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It’s ridiculous to call a carbon tax a sales tax. Here’s why.

A carbon tax is no more a sales tax than income taxes are, writes University of Calgary economist Trevor Tombe


 
Premier Rachel Notley unveils Alberta's climate strategy in Edmonton, Alberta, on Sunday, November 22, 2015. The new plan will include carbon tax and a cap on oilseeds emissions among other strategies. (Amber Bracken/CP)

Premier Rachel Notley unveils Alberta’s climate strategy in Edmonton, Alberta, on Sunday, November 22, 2015. The new plan will include carbon tax and a cap on oilseeds emissions among other strategies. (Amber Bracken/CP)

Is a carbon tax a PST in disguise?

It’s a question on the minds of many Albertans, and embraced by certain political leaders and public commentators. To take just two notable examples, Brian Jean, leader of Alberta’s Wildrose Party opposition, called it a “back-door PST” and Michelle Rempel, a prominent Federal politician from Alberta, recently made the same comparison.

This isn’t mere semantics. Words matter. Thoughts matter. How we communicate and debate matters. This question matters.

So are they correct? Is a carbon tax a PST? No. The two taxes have different effects, different objectives, are levied on very different things, and have different legal implications. In short, a carbon tax is no more a sales tax than income taxes are.

Before diving in, let’s put aside the issue of whether a carbon tax is good or bad. That’s a separate conversation. Even if you’re not convinced by the arguments in favor of carbon pricing, a carbon tax is not a PST in disguise. It is entirely possible to oppose a carbon tax on reasonable and rational grounds. Acknowledging that a carbon tax isn’t a PST is in no way support for a carbon tax, but it is support for clear and honest debate. Something I hope most of us favour.

So, let’s get started.

Different Effects

A common argument is that the prices of the goods and services we buy will rise. Thus, a carbon tax is a PST.

That prices will rise is undeniable, but doesn’t itself make a carbon tax a sales tax. The two taxes have very different effects on the cost of things we buy.

A sales tax typically falls on the vast majority of goods and services out there. (Though some goods are exempt.) A carbon tax, on the other hand, is a tax on only carbon. Goods that are more carbon-intensive will experience a larger price increase than goods that are less carbon-intensive. Recent research from the University of Ottawa’s Nic Rivers crunches the numbers for Canada. I plot his results below, and compare them to the stylized effect of a sales tax.

price_effects

Notice sales taxes increase the price of everything the same way. You pay 5 per cent GST on a new computer. You pay 5 per cent on a haircut. You pay 5 per cent on gasoline when you fill up at the pump. And so on. A carbon tax, however, increases the price of gasoline (a carbon-intensive good) much more than haircuts.

Different Objectives

The purpose of the taxes also differ. One is primarily to raise revenue, while the other is attempting to change behaviour.

The reason economists favour sales taxes is they tend not to distort behaviour as much as other taxes. They apply broadly and evenly. The empirical evidence on this is also quite clear. A broad-based sales tax tends to be less damaging to the economy than corporate or personal income taxes. So, when economists are asked how governments should raise revenue, they typically point to a sales tax.

The objective of carbon pricing, however, is not itself to raise revenue but to correct a market failure. Where is the failure? Pollution causes damages, and those doing the polluting don’t take those damages into account. To correct this failure, one can use either inflexible government regulations or what’s called a Pigouvian Tax. The latter approach relies on decentralized decisions in the market to abate pollution, while the former relies on centralized decisions by governments. As markets are generally more efficient, economists broadly support carbon pricing.

To be sure, carbon taxes do raise revenue. For Alberta, the carbon tax and net revenue from pricing the emissions of large emitters will raise nearly $2.6 billion per year (once fully ramped up).

This is roughly equivalent to the amount of revenue generated by a 3 per cent sales tax in Alberta. But that doesn’t mean a carbon tax is a PST. Not at all. Last year, Alberta raised about $2.5 billion in resource royalties. Is a carbon tax then a resource royalty? No. The government also raises about this much from gambling and liquor licenses, plus net income from ATB. Is a carbon tax then a casino or a bank? No.

But, some might point out, the carbon tax is being used to increase government spending just as some suppose a PST would. They are spending the money on infrastructure, energy efficiency, and the like. That’s true, they are spending a great deal of the money. Here’s the relevant table from the budget:

revenue

But it’s important to separate the use of carbon tax revenue from the nature and merits of the tax itself.

It’s true that many economists favour an alternative revenue-neutral approach, where other taxes (in particular corporate and personal income taxes) are lowered by an equal amount as the carbon tax brings in. For strong arguments in favour of this option, see this report by my University of Calgary colleague, Ken McKenzie. But there are also those against (see this, for example). There are many options, and governments must choose wisely. This is an entirely productive and helpful debate to have. But regardless of where you come down on it, a carbon tax is not a PST, whether the government spends the money raised or not.

