all along about a carbon tax has been the absolute dishonesty on the subject. You’ll see if you click through the links I have given that in the past I have stated that a carbon tax would have to be many times higher than anyone is willing to suggest before it would have a great impact. Revenue neutral is another such problem. They always, and I mean always, mean that is will be neutral for the government. Must protect those government revenues you know. But that means it will have to be, by it’s own logic, a self perpetuating tax. That means, you never, EVER get a tax break.

    The things that are wrong with this tax idea are a legion, and you mention one I hadn’t thought of myself.

  3. Powell lucas
    June 27th, 2008 at 12:05 | #3

    The Nutty Professor and his Climate Cabalists know full well this Carbon Tax is not revenue neutral. He and his gang of Liberal pickpockets have said nohing about the GST that they will gain when the carbon tax gets passed on to consumers.
    Every dime of the tax added to the cost of manufacturers and producers doing business will be added to the cost of their output. All thes additional taxes, plus a hefty markup, will eventually show up in the final price tag to which the goverbnment will rake in their 5% cut.
    If you take any product and follow it through the system, from the raw material and all the intermediate steps to the final consumer, and then apply the value added at each step the price increases will be staggering. Then calculate how much GST the government will get from all these value added increments and the rake off will be in the billions.
    This shell game has nothing to do with reducing greenhouse gases…it’s simply a scheme to finance liberal social programs that they can’t get the public to support.

Comments are closed.