Why a "Revenue Neutral" Energy Tax Isn't

I disagree. Taxing energy has the side effect of decreasing pollution (not talking CO2 here). Taxing labour has the side effect of increasing unemployment.
Any tax levied by the government will increase product cost more than the tax itself. Doesn’t matter if its energy, labour or corporate taxes. That is a reason to keep government small, but the taxes you do have to levy might as well be taxed on things that have nasty side effects. Any energy production (incl solar, wind etc) have severe environmental impact and is thus a good source to tax.
I choose decreased pollution over decreased employment any day.

Willis,
Are you in a production line mode with all your frequent postings?
I find two problems with the idea of the energy taxes being proposed, whether they be called neutral or regressive or environmentally friendly or just baldly plain interventionist.
First problem is precedent establishment yielding government entitlement to escalate the taxes. The taxes negotiated initially will be threshold level in order to ease enactment of the law. But then, wham bam thank you mam (or man), the tax will escalate to suit the administration/congress/environmental fashion of the day. And more than that, the tax will introduce an economic distortion over what the free market behavior without the taxes would have been . . . . then government will intervene (again) to correct the distortion they caused thus escalating the distortion of what the free market would have done. This intervention, distortion, re-intervention, re-distortion, re-re-intervention, re-re-distortion endless cycle yields, inevitably, a totally controlled economy and authoritative government to implement it . . . . that is the path toward a total government scenario . . . . socialism=> of the totalitarian trending variety.
Thus, Ludwig Von Mises used to say,

” Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.”
Taken from his book “The Anti-Capitalistic Mentality”

The second problem is the proposed energy tax system is what I call the ‘USA’s social security system’ type illusion. The illusion I am referring to is that you give your money to the Social Security Administration, which according to government explanations, they will safely keep for you someplace. Then when you need it when you are old it is there waiting for you to reclaim. It is an illusion only, of course, the government spent the money you gave them for your social security on something else as soon as they got it. The government just raises taxes later on to actually give you the ‘neutral’ tax money back to you.
Willis, we haven’t even touched on the ever expanding bureaucratic mechanism that the government would propose to take and give you your money back. This of course will always evolve into big indirect costs.
I say forget all this energy tax stuff and give the energy industry entirely back to the free market and those lovely (in my view) capitalists.
John

I hope this is on topic as it is related to biofuel deception.

Spiegel – 17 March, 2011
“And Germans have been unusually stubborn about the biofuel E10 — the name refers to the 10 percent ethanol admixture……Many haven’t yet fully realized that E10 is an ecological swindle. People who want to help the environment shouldn’t use it. Nine large European environmental associations recently conducted a joint study which concluded that the bottom line impact of the fuel on the environment is negative…….A single full tank of bio-ethanol uses up as much grain as an adult can eat in a whole year.”
http://www.spiegel.de/international/germany/0,1518,751469,00.html

It also talks about the massive clearing of forests to make way for biofuel crops and farmers switching away from crops for food and onto crops for fuel – helping raise the price of certain cereals. The law of unintended consequences at work?

And pray tell, who pays the administration costs, I would think that it would cost a minimum of $15.00 to collect the $10.00 and redistribute it !

Dave, what does matter is that the domestic widget maker is in competition with overseas widget makers.
Slap on an energy tax and the domestic widget maker is at an immediate competitive disadvantage.
They have 2 choices
1) Go bust
2) Outsource production overseas.
Welcome to the rustbelt!

To take away with one hand and give back with the other costs money. Whatever a government does costs taxpayers money because governments are very inefficient at everything especially taxation. So any neutral tax is never neutral.

That explains why the electricity producers are so happy to promote renewables. The demand for power is fairly inelastic. If you push up the cost, people will pay more. If people pay more, the utilities get a bigger cut along the way.
Also, if electricity producers shift to dearer renewable energy, the tax goes down, the rebates and give backs go down, but the power costs more so prices are still up. That’s the bad part. The more a tax works, the worse for people because the higher costs of alternative sources of power but there’s no tax raised for givebacks.

DaveF says:
March 18, 2011 at 1:52 am
I’m probably missing something here, but won’t the widget maker be in competition with other widget makers, and won’t this competition drive the profit-margin down to $30 per widget, which it was in the first place? After all, the rule of thumb that you double costs to arrive at the sales price doesn’t have to be carved in stone, does it?
Experience in the UK after mass privatisation schemes in the 80s, well intentioned to create competition to drive costs down, free up marktes, increase freedom of choice, etc. The big muscle boys got in & gradually overtook all the others or drove them out of business, reduced cometition, & put up costs to increase profits. I have no objection to profit but were’s the competition? It was similar in the privatisation share options. Yes lots of peopl bought shares in BT, British Gas, et al. Very quickly those small investors saw the chance for a quick pound profit & sold out to the big boys, going back to square one in many ways!