Different Tax Bases

We’ve seen that a sales tax applies broadly on almost all goods and services, while a carbon tax is specific and applies only to carbon. That is, their tax bases differ.

But, some say, we pay the carbon tax at the point of sale, such as when we buy gasoline for our cars or natural gas for our homes. Thus, they are a sales tax.

This isn’t helpful. By this logic, all taxes are sales taxes. Payroll taxes are on the sale of labour by an employee to an employer. Income taxes are as well. Does that mean they are both sales taxes? No. Let’s stretch this logic even further with property taxes. The value of your home is roughly the value of all future housing services it provides. Even if you don’t explicitly rent your home to someone else (a sale), you implicitly rent from yourself (a “sale” … to yourself). So are property taxes sales taxes? No.

Different Legal Implications

Economics aside, there are interesting legal implications of whether a carbon tax is a PST or not.

For the past 21 years, the Alberta Taxpayer Protection Act requires a referendum to implement a PST in Alberta. So, if a carbon tax is a PST then a referendum is required. (Of course, the Act doesn’t really do this. It’s theatre. Any government could repeal the Act first, and then bring in a PST. The Act simply increases the political costs of implementing a PST.)

For a clue to how the law treats each type of tax, I can think of two easy places to look.

In Canada, laws around federal and provincial financial arrangements classify taxes. Specifically, let’s look at the equalization formula. The entire formula is based on a province’s ability to raise revenue across a wide variety of tax instruments. The regulations governing the system classify general sales taxes and carbon taxes differently. (For those nerdy enough to want to know: a carbon tax is a s4(c)(xv) tax while a PST is a s4(c)(i) tax.) So, a carbon tax is not a sales tax.

Next, the OECD also systematically and authoritatively classifies taxes. (Thanks to Kevin Milligan for pointing this out.) While it doesn’t specifically list “carbon taxes,” sales taxes (item 5112) are differentiated from specific taxes on goods and services. A tax on gasoline is not a sales tax, it’s a specific tax on gasoline (an excise tax, item 5121). A carbon tax is similar. It is a specific tax on carbon. If you don’t want to call a carbon tax a carbon tax, then I suppose you could call it an excise tax. But not a sales tax.

Concluding Thoughts

When we hear “sales tax”, we don’t think of income taxes, payroll taxes, or property taxes. We think of a PST, the GST, or an HST. Given that people hate sales taxes, the political motivation to couple carbon taxes to sales taxes is clear. But it also dangerous.

George Orwell wrote that political language is designed to make lies sound truthful. That is precisely what is going on in the carbon tax debate in Alberta. Luckily, politicians, like all of us, respond to incentives. If we demand clarity in words and respectful policy debates, then our political leaders and public commentators will respond and we will all be better off for it.


 

It’s ridiculous to call a carbon tax a sales tax. Here’s why.

  1. I suppose we can all agree it is a tax. One we don’t need and one that will accomplish nothing.

    • Many of the differences noted are not in fact real.

      Many sales taxes are complex and apply differently to different products. Exemptions for books, or drugs, or feminine products, entertainment, food of different types, education, sports programs…

      Many sales taxes (or excise taxes which are another form of sales tax) are designed to bias behaviour: Put more weight on consumption, and less weight on investment is a common refrain and it applies to plain vanilla sales taxes.

      “We’ve seen that a sales tax applies broadly on almost all goods and services” That is not true, the GST is pretty broad, prior to that our sales taxes, and manufacturer’s sales taxes were relatively narrow. Even if the application is broad, the tax type is not dependent on that.

      It is ridiculous to look at law on equalization and say it somehow helps us understand the definition of a sales tax. That policy is designed to produce certain goals, if the principle goal was to equalize the effect of the government’s delivery of services across the country but to also ensure that citizens across the country were equally influenced to use less carbon. The law would be written one way. If the sole concern was equalizing effect on delivery of services it might be written another way. This is not an argument from first principles as to the type of tax.

      I do agree that an excise tax is more targeted, it is a tax on the sale, or production for sale, of specific goods. In one form that is a sales tax.

      The purpose of a carbon tax may not be theoretically the raising of revenue, but our experience on that point, and the blizzard of lies it brought forth on the GST, is instructive. We will not get a “carbon tax”. We will get a carbon tax that is implement in a specific way, for specific policy reasons. In the real world there is no reason to believe that will be revenue neutral, once credits are issued.

