I’ve been dutifully reading the op-eds and campaign essays by people opposing I-732, Washington State’s carbon tax initiative, trying to understand what they’re missing. Obviously, emotions are running hotter because of the state’s budget crisis, ultimately a product of its horrible revenue system. And there is no question that 732 is flawed in fundamental respects, mainly because of its misguided attempt to return carbon revenues via tax cuts. But the issue opponents of 732 have seized on is not the inefficiency of using the tax system for returning carbon money, but the principle of revenue recycling itself. They view the carbon tax as a necessary and valuable new revenue source and accuse 732 supporters of being enemies of social justice for trying to return it. If their public statements are to be believed, returning carbon money is no more than a cynical play for the votes of pro-business conservatives and serves no other purpose. How to explain their inability to understand the case for recycling?
Well, I think I may have figured it out, or at least I have a hypothesis. It goes like this:
For PR purposes, environmentalists have sold carbon taxes on the basis of a moralistic interpretation of the “polluter pays” principle: companies that generate carbon emissions should pay for their sins. I can understand why they do this, and I’m sure it polls well and comes out favorably in focus groups. Nevertheless, it’s based on an incomplete representation of how the price mechanism operates. Yes, a tax on manufacturers or energy companies will initially be paid by them, but most of it will be passed along to consumers, as logic dictates it should be. After all, it is not just a few companies, but all of us whose economic choices need to be shifted. You can see this already in the taxes levied on various “sin” products. Cigarette taxes, for instance, are not paid out of reduced tobacco profits; they are passed along to smokers in the form of much higher prices on cigarettes. That’s exactly how the system ought to work, too.
Carbon taxes operate the same way. The general public will end up paying virtually all of it through higher prices, and the argument for recycling the revenues is that doing this protects our real income and living standards. The social justice dimension is about the progressivity of the recycling mechanism, especially since consumption taxes are intrinsically regressive. The true incidence of eco-taxes and the consequent role of recycling are not emphasized by green activists, however, for obvious political reasons. Nevertheless, I had thought that, being informed people, they would know how taxes function.
Maybe I was wrong. Absolutely nothing in the argumentation of the anti-732 crowd conveys an awareness of who will actually pay the carbon tax. These people claim to defend their communities, but their logic depends on ignoring the fact that their communities will pay the freight. Defending them, from their point of view, therefore does not include defraying their higher living expenses. Could this interpretation be correct? It’s believable if you think these “left” groups are uninformed about economics and actually believe the rhetoric that it is only the corporations that will pay carbon taxes. (I have noted this misconception in the writing of Naomi Klein, who has gone on record against 732.) Or, perhaps, it is more devious than this—perhaps the opponents of 732 understand their constituents will pay the tax but believe they will come out ahead by asserting a claim on the tax revenues generated from other communities in the state. Between not understanding and understanding but dishonestly manipulating, I prefer the first.
I could be wrong about all of this, of course. The easiest way for me to be proved wrong would be for committed “social justice” opponents of 732 to explain out loud why they are not concerned about the regressive payments imposed on their own communities by a carbon tax, and therefore why defraying them is not part of their agenda.
9 comments:
Things known by people who "understand" economics:
1. Minimum wages kill jobs.
2. Sin taxes are passed on to the consumer.
I would never intentionally defend Naomi Klein, who could not reason herself out of a paper bag, but could not reasonable people in Washington conclude that the truth value of 1. and the truth value of 2. are the same?
Last time I checked the sort-of consensus on incidence of corporate taxes was that it at least partly depends on the market power of the taxed firms: the more market power they have, the more they can pass the tax on to consumers. Not all such taxes get passed on to consumers, but in fact the old lit on this was long and contentious, and I think remains somewhat up in the air, if also somewhat passé, although perhaps it is time for another close look at all that.
I'm curious as to why you think that tax rebates are an especially inefficient way to rebate/recycle revenues generated by a carbon tax. (I realize you and Barkley prefer a cap-n-trade system and I disagree, but I'm not interested in arguing that point here). The perfect matching of ax incidence and rebate incidence is probably impossible, though a rough correlation shouldn't be too hard to figure. And aside from providing buffering for low income households, who have less resources to adapt, the rebates should basically occur in terms of returning the money to the broad middle class, who would have the wherewithal to shift their energy usage preferences. The point that the "climate justice" opponents seem to badly miss is that, by reducing demand and creating demand for alternative energy sources, investment decisions by larger "players", which must plan 1-2-3 or more years in advance, would also shift, provided the tax schedule was sufficiently steep and assured. In that sense, demanding that the tax revenues be retained for public investments, which, to be sure, would also be needed, but don't have to come from this revenue source, (and ultimately must come from the Federal gov. with its currency-issuing and deficit spending capacities and long-run risk-bearing outlook), would be redundant and beside the point.