Willis said: “And that’s why a “revenue-neutral” energy tax isn’t neutral at all … and more to the point, it’s one reason why taxing energy in any form is a really dumb idea. Even when it’s revenue-neutral it slows the economic cycle, and when it’s not revenue-neutral, it slows it even more.
Why will the economy slow? If we have the same amount of goods at higher prices, demand will fall and the economy will slow. It’s basic economics.”
You have misunderstood what revenue neutral means. It does not mean it will be revenue neutral *for you*. It is not the overall cost you must consider but the revenue that the Government receives from the process. You would not be getting $10 from the Government. You and all the other players in the process would see a reduction in other taxes equivalent to the $10 energy tax.
As explained at Juduth Curry’s page it is supposed to be an policy that does not alter the total revenue of the Government – replacing one tax with another. eg, working out how much an emissions tax would bring in and shaving a bit off income tax to keep Government revenues static. A reduction in income tax would leave more money in your pocket offsetting the higher sales prices you would be paying.
The merits of such a change are likely shortlived though. If the tax worked the Government would see a reduction in revenue due to falling emissions, and either increase the emissions tax rate or put up other taxes. That is where the drag on the economy would come – the Government making a change that changes market behaviour but not being prepared to ride out the revenue consequences of it.

There’s no such animal as a true ‘revenue neutral’ tax, be it on energy or anything else, even if the government-du-jour introduces this tax as such.
Come the next budget, this tax will allow a government some nifty manipulations/social engineering.
They’d claim that those above a certain income level can’t/won’t get the whole amount back because they surely would like to support ‘the poor’. So have your income tax code handy for every time you buy a widget from Willis … and the government will then also have a very good idea who buys what with their own, hard-earned money.
Next, they rise this tax. Since it’s revenue neutral, this doesn’t really matter, right?
Well – those on ‘higher incomes’ will get even less back while the government retains more.
Next, the level at which the tax will be paid back in full will be extended downwards, so more people will get less back … and so forth.
Can’t happen? Hah! Show me one government which isn’t adept at getting more out of people’s pockets, year by year!
Here in the UK, this sort of thing is called ‘stealth tax’, and we Brits have been exposed to this sleight-of-hand since 1997.

Even without the profit multiplier it’s still a bad deal, because the buyers have less money for most of the year, thus less ability to spend their money on anything. Typical consumers won’t feel the annual refund as a compensation for the money they overspent. It will just feel like inflation of prices without inflation of wages.

TFN Johnson says:
March 18, 2011 at 1:06 am

Rubbish, Willis.
Cost = $30 + $10tax – $10rebate = $30.
Price = 2*cost (lucky you) = $60.
No change. U
Unless you think the government will renege on its promise to return the tax.

Your cost line in inaccurate.
The widget maker does NOT get the rebate.
His costs still must account for the $10 ‘neutral tax’ until he recovers it. But as I’ve noted above, he does not get the rebate. The government will not distribute the rebate back to the single, rich widget maker, but rather the thousands of widget buyers. Move votes with the widget buyers than widget makers.

Willis,
1. The tax is supposed to reduce or slow the growth of CO2 emissions, so unless there’s an equal or better substitute for emitting CO2, it *must* slow the economy.
2. A tax on “the output of production” is a consumption tax. It’s misleading to speak as if it were a tax on production, although obviously it will slow down production, unless there’s an equal or better substitute etc. as I said.

Barry Dwyer said: Excellent, simple description. The pollies only talk about the part that relates to the business. So they hide the inconvenient truth that the consumer pays the tax – ie., increased price.
No, the consumer pays part of the tax. The consumer may pay all of it, but this is far from guaranteed. I’m not speaking of the legal arrangement. I’m speaking of the economic loss. This is in economics textbooks, and it is not controversial.

As a thing of note, the multiplier of 2 that Willis uses does not really mean that company that produces said widget is making 100% on it. Majority of that multiplier is going to pay for distribution and retail. The end product is going to wholesaler, then to local distributor, then to a local store shelf, and so on. Everyone in the chain has to make money. Depending on the product, multiplier can be as large as x3, while profit margins could be 15%-25%.
By charging tax on the “front end ” of production cycle, any multipliers that are applied to the cost of the product will be applied to the tax as well, and had to be applied to rebate to be revenue neutral on all of the levels of the distribution. That will require exact knowledge of multiplication factor at every level and will make cost of collection enormous.

Dr Curry is my hero. Truly.
If Mr Willis respects her blog, that says everything.
No?

