Tuesday, September 25, 2007

First, they tax your carbon, and then they tax your shirt? -- The Trouble with the Green Party of Ontario's "Tax Shifting" Proposal



I've blogged (here and here) that the Green Party of Ontario (GPO) should be in the Legislature, to help keep Climate Change on the agenda. I agree with many points in their 2007 Platform, and I still think that they should have a voice in the Legislature (and I still support MMP). Having said this, I have problems with the GPO's proposal to shift revenues from the income tax to a carbon tax ("pay for what you burn, not for what you earn"). Better alternatives exist, including direct regulation and cap-and-trade.

The GPO wants to tax carbon and to cut carbon emissions to zero. In fact, they want a 100% renewable energy system (including a nuclear power phase-out). I support this goal, but I question the GPO's proposed way of getting there. There is a conflict of interest between relying on carbon revenues and eliminating the revenue source (remember Tobacco Taxes and Lotteries?..).

I raised this concern, among others, directly with GPO Leader Frank de Jong on a CBC radio phone-in on September 20, 2007*. Unfortunately, his answers made me even more wary. He said that once carbon is phased out, the GPO would make up the revenues by raising taxes on things like food, clothing and shelter:

“Your point about you know, let’s say if we continue to raise the tax on cigarettes, and sooner or later everyone will stop smoking, and then up -- uh, your revenue stream will dry up. But I think we will always need products, we’ll always need resources, we'll always need, you know, clothing, and food, and stuff to build houses with, so there will always be something to collect as much General Revenue as you need. And it will be a a continuous virtual spiral toward sustainability. It’s a long process but we got to get started at it” [my transcript of Frank de Jong's remarks; my bolding].
Hear for yourself: on the ODEO player below, click Play, wait for the player to buffer the whole file, and drag the slider to around 00:04:19.

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The phone-in show cut me off before I could retort, to the tune of ‘First, we take Manhattan’:
First, they’ll tax your carbon, and then they’ll tax your shirt!
(With apologies to Leonard Cohen :-)

Some "spiral toward sustainability"!

Sure, taxing carbon instead of income today would mean "taxing bad instead of good". But taxing food, shelter and clothing instead of income would mean "taxing good instead of good". Worse yet, consumption taxes are notoriously more regressive than income taxes. Consumption taxes do not take into account ability to pay. The GPO leader seemed to have no problem with that. I do.


Background:

I had actually started debating carbon taxes with one of the candidates for the federal Green Party of Canada (GPC), Glenn Hubbers, Newmarket-Aurora, on his blog (here and here -- see my Comments). The GPC also supports carbon taxes, e.g. "$50/tonne".

Then the GPO announced that a carbon tax would be an even bigger part of their 2007 Platform. Frank de Jong, Leader of the Green Party of Ontario (CBC profile), was on the CBC Radio Ontario Noon Phone-In show on September 20, 2007. I managed to get through and challenge him on-air to justify his Party's carbon tax plan. In particular, I asked:

  • What is the price-elasticity of carbon emissions, i.e. how much would their tax really reduce emissions? Where is the economic modelling?
  • The GPO Platform calls for a transition to a 100% renewable energy system—what would happen to the revenue from the carbon tax then?
  • There is a conflict of interest between wanting more revenue and less carbon emissions. This would weaken incentive for Government to drive emissions to zero—think of the Tobacco Tax & Lotteries.
  • A carbon tax is regressive, like any consumption tax. Income tax relief may help some of the poor, but not all. Increased Northern/Rural subsidies may help others, but at cost of encouraging further inefficient development (e.g. the proposed Green Party subsidies to airports, even if they would be in the North?..)
  • They also want to phase out nuclear power, but they are not proposing a tax on Uranium. Apparently, nuclear power would be phased out entirely by regulation, not taxation. Why not use regulation instead of taxes for carbon as well?
  • Why not expand the carbon cap-and-trade system that GPO also proposes? (See more below.)

Unfortunately, I don't think that he answered most of my questions, though in fairness the phone-in format makes it difficult to conduct an in-depth debate. Further comments from GPO supporters (and opponents) are very welcome.

You can listen to the part of the show that contained my questions and Frank de Jong’s response using the ODEO player below, or you can download the MP3 from mediamax.com (4.3 MB).


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[UPDATE, September 26, 2007: After posting this blog entry, I discovered that Marc Lee, a Senior Economist with the Canadian Centre for Policy Alternatives, had made many similar points about carbon taxes in the Progressive Economics Forum here and here. He also agreed somewhat reluctantly in a Comment to a post that putting carbon tax moneys into an arms-length fund might be better than putting them into General Revenue. I prefer cap-and-trade, which sounds simpler and more direct to me -- see below.]

More on cap-and-trade:


One advantage of cap-and-trade is that it does not make governments dependent on carbon revenues. The money from high emitters goes to low emitters through a private (regulated) carbon market. The incentives to reduce emissions are very clear, with no conflicts of interest. Prices on carbon-heavy products go up, but prices on carbon-light products come down, which eases the effect on consumers. Progressive income taxes and redistribution can help take care of the rest in the usual way.