  2. I understand that “technically” a carbon tax and a sales tax are not completely identical…most educated people will agree with that. The reason why taxpayers are calling it a back door PST is not because of the technical issues surrounding it. It’s because just like a PST, this carbon tax is the government forcing themselves into my wallet and pulling out my hard earned money without me having the ability or right to protect it. And why are they doing it? Because they believe they know how to spend my money better than I know how to spend it. But ultimately, they’re just politicians…at the end of they day, they want more of my money under their control. And in that sense, it’s just like a PST – I earn my money, they take my money.

    • We get it, it’s all about you, the rest of the world be damned. You mentioned “my money” four times in that small paragraph alone.

  3. Carbon tax is a tax on the sale of something, therefore it is a sales tax. Income tax is a tax on income, no sales involved. Property tax is a tax on the ownership of property, no sales involved. A carbon tax is definitely and simply a sales tax no matter how you want to spin it.

  4. You are right, it will accomplish nothing because CO2 is not the culprit of global warming. How can a gas that is only 0.054% (1/2,000) of the total atmosphere be the primary cause of global warming? Real atmospheric scientists admit that they don’t know the cause. We are throwing billion of dollars at the wrong ‘solution’.

    • “How can a gas that is only 0.054% (1/2,000) of the total atmosphere be the primary cause of global warming?”

      There’s this thing called the science of thermodynamics. Carbon dioxide has been known to interfere with the transmission of infrared, the band of EM energy Earth emits, since Tyndall’s work in gas chromatography in the 1850s. Since then, we have refined our knowledge and know with a certainty that the amount of CO2 in the air has a significant effect on the earth’s energy balance.

      “Real atmospheric scientists admit that they don’t know the cause.”
      Name one.

      • Water vapour exists in the atmosphere in amounts orders of magnitude greater. Water vapour is 6 times more effective at trapping heat than CO2. Methane (released by swamps, wetlands and animals) is between 100 and 200 times more effective at trapping heat. But global warming (ooops, “CLIMATE Change”) acolytes only consider CO2 to the complete and utter exclusion of all else ! Also, consider that Arctic and Antarctic ice cores consistently show increased levels of atmospheric CO2 PRECEEDED every ice age. Talk about an “inconvenient truth”

      • Syun-Ichi Akasofu, retired professor of geophysics and founding director of the International Arctic Research Center of the University of Alaska Fairbanks.

        Claude Allègre, French politician; geochemist, emeritus professor at Institute of Geophysics (Paris).

        Robert Balling, a professor of geography at Arizona State University.

        Pål Brekke, solar astrophycisist, senior advisor Norwegian Space Centre.

        John Christy, professor of atmospheric science and director of the Earth System Science Center at the University of Alabama in Huntsville, contributor to several IPCC reports.

        Petr Chylek, space and remote sensing sciences researcher, Los Alamos National Laboratory.

        David Deming, geology professor at the University of Oklahoma.

        Vincent R. Gray, New Zealand physical chemist with expertise in coal ashes

        Keith E. Idso, botanist, former adjunct professor of biology at Maricopa County Community College District and the vice president of the Center for the Study of Carbon Dioxide and
        Global Change

        Antonino Zichichi, emeritus professor of nuclear physics at the University of Bologna and president of the World Federation of Scientists.

        Those are a few of the scientists that say we can’t be sure what the cause is. Then there’s the scientists that say the accuracy of the effect is questionable, and the ones that suggest that climate change is caused by natural processes, and the ones that say that the climate change will have few negative effects.

  5. Bullcrap, Horsehockey article, its a tax. Where’s our Donald Trump ?

  6. What’s truly ridiculous is this ineffably stupid article when you consider that a carbon tax is A TAX ON THIN AIR! It’s akin to earnestly discussing the intricate finery of the emperor’s clothes when in fact he’s parading around buck naked. “Carbon,” i.e. carbon dioxide, CO2, is a beneficial gas without which there would be no life on earth. It is vital plant food. It is NOT a pollutant. You can’t see it or smell it. Rising levels of CO2, which have always occurred AFTER warming (and there hasn’t been any warming for 19 years) have served to green more of the earth—a very good thing. Putting a tax on a deliberately maligned, demonized gas without which there’d be no life on earth is as insane as it is arguing about exactly what to call it. It’s a nakedly venal, pernicious, kleptocratic cash grab corruptly justified by a fictitious global climate emergency.

  7. After reading this,carbon tax is going to have a more of negative effect on the economy than I thought.We are already over taxed and pay way to much for hydro as it is.A tax that will do nothing to help stop global warming ,call it what you want its just another tax that we don’t need,their is a lot more important things going on this world right now

    • If you look at economic reports based on the last 200 years of thermodynamics not being entirely wrong, the cost of mitigating the effects of climate change compared to the cost of adaptation are an ounce-of- prevention-pound-of-cure thing. Pigouvian taxes have been used effectively for around 100 years, and a carbon tax is the most cost effective way to mitigate climate change. It’s more cost effective than regulations, and it is more cost effective than cap and trade, and all of the above cost less than doing nothing.