But why would a "lump sum" rebate, (which sounds like it comes from out-moded GE theory), be preferable to a shift in the tax system? Mankiw's proposal to use the SSA tax system seems reasonable to me on a federal/national level, since that reaches most of the public, allowing for a further build-out from there to reach those poor not involved, and is a fairly regressive tax, (counter-balanced by a moderately progressive tilt in benefit payouts, though eliminating the cap on the tax would both improve its progressiveness and cure any proclaimed shortfall in benefits). A further point is that a national carbon tax shift would also be imposed on imports, which a +$3 trillion would have a large impact on the RoW.
Bauman's proposal only contains one flaw, as far as I can tell. It provides for rebates to poorer households via the "working families tax credit", (which, given there is no state income tax, I have no idea what that means), covering some 450,000 lower income households, but it seems that there are some 300,000 such households not so covered. That fixed, I don't see any basis for the objections from the "climate justice" crowd. But then "justice" and "truth" are completely different normative dimensions and conflating them as if they were the identical goal of social movements is obfuscation. They require different policies focused in different control variables to be formed into a "unitary" program. Since, in the first instance, AGW is a geo-physical and bio-physical problem involving "indifferent" natural causal processes, which have nothing to do with justice or morality at all.
David Roberts at Vox probably sums up the argument for those that see reducing emissions as the goal. He looks at the British Columbia carbon tax as an example. What we can learn about carbon taxes from British Columbia’s experiment. The takeaway:
"The BC example may show that it is possible to pass a revenue-neutral carbon tax. But it doesn’t show that it’s possible to pass one that does what’s needed. As a climate policy, the BC carbon tax is weak. It is weak along the metrics that matter most for climate policies: It doesn’t reduce emissions much, doesn’t spur much innovation or deployment of clean energy, and doesn’t seem popular enough, at least at the moment, to build on itself or spread to other jurisdictions. Other policies in Canada, like Ontario’s decision to ban coal plants, have reduced emissions much more dramatically. (See Mark Jaccard, a professor of sustainable energy at Simon Fraser University, for more on this.)
The metric where BC’s carbon tax most excels, namely “how much economists like it,” doesn’t actually matter for shit in the real world.”
The goal is to reduce emissions. Carbon tax, cap 'n trade, and other schemes are merely possible tools to use to achieve this goal. If the tool has already been found to be ineffective, then obviously we need to look for a different tool.
The fact that most/all of the increase in prices is borne by the consumer is of little or no relevance to the argument. That can be 'fixed' with rebates to the less well-off to 'correct' for the regressive nature of the tax. But the regressive nature of the tax and its effect on the less well-off is superfluous to the argument that the tax will be simply ineffective.
Good analysis, but it should not be surprising that Leftists fail to understand how prices work in this one case. Typically they make incorrect populist arguments for things like employer "provision" of health insurance, favor minimum, wages over EITC, do not support substituting progress individual consumption taxes over corporate income taxes, etc. We Neo-liberals have to fight a two front war. :)
Intentionally or not, this post perfectly demonstrates the hard core of neoliberalism.
A branch of study concerned with empirical reality would proceed like this:
Question: how do the humans working in corporations behave when government institutes a tax on the product which that corporation sells?
Study: Observers were placed within corporations for the year before and year after the change in tax law. Observers were also placed in similarly situated corporations in jurisdictions where no change in tax law occurred to serve as a control group.
Results: The following behavior was observered in the corporations subject to tax:
However, economics PhDs are only awarded to individuals who have demonstrated a preference for the company of MicrosoftExcel rather than human beings. The consequence is that they do their very, very best to imagine what equations might substitute for observing human behavior and arm themselves with the catch-all defense that all models make incorrect assumptions (despite the fact that such a claim has absolutely nothing to do with observing human behavior).
I have NEVER understood why supposed social democrats have not proposed redistributing sin taxes directly and evenly (not in the form of tax cuts, but checks). This has the advantage of making a regressive tax, relatively progressive and being a step on the way to a basic income, which is my view is the best way to increase the bargaining power of the poor.
I see that John c Halasz said something similar, so apologies for not giving credit where it is due. I happen to disagree with him about the relative merits of a carbon tax and tradable carbon rights, but I think giving that we are not doing anywhere near enough, any step forward is positive.
My concern with 732 has to do with food availability and scarcity, particularly in the far out counties in the state.
Already in Washington State there exists a dearth of transportation for food producers, and significant amounts of product go to waste without even entering the market.
I'm not certain that the reduction in the b&o tax will be enough to offset the increase in manufacturing and transportation costs (created by 732) for food to reach already at-risk/food insecure areas in the state.
Could larger or more financially secure producers and transporters fill any potential gaps? Possibly. But I don't feel comfortable with the potential to create or worsen food insecurity. Certainly tax rebates and sales tax reductions do little or nothing to offset the immediate needs of calories.
I don't know how my concern would pencil out under more analytical scrutiny, but I could find nothing to allay my worry.
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