_____
* You can hear the entire September 20, 2007 phone-in on the CBC Ontario Today archive site (in Real Audio format - direct link). Unfortunately, they only keep these free links for 30 days, after which you have to pay some other company for a recording or transcript.

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3 comments:

Anonymous said...

Hey,

I would have to agree that the 'tax shift' idea is a bit suspect. Basing your revenue generation on something you want to eliminate doesn't make sense in the long term. The concept, though, is sound in the short term.

I believe that the tax shift solution is attractive to the GPO because it forces the market's hand without regulating the hell out of everything, which is right in line with the Green's surprisingly right wing policies. I suspect the big idea is that if we build a clean, green and sustainable society, the government won't need to collect as much tax because it won't need to pump as much money into things like social programs and health care.

This prospect scares me. It sounds a bit like the green agenda is actually a move towards anarchy, even if they don't really realize it. If the Greens ever form a majority government, we all may be in a lot of trouble. Luckily we won't have to worry about that for a while.

But we will probably in a lot more trouble if they don't win any seats at all. They are well suited to be the government watchdogs, and frankly I'm sick of the NDP in that role.

ydzabelishensky said...

Thank you for your thoughtful rebuttal. I agree with some of your points, but not all. True, the short-term and long-term differ. A carbon tax would make a bit more sense in the short term if the Green Party had a good long-term "exit strategy". But they seem to have no long-term plan for the revenue gap, so they improvise. Ominously, for me, Frank de Jong's reply, when pressed, was to increase taxes on necessities like food, shelter and clothing. He did not mention raising income taxes back up, which would be a more progressive form of taxation.

Raising income taxes after cutting them would be going against powerful and articulate interests, though. If increasing taxes on necessities also proves politically impossible, the only solution would be to cut services.

This is where you would probably say again that a greener society would not need as much revenue because it would be healthier. And that would be a good point. With less smog, heat and toxins, and more walking and cycling, we would need to spend less on health-care. That's a major part of the provincial budget, but I'd like to see an economic analysis before I agree that's the whole answer.

I'm not sure how we could reduce spending on other social programs, though. Is poverty mainly due to pollution and bad urban planning -- or is it mainly due to other things?

I don't get your point about anarchy. Needing to spend less on treating preventable illness might shrink the size of the public sector a bit. But it's not the same thing as the Disappearance of the State.

In the end, I'm with you on wanting the Greens in the Legislature as watchdogs. I don't have to agree with them on every issue. They should have a voice because they do have many good things to say.

Speaking strictly for myself, I'd vote for the Greens under MMP, balanced with a vote for a local Liberal or NDP candidate. But I'm not sure I'd vote for the Greens under the current electoral system. Please see also my follow-up blog post.

nathaniel said...

Just a few comments on some of the posts which expound upon the regressive nature of tax shifting. The scope of potential sources of tax revenue discussed needs to be far more broad. To begin with, user fees ought to be enacted on activities and services which are environmentally or socially harmful, particularly on relatively inelastic items such as roads and airports. Imagine the revenue that could be garnered if all provincial and federal highways charged a toll, tabulated by means of a transponder, and billed similar to the way the 407 currently works. That could be a potential source of billions which, similar to other carbon-targetting taxes would decrease over time, but would eventually stabilize and still provide a sizable source of revenue. It is hard to argue that road tolls are a regressive tax since the poorest in society often don't own vehicles, and rarely travel long distances by car on a regular basis--if they do this type of tax would encourage a positive shift in behaviour to move closer to work.
Congestion taxes work in a similar way, and in effect, would likely effect the upper middle, and upper classes the most as ultimately a luxury tax for the privilege of driving to your high paying job in the city center...highly progressive.

Another tax shift proposed by the greens is to shift property tax calculations more towards square footage as opposed to taxing real estate value. If implemented in a sensitive, thoughtful and incremental way so as not to be too punitive, this is an excellent way to increase density and again is quite progressive, and does not target the poor since poverty tends to be concentrated in areas of relatively high density--whether apartment tenements, row houses, or compact tract housing.

Other examples of progressive taxes include taxes on highly processed food of demonstrably low nutrient value, on individual items of clothing which retail over a certain determined value which could be regarded as luxury, on vehicles with a fuel efficiency below a certain value benchmarked each year against the median in the industry. Food in restaurants that retails at over, let's say 30$ per plate could be taxed and regarded as luxury. Fast food could be taxed (inordinately targetting the poor, yet for the betterment of all). building materials, particularly ones with high embodied energy or high toxicity could be taxed.... professional sporting events
television commercials
magazine and billboard advertising
videogames
movies in theatres
DVD's and CD's
Pornography
Luxury goods such as sport/fishing boats, performance ski-dos, sport atv's and dirtbikes


These are just a few novel ideas that I've spouted off the top of my head...use your imaginations!!!