      • Wrong on all counts. A “carbon” tax is simply a cash grab. The insane amounts of revenue will simply flow into general revenue, and be wasted on fuzzy, left wing social engineering. As a cold province, in a northern nation, almost every commodity we enjoy is either stored, heated, transported or created using energy. Literally EVERYTHING we consume here will be subject to this insane sales tax. The citizens (read: TAXPAYERS) of this province are more than justified at denouncing this thoroughly rotten SALES tax.

        • Could you be more specific?

          What do you know about economics that Howard Stern, Gary Becker, the National Resource Defense Council, Munich Re, and a host of others do not know?

          Are you saying that Pigouvian taxes are ineffective? Maybe you should look up what those are before commenting further.

          What do you know about thermodynamics that has gone undiscovered since Fourier’s work in the 1820s?

          I’m not really in favor of giving government more money; that’s why I’d prefer a carbon tax to be revenue neutral, and by that I mean all of the money is returned to the populace, directly. But whether it is on not, it is still cheaper than, for instance, destabilizing the world’s food supply.

          https://www.google.com/search?q=food+security+climate+change&oq=food+security+cli&aqs=chrome.0.0j69i57j0l4.5383j0j4&sourceid=chrome&ie=UTF-8

    • I think you make a great point. It is solely a sales tax if it doesn’t achieve anything. There is little chance it will achieve anything and no chance it will achieve anything for Canada, so I think the revenues and income redistribution will be the main effects.

  8. Whatever else you call a carbon tax it is still a tax. And no one in their right mind trusts politicians anymore. Besides why do the tax? Why not identify the polluters and point the “tax gun” at them, clean up or else? The so called carbon tax is an Orwellian lie substituting faux-economics, for direct action, which is so much more to a politician’s preference. If someone is polluting in your neighbourhood you identify him, the source and by dealing with it directly stop the pollution. And as to not trusting politicians, economists, really? Duuh. As the Simpson might say. Tell the truth, transparency, trust the people, direct action. We don’t need no more stinkin taxes.

  9. Many of the differences noted are not in fact real.

    Many sales taxes are complex and apply differently to different products. Exemptions for books, or drugs, or feminine products, entertainment, food of different types, education, sports programs…

    Many sales taxes (or excise taxes which are another form of sales tax) are designed to bias behaviour: Put more weight on consumption, and less weight on investment is a common refrain and it applies to plain vanilla sales taxes.

    “We’ve seen that a sales tax applies broadly on almost all goods and services” That is not true, the GST is pretty broad, prior to that our sales taxes, and manufacturer’s sales taxes were relatively narrow. Even if the application is broad, the tax type is not dependent on that.

    It is ridiculous to look at law on equalization and say it somehow helps us understand the definition of a sales tax. That policy is designed to produce certain goals, if the principle goal was to equalize the effect of the government’s delivery of services across the country but to also ensure that citizens across the country were equally influenced to use less carbon. The law would be written one way. If the sole concern was equalizing effect on delivery of services it might be written another way. This is not an argument from first principles as to the type of tax.

    I do agree that an excise tax is more targeted, it is a tax on the sale, or production for sale, of specific goods. In one form that is a sales tax.

    The purpose of a carbon tax may not be theoretically the raising of revenue, but our experience on that point, and the blizzard of lies it brought forth on the GST, is instructive. We will not get a “carbon tax”. We will get a carbon tax that is implement in a specific way, for specific policy reasons. In the real world there is no reason to believe that will be revenue neutral, once credits are issued.

  10. MacLean’s again, gets Liberal sh#t all over it’s holier that thou nose. This is a tax, no more, no less. It is a vile attempt to fill the Liberal coffers on the back of Alberta tax payers. PM sh#t for brains will soon follow suit, doubling down on what the crooked Provincial/territorial Liberal governments are saddling their population with. Here’s what really happening, or should I say not happening.
    http://miltonconservative.blogspot.ca/2016/06/30th-anniversary-of-hansens-first-big.html

  11. As *originally proposed* a carbon tax is different than a sales tax – though not so different as the writer would like us to believe.

    But as implemented by the NDP govt in Edmonton, the carbon tax is far more alike to a sales tax than to the `revenue neutral’ taxes that are supposed to offset reductions income from the payer.

    In fact, their carbon tax is a sales tax in so far as the `revenue neutrality’ is a cut elsewhere in govt expenditures (though if you believe that, I have some land somewhere to sell at a premium… no swamps, promise)

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