The Liberals' carbon tax proposal

Stéphane Dion and the Liberals are floating the idea of a carbon tax:

Liberals say carbon tax will be revenue-neutral: [I]nternal policy discussions are still underway and a number of proposals are under consideration. One proposal under study would replace the federal fuel excise tax - which applies to gasoline and diesel used for vehicles - with a more broadly based "environmental tax" to include other fuels such as natural gas, heating oil and coal-generated electricity.

That plan, proposed by economist Jack Mintz and Nancy Olewiler of the Sustainable Prosperity Institute, would leave the existing excise tax of 10 cents per litre of gasoline and four cents per litre of diesel unchanged. The authors estimate that applying the excise tax to other fuels would increase tax revenue by between $12 billion and $15 billion annually. The revenue could be used to substantially lower personal and business taxes and to fund tax credits related to climate change technologies.

If the Liberals follow through on this, they will have the distinction of being the only major party that has a sensible position on reducing greenhouse gas emissions: the Conservatives are unable to distinguish between smart and stupid taxes, and the NDP is busy pandering to those who think that gasoline prices are already too high (h/t to Paul Wells).

But I don't see why they have to make such a big deal about it being revenue-neutral. $12b-15b is a significant chunk of change - roughly the equivalent of the two GST percentage points that the Conservatives frittered away to no apparent purpose. A carbon tax will be regressive, so a good portion of those revenues should be used to compensate lower-income households. The Liberals seem to understand this point:

[Liberal finance critic John] McCallum said the Liberals are working out a plan where tax credits or some other mechanism will be necessary to ensure pensioners and other Canadians with fixed incomes, low wages or who are otherwise in zero or low tax brackets must also receive compensation.

"You may be sure that we would be acutely aware of people who have lower incomes or more difficult times and you could be certain we will do everything to look after those people," McCallum said. "Some of the lower-income people don't pay tax, so that would be a feature of any such program if we were to have one."

I don't know how it happened, but the Liberal Party of Canada has found a way to be relevant again.

Comments

[Ryan]

Not every economist agrees that the GST cut is a bad thing. I don't claim to be a Public Economist, but it may not be as cut and dry as a 2nd year Macro course would lead us to believe....

link

[Stephen Gordon]

Kesselman missed the main point in favour of consumption taxes: they don't affect the rate of return on savings.

[Traciatim]

I think the point that's being sorely missed everywhere is that raising consumption taxes like the GST, or introducing a new 'necessities tax' like proposed here, will increase the CPI and CoreCPI. I think one of the major reasons that the BoC has been able to make large cuts to the overnight rate and keep Canada only mildly wounded from the global problems is that the GST cut is masking a rather large portion of inflation keeping the CPI low.

Now, next year when Bush is out and the USA has a renewed vigor we may see our dollar drop compared to theirs, the GST cut will no longer effect the numbers, and if the Liberals come in we will have a new consumption tax further skewing prices. This can only lead to one thing, and that is increased interest rates and cutting back on lending. It seems to me like this may be the perfect storm that could halt Canada's ability to shelter itself thus far.

Plus, I wanted to point out that 'Revenue Neutral' will be from the Governments perspective, not the corporate or personal perspective. All this means is that (Money Collected - Costs) = Money refunded. Though they claim that money collected will be from both corporate and personal sources, the corporate portion will in turn be reflected in price increases in the long run; making all monies collected from this tax indirectly from the people of Canada. The only progress this plan makes from the details shown so far is increased bureaucracy creating a few jobs.

[James Paul]

Both in the USA and in Canada, the political parties have failed, so far in making hay from the fuel price crisis, as far as it is the natural solution to at least two other seemingly unrelated important issues in the public eye. The first, most obvious connection is to the environment, by resticting the market to importing and exporting goods and materials that are essential and pricing the slightly frivilous or luxuriant transportation of people or goods, out of popular demand.
By the same mechanism, the second benefit arises, that being the return of manufacturing jobs to the local domestic realm on a scale possibly not seen since before steam industrialization. The costs of many manufactured goods are now more influenced by the transportation to and from a cheap labour market, than they are by that labour market itself. It stands that a screen door or a pair of pants may be cheaper to retail nearer the point of manufacture at triple the labour cost, rather than octreble the delivery cost.
The realization of these two, no, three factors could sway even the most desperate voter towards a fast talking deep thinking political candidate who can promote these benefits in a welcome and practical economic presentation. The factors themselves, are creating the conditions for change, so, no drastic alteration in economic policy required, only those terms which would recognize and favour the trend.
Protectionism becomes moot, support of local industry on a basis of employment opportunity and fairness and on the basis of environmental favour, are all that's required in a matter of course.
This is true for any nation, not just Canada and the USA.
JP