Here in Australia, we are in a pitched batttle with the government over a carbon [dioxide] tax. But not all Aussies are fooled. We video interviewed people in the street in Sydnety CBD and it is clear to everyone that we will pay and pay – for virtualy no benefit. The greenies however think the symbolic act of a 5% CO2 reduction is worth the pain.
See Here.

John Johnston, “I am old enough to remember the oil shock of the 1970s, when OPEC flexed its muscles and oil prices went through the roof. Funny, it didn’t reduce oil consumption”
There is a simply reason for that, the economically illiterate Richard Nixon introduced price controls. That was the real problem not OPEC. If prices are not allowed to rise based on supply and demand then you will wind up with shortages, thus the gas lines. Consumption had no incentive to be reduced because the price still artificially looked affordable. Increased prices send the signal to consumers to reduce their consumption and for producers to increase their production. If the government stayed out of it, producers would have moved to find alternative sources of oil sooner as they eventually did with the North Sea and Prudhoe Bay. All OPEC can do by raising prices is make sources of oil that were not economically viable before now become economically viable. Thus the market forces OPEC to keep their prices lower not higher.
This same problem will happen again if our economically illiterate president starts pushing “price gouging” laws.

mod could you delete my first post thanks 😉
I don’t think the example stacks up, there is still that extra $10 the widget company has which will ultimate be passed on to the consumer, as other people point out due to competition.
secondly, ummm I think people are missing the BIG point about a carbon tax – i.e. the widget maker will be forced to find ways to use less energy, after all he is competing with overseas manufacturers also – and there are always ways to improved efficiency. Less energy use = less oil dependence, less pollution, less handing over barrels of money to middle eastern countries …
as for the widget manufacturing going overseas, don’t you worry about that- the price of energy is going up and with peak oil it will go up still, companies that have implemented energy efficient manufacturing are going to have a huge advantage in the future, while inefficient companies are going to struggle

Regardless of who gets the rebate, an unavoidable consequence of the increased cost of the product is fewer sales. As a result, the producer has to increase how much he charges per unit to make up for the decrease in volume. This leads to a spiraling effect of an even greater decrease in sales, which in turn leads to a greater incentive to increase prices.
And then, all too often, this spiraling decrease in sales and increase in prices leads to a total collapse of the supply and demand dynamic, with the consequent closing of businesses and the disappearance of entire professions. Anyone who has been paying attention can give a long list of such products and services that have essentially disappeared in the past 50 years. And a large percentage of those losses have been caused or accelerated by government regulations and taxes. Revenue neutral taxes are part of that government induced gangrene that kills business.

I think Willis was using a simple example to show that revenue-neutral taxation isn’t really possible (and I strongly agree with him).
Anyone I know who runs a successful business (including myself) bases his/her prices on costs with some form of markup (Willis used 100%). Yes there is the issue of supply and demand but you can’t run a business where the demand forces you to charge only a 10% mark-up. Supply and demand is the differential to your cost+markup. And 100% markup is fairly conservative especially where there are high up front capital costs or long inventory times.
Another way to look at this is to assume your gross margin should be about 50% (direct costs taking up only half gross revenue). Then you subtract fixed costs (such as overhead), then depreciation, amortization and taxes.
If you run a business where a tax has been buried into your direct costs, you have to factor that in to your price. Just think about your cost of capital, for example.
This ignores the fact that implementing a tax is not 100% efficient. It costs the government money to implement it.
So why not just charge people an energy tax directly but make it lower. People can see the tax, they can relate it to their energy consumption, and then they can vote you out of office at the next election. Oh…

Sadly, this post shows exactly what is wrong with “skeptics”.
Willis applies “common sense” to economics. But if you could do economics by common sense, then no one would pay economists. If Willis were to try harder, he could probably come to an analysis of the situation which would agree with economists, and rather more closely match reality. If he tried really hard, he might even show that some economists are wrong, in some minor way that doesn’t really matter, but wrong none the less.
This is, of course, exactly the tactic that “skeptics” have used against the science of AGW. First they tried “common sense”, and were shown to be wrong. Then they tried to go toe to toe with climate scientists – e.g. by claiming that many terrestrial temperature measurements were corrupted by local warming. The end result? Little if any difference. Why? Because the scientists, being professionals, had thought this stuff through and allowed for it already.
So, how about you stop doing “amateur hour” here. If you want a post about the effect of a revenue neutral carbon tax, get an economist to write it. That way we can all be enlightened, which is so much more interesting than having a bloke who knows no more than us tell us what he thinks.

There is a lot of myopia in Eschenbach’s blogpost.
It is true that the carbon tax puts a burden on businessmen. They have to consider a tradeoff between paying to emit CO2 into the atmosphere, or investing in clean energy technology to avoid this.
The purpose of the tax is to make the consumer change life style and reduce the consumption of energy or energy sources which emit GHG’s. If one accepts the necessity for doing this, there is no “free lunch”. Adding bureaucracy for this function is unavoidable.
In fact if we look at the state of economic affairs today, the wealthy capitalist has been getting the main benefit of the improvement in productivity in the US economy, while general public has lost ground. The distribution of wealth has continually been skewed toward the wealthy. They can afford a lower rate of return and live well, while reducing the burden on climate change of the industry that they own and control. In addition the life style they have does increase the emission of GHG’s.
I understand that Eschenbach doesn’t believe that GHG emissions are a problem but that is another discussion.

Where in the US constitution is the government given the power to do this? I can’t see it. The states can do it. But, I can’t see where the federal government has the authority.

Re: SideShowBob

i.e. the widget maker will be forced to find ways to use less energy, after all he is competing with overseas manufacturers also – and there are always ways to improved efficiency.

If that where the case then ultimately the widget maker would end up using no energy.
The reality is that every business looks at its costs and works out what is best for them. This includes energy efficiency. We have just being going through a pretty bad recession and businesses have been looking at anything they can do to survive, do you really think they will have ignored energy savings?

At 603 AM on 18 March, Bruce Cobb had written:

As a glass craftsman/Artist (with fairly high energy usage) I don’t produce widgets, but the same principles apply. First, a nitpick; the 2x cost principle would relate to the wholesale price, not retail, and that 2x would be at minimum. The reason is that there are a whole truckload of costs which aren’t included in the production cost, including what has been invested in equipment and maintenance/repair of same, R & D costs, sales/marketing (yes, it does cost money to sell at wholesale), profit margin (without which a company would go bankrupt), and production losses (not all widgets make it all the way through the production process, and some will get weeded out for various reasons – quality control).

–
Gawd, is anybody else reminded of that one single greatest scene – as a snotty professor in a business course begins to lecture about a hypothetical manufacturing enterprise – in Rodney Dangerfield’s Back to School (1986)?

Thornton Melon: Oh, you left out a bunch of stuff.
–
Dr. Phillip Barbay: Oh really? Like what for instance?
–
Thornton Melon: First of all you’re going to have to grease the local politicians for the sudden zoning problems that always come up. Then there’s the kickbacks to the carpenters, and if you plan on using any cement in this building I’m sure the teamsters would like to have a little chat with ya, and that’ll cost ya. Oh and don’t forget a little something for the building inspectors. Then there’s long term costs such as waste disposal. I don’t know if you’re familiar with who runs that business but I assure you it’s not the boyscouts.
–
Dr. Phillip Barbay: That will be quite enough, Mr. Melon! Maybe bribes, kickbacks and Mafia payoffs are how YOU do business! But they are NOT part of the legitimate business world! And they are certainly not part of anything I am doing in this class. Do I make myself clear, Mr. Melon! Now, not withstanding Mr. Mellon’s input. The next question for us is where to build our factory?
–
Thornton Melon: How ’bout Fantasyland?

–
The criminal predators – and that includes the officers of civil government – make their demands, and the honest businessman must budget the costs imposed thereby.
The alternative is to be destroyed by those predators, pour encourager les autres.

Interesting but it would be better if it was possible to find examples in reality. If the taxes have been raised in one country but not the neighbor, it should be possible to see if companies have increased their profit.

Free junk for junkies – just say NO
Free guns for crazies – just say NO
Free alcohol for alcoholics – just say NO
Free money for governments – just say NO
You know it makes sense.

The article is basically acurrate on pricing, but many of the commentors don’t agree. I hope this real pricing information of plastic bags from about 10 years ago will help the discussion.
We normally sold the bags in the $12 to $18 dollar per box range. The sales manager would price as follows:
Factory Price $6.50 per box + Freight per unit from factory to customer $1.00 for $7.50 direct costs. These are all hard costs that he looked up.
Next he would look up the payment history of the big box retailer. He would find that last year, they paid 89 cents for every dollary billed to them. He then looked up percentage promised to the outside broker (15%). We had a standard markup for the distribution of 17%. He then added the numbers (11%+15%+17%) for 43%. He then divided 7.50 by .57 for a price of $13.16 per box. This 13.16 price is close to double the 6.50 factory costs, and this is where the rule of thumb comes from.
Now lets add energy tax. Since plastics bags are mostly resin (natural gas) costs, the factory costs would now be near $10.50. (This is a 10 pound box, with 40 cents per pound resin, 25 cents per conversion costs. The resin is double in price.) And i will Assume freight goes up from 1.00 to 1.50) The new base cost of $12.00 is divided again by .57 for a new selling price of $21.50. This price is again near double the factory costs of 10.50. Also note a $4.00 change in manufacturing costs resulted in a little over a $8 increase in selling costs.
These are real numbers that were typical for a plastic bag seller, that produced interally, purchased from domestic manufactures, and imported bags. I hope this illustrates why a 2 to 1 markup is a common rule of thumb, and best simplified way to estimate retail price changes due to energy cost changes to manufacturing. These examples are for the United States, and other markets may be organized in a different manner.

@ Don K, and Willis
If the government tries to add a $10 tax to the price of a $30 good then the seller will try to pass on the tax to the customer. Initially the good sells for $30 + $10 tax = $40. However, some customers will no longer buy the good because the price is higher, which creates some inventory builid up. Faced with rising inventories, sellers must lower their price, for example by $5, to $35. Furthermore, the industry is selling a smaller quanitity than they did before the tax, because as the price falls, some sellers decide to sell fewer units, or drop out of market.
The result is that sellers in the market who were getting $30 before the tax, are now getting $35 at the cash register, but must send $10 to Uncle Same, so sellers’ after tax take home $25. $5 less than before the tax. The customers are paying $35 which is $5 more than before the tax.
Thus, the buyers and sellers split the $10 tax. Both are worse off, until the government spends the tax revenue.
If the government gives $10 back to the customer, then customers are $5 better off after the tax, and some sellers will have to shut down.
A win win for progessives. Redistribute some income from capitalists to potential voters and reduce carbon emissions by driving some sellers out of business.

Re: tom in indy

Furthermore, the industry is selling a smaller quanitity than they did before the tax, because as the price falls, some sellers decide to sell fewer units, or drop out of market.

Sell fewer units = reduce workforce, become a smaller company.
drop out of market = go bankrupt
So the net effect of your idealised scenario is less industry and fewer jobs.

Some people have engaged in some great fallacies here. First of all, a tax is a tax. There is not, and never will be, one kind of tax that reduces pollution, and another kind of tax that increases employment. ALL taxes reduce (private sector) employment. All taxes slow the economy. Taxes never have the DIRECT effect of reducing pollution.

Willis – as a generalist you are not bad! But reading through the comments, I found some who touched on parts of what I wanted to say (my education is economics, my occupation is network engineering). So I will just list the person who made a point, and then respond to each.
H.R. says:
March 18, 2011 at 2:11 am
HR was the first to bring up the overhead issue, and a very good one. Not the company overhead, but the bureaucratic overhead. There has to be mighty midgets in DC that adminster it and their cost will not be reimbursed. Hence it is a revenue hole just for that reason.
Willis Eschenbach says:
March 18, 2011 at 2:37 am
Ira Glickstein, PhD says:
March 18, 2011 at 5:24 am
I lumped these 2 together since they are really about the same issue – competition. Willis states the companies can increase the price since all are affected, and Ira disagrees for the same reason. Yet both missed an important supplier. WE (the USA) can go ahead and shoot ourselves in the foot with the tax. And it will nail every DOMESTIC manufacturer with the additional cost, so if they were the only ones supplying it works fine. Prices go up, the government remits a pittance, and the lemmings are happy “SEE what I got from the GOVERNMENT?”. (The same people who think they get a tax refund at the end of the year when they file).
In reality, we are a world market. So Joe Blow in Thailand makes the same product – there is no way to determine the energy he used, so sells it cheaper. And another job is shipped overseas. But-but-but you say (not you as in Ira oe Willis – the proverbial you)!!! We will charge tarriffs on the imports! Smoot Hawley anyone?
So the energy tax is great! For foreign manufacturers. not the US and not for our “suffering” manufacturing sector.
Tom in Florida says:
March 18, 2011 at 5:40 am
Tom brings up a very good point that is not rebatable and is in effect in almost all states. Sales tax! The price is higher, so the tax is more and again the consumer loses. The states are not going to lower their taxes! They are busted already!
And finally, the key idea that Willis over simplified but is highlighted here:
Allanj says:
March 18, 2011 at 3:36 am
Alln correctly points out that while we (the consumer) look at whole dollars, business does not run that way. They deal with margins. Why? If you make $1m on sales of $1b, you do not stay in business long. The investors will take their money to a 1% CD! So they have to get a decent return (as expressed as a percent since that is the way investment is rated) or people do not invest!
And while the tax is collected by the companies, they have to front the cost – so it is cost of doing business (money) and they have to get a return on it. So that extra $10 dollars in Willis original example is a return on the money people invested – in other words, their return for lending the business money (no one is going to get 100% return – Madoff is in jail – so that is why Willlis’ example is simplistic, but accurate).
Reading through the comments, I was worried that no one was going to get it. But many did as you see from the list of comments I noted – and I stopped on the first one I saw that made the points I brought together, so many more probably made the same points. For the ones that still do not get it – do you get any interest on your savings? Or do you pay the bank for saving your money in the institution?

Willis: You forgot the cost impact from government overhead. Our federal government consumes at least 50% of every dollar of tax revenue or borrowed money from the cost of its performance, duplication, inefficiency, incompetence and fraud. Thus, the government’s cost of redistribution of $10 is $15 that must come from other tax receipts or additional borrowing. Since the energy tax is regressive, lower income taxpayers get the double whammy.

vindsavfuktare says:
March 18, 2011 at 1:52 am
“I choose decreased pollution over decreased employment any day.”
Unless it’s YOUR job, pal, right? Of course, you probably prefer that the government and the taxpayers take care of you from cradle to grave, so your indifference to the issue is even more criminal. Such fraudulent dichotomies as you present are the reason why we are in the state we are in America these days.
Willis, I liked your post, again. I would add to your example the following: what if the government picks and chooses to subsidize some of those competitors of yours (for whatever noble, environmental reason – /sarc), thus enabling their price to be $70 per widget instead of $80? And this widget in the absence of the subsidy would otherwise cost $100 per widget and not be as effective a widget as yours? That sounds familiar, doesn’t it?

Don K says: “So, what we probably need to do is figure out how the tax shifts the supply and demand curves and see where the new equilibrium point is. I haven’t the slightest idea how to do that. I’m not sure that anyone does.”
As smokingfrog says, this is basic economics and not controversial.
If gov’t sets a tax on production, the whole supply-price curve moves up on that supply-demand curves you mention. The tax is then shared between suppliers and consumers, depending on their relative bargaining power. This is closely related to the slopes of the two curves.
The slope of the demand-price curve is called the “price-elasticity of demand”. If demand is highly elastic (a flat line), producers have no choice but to bear all of the tax. If they tried to raise prices, demand would be killed-off immediately. This may be analogous to the above comment that widgets would simply be imported (assuming the imports don’t bear the same tax on arrival).
If demand is highly inelastic (vertical demand-price curve), producers can pass all of the tax onto consumers. This is the case where consumers have no choice but to pay-up (e.g because the’re addicted). This case appears to be the underlying assumption of Willis’s analysis where a rise in prices can simply be imposed on consumers with no consequence on consumtion. But it is not genrally true and it’s where Willis’s analysis falls down.
Similar arguments can be made for the supply side (the slope of the supply-price curve being the price elasticity of supply). In the end, it is the relative slopes that determines who bears relative shares of the tax.
You will sometimes hear business people saying how taxation is killing their business. This is why.
In fact there is a completely different reason why Willis is basically correct, if the point were to be rephrased as taxation not saving CO2.
If the tax revenue was simply taken out of the economy (throw the tax raised into a furnace), demand would be reduced and CO2 could then fall. As soon as the gov’t spends any money (or however else it returns the cash to the economy), the resulting economic activity will result in CO2 emissions. The only question is who spends the cash and who is then responsible for the CO2 emissions.
If the gov’t spends all of the cash, the tax has simply “nationalised” CO2 emissions.
There is a fair point about administration costs above – even if the gov’t wanted to return the cash to consumers. In this case, part of the CO2 emissions would then be “nationalised”.

Like the government is really going to refund the tax. Why would it collect it only to refund it? A carbon tax is just another scheme for government to loot the people.

Gotta Love this!
http://abetz.com.au/news/its-not-easy-being-green

John Brookes says:
March 18, 2011 at 7:27 am
Sadly, this post shows exactly what is wrong with “skeptics”.
Willis applies “common sense” to economics. But if you could do economics by common sense, then no one would pay economists. If Willis were to try harder, he could probably come to an analysis of the situation which would agree with economists, and rather more closely match reality. If he tried really hard, he might even show that some economists are wrong, in some minor way that doesn’t really matter, but wrong none the less.

Mr. Brookes, Willis is right and you are clueless. A lot in economics is common sense – but common sense is in short supply. So yes, Economists have jobs because people do not think or use common sense.
You would probably make a better argument by not damning your side so badly. Clearly you have no clue, yet pontificate against those who do. Much like the rest of the AGW cabal. They have proven nothing, nor is the duty or obligation of the skeptics to prove anything until the AGW does PROVE something. So your diatribe against skeptics is actually a condemnation of the AGW side since they are the ones guilty of the transgressions you list.
That plus you really have no common economic sense, so that is why We have jobs.

Jordan,
“In the case of VAT, businesses collect VAT on sales and offset against VAT paid on input costs. The difference is due for payment, and should be cash-positive (if sales value is greater than costs). Taxes on profit are due after the profit is earned. Again, cash-positive. I could give other examples.
Take a deep breath Willis and count to 10. While you are doing that, here’s something you might like to study: ”
Take a deep breath Jordan, here’s something you might like to consider. The carbon tax that Willis is talking about (and that Hansen et al have advocated), is a tax levied at source on the carbon content of fossil fuels. For the businesses purchasing energy, the tax is baked into the cost – a bit like the duty in petrol is baked into the price. There is no way the business can claim back that duty (as it can with VAT). This makes it different from either VAT or corporation tax – the former is reclaimed and the latter is not paid unless a profit is made. A price on carbon is a price the business must pay, whether it makes a profit or a loss.

Douglas,
“John Brookes. What a pitiful item you are. Your statement is simply a bit of ad hominem. You add nothing. Go away.”
Yes, but a quite skillful example of sleight of hand, though. He starts by talking about common sense, and links that into AGW with the non sequitor “This is, of course, exactly the tactic that “skeptics” have used against the science of AGW. First they tried “common sense”, and were shown to be wrong.”
Since the reader has been primed with the meme of common sense, he subconciously accepts the smuggled premise that sceptical arguments against AGW are based on common sense – and therefore must be flawed.
Somebody should tell Lindzen, Spencer, Pielke etc that their research isn’t science at all – only common sense.

Ira Glickstein, PhD says at 5:24 am
The revenue-neutral carbon tax… would be charged at the port of entry, mine, or well for all fossil fuels… [and then the government will] distribute the money to all citizens and legal residents!
Since when? Will I get a check every month from the government for my energy expenses? Is this going to work like Social Security or Obamacare?
When ever in history has a government wealth-redistribution scheme worked? It didn’t work in the USSR. It hasn’t worked here.
You gotta love the Ph.D.’s who think they can command and control the economy and thereby impart “welfare” to the pipple. Just let us geniuses monkey with supply and demand and the peasants will all be better off!
“Ve vill fleece you, but then ve vill give you your money back?” It’s beyond laughable. Crooks do not willingly return what they stole.
Note that gas at $4/gal isn’t high enough to satisfy. The Ph.D.’s want it to be $10, $20 $1000/gal, so that the economy grinds to a halt and inflation explodes. Then what, Doctor? If you’re not lined up against a wall by the angry mob, you will find yourself hoeing potatoes at the Pipple’s Farm. Come the Revolution ain’t gonna be no more limousines, but there will be short-handled hoes for Ph.D.’s, I guarantee it.

John said at March 18, 2011 at 12:35 pm:
“Gotta Love this!” …on the list of things that the Greens are demanding that Julia Gillard and Labor support? …Relax anti-terrorism laws in Australia.
From The Australian 1 May 2008:
“ASIO can detain a person for up to seven days for questioning even though they are not suspected of a terrorism offence. That person can be jailed for five years if they tell anyone in the following two years what happened to them.
Where people are charged with terrorism offences, information can be given to the court but denied to the defendant and their lawyer on national security grounds: a clear breach of the principle of a fair trial.”
Eric Abetz and his cohort are no less interested in authoritarian control than the Greens. All of our politicians IOW.

Vince Causey says:
“The carbon tax that Willis is talking about … is baked into the cost – a bit like the duty in petrol is baked into the price.”
Vince – you are adding nothing by making these points. If there is any unavoidable tax paid by a business, it could be argued to be “baked into” costs in some way or another. You are not making a case to say there is something unique about CO2 emissions as a taxable event.
I used the example of VAT and corporation tax to illustrate how taxes are generally not cash-negative to businesses. I could add other examples. But it was wrong to say business must fund every dime of tax.
Please look at that link I added above – it explains why taxes on business are shared between business and their customers. The argument that business can simply pass-through cost (including tax) plus a mark-up is contrary to basic economics.
(The exception is totally inelastic demand – but that almost never happens so we don’t have to discuss it.)
“A price on carbon is a price the business must pay, whether it makes a profit or a loss.”
This adds nothing to the discussion. It is not unique to CO2.
I agree that CO2 taxation is wrong if the goals of the AGW catastrophe theory are supposed to be the justification for the sacrifice. As I dispute the AGW catastrophe theory, I happily agree that CO2 taxation will be bad for business and therfore bad for consumers. But trying to say CO2 taxation (or energy taxation) is in some way unique as a basis of taxation is not supportable.

A $50/ton carbon tax would add dimes to the cost of most ‘widgets’ rather than $10, so the math isn’t as drastic. Of course, I want the revenue to be returned as an energy efficiency subsidy (home insulation, passenger rail, etc) rather than cumbersome wealth redistribution.

Bob Maginnis says: “A $50/ton carbon tax would add dimes to the cost of most ‘widgets’ rather than $10”
A great point.
Small taxes are not controversial because people don’t notice them. But they also do nothing to change behaviour and are ineffective if the purpose is to reduce CO2 emissions.
Big taxes can change behaviour. But they are noticeable and people get mighty brassed off when they are taxed out of choices.
The response of the electorate is to threaten their political representatives to justify the sacrifice, or to back off. Unless the case is uncontrovertible case (in which case the question never arises), the pressure is on the representatives to back off – and that’s what they will do.
CO2 taxes will only ever achieve anything when the threat of the CO2 catastrophe theory is demonstrated beyond reasonable doubt Not in the claims of the (so called) scientists, but in the minds of the electorate.

Another carbon limiting scheme is Tradeable Energy Quotas, which are basically vouchers, distributed to everyone on a per capita bases, which are required to purchase fuels. Those who conserve sell their TEQs to those who use more fuel. The market takes care of the distribution. No government involvement necessary, except to issue the vouchers and track for counterfeit.
A side benefit is having this carbon-based (reality-based) currency on hand when fiat currencies go by-by.

Willis you nail it again, here in Canada we are due for the annual wail of, productivity is falling in Canada, happens every year about this time. When we are taxed to the point of absurdity and our government lies about all benefits they pretend to provide, our answer has been to earn less, tradesmen refuse overtime, small businesses limit their known income, we go fishing instead of investing our effort in creating anything as our government steals over 1/2 of the return on our labour and then rewards clueless authoritarians with highly paid well benefited positions to oversee us.There is no revenue neutral tax there is only theft by authority through tax, fee, permit, licence and any other code words. Canada is going broke and we can all see that govt can not provide the benefits (bait) they insisted would flow from the endless taxes. Many here have taken govt jobs to hasten the end, thats a common joke among our work force. For at least as a govt employee you do not pay tax, you are just lied to as to your hourly rate of pay.
How can you tell its tax filing time in Canada?

One twist in this example:
When the widget price goes to $80, or even $70 if the widget maker doesn’t mark up the tax, the widgets made in China, or Zimbabwe or wherever, will continue to sell at $60 (or for whatever they were selling before the tax), thus creating (or increasing) the price difference.
The government (in Australia) said that they will compensate consumers, not manufacturer. So I will collect my $10 from the government and buy the Chinese widget. What is going to happen to Australian manufacturers?

Willis, don’t take it as a personal attack or ad hom, but the truth is I really do want to see what an economist has to say. I do think that you are wrong in your logic – but me arguing with you is silly, when there are highly trained economists out there!
What about asking Stephen Levitt (co-author of Freakonomics)? He has the knack of making economics comprehensible to the layman. We readers here would go away knowing stuff we didn’t know before – and that has got to be good.
Why, I’ll bet, Willis, that even you wouldn’t mind knowing a bit more than you do now.

Willis Eschenbach said:

Smoking Frog says:
March 18, 2011 at 4:31 am
… 2. A tax on “the output of production” is a consumption tax. It’s misleading to speak as if it were a tax on production, although obviously it will slow down production, unless there’s an equal or better substitute etc. as I said.
[Willis] You’ve missed the point entirely. I was making a distinction between a tax on the inputs to industrial production (mat’ls, labor, energy) as opposed to a tax on the output of industrial production. Those have different effects.
I don’t really see that I missed the point. I recognize the distinction, but I think a tax on “the output of production” is more appropriately called a “consumption tax,” and I’m not persuaded that its effects are very different from those of a tax on “the inputs of production.”
I might be wrong about some aspect(s) of that (e.g., the effect on investment), but I don’t see your argument that the widget maker “has made ten dollars extra for the same widget,” because I don’t see that his price/cost ratio will still be so great as 2X. Even if it’s still that great per widget (which I doubt), he’ll be selling fewer widgets.
[Your whole post was italicised – I have removed the second iteration of the html tags around what ‘seemed’ to be your reply – hope I have got it right ~jove, mod]

Another combatative and bombastict post from Willis Eschenbach
Willis: “Quote? Cite?”
Simple – look at any balance sheet with a current liability called “tax” and net current assets where creditors exceed debtors. I even gave you examples. If you cannot grasp that point then I don’t know what else there is to add.
Willis: “I’m not going to guess what you are raving about”
I know. But attacking me (and Ira and others) doesn’t disguise your nakedness. You clearly don’t understand why your basic argument above is wrong and you are too emotional to try.
Willis: “I know I never said anything that asinine about funding businesses.”
I know Willis. But I did . And you have not been able to understand the linkage sources of cash and funding of a business and therfore why the point was relevant to the debate above.
Willis “My friend, my most recent job was as Chief Financial Officer for a company with sales of $40 million a year, so don’t even think about lecturing me on how businesses fund their actions.”
I don’t know what I can add to that, except to wonder how those around you managed to prop you up against your own incompetence.
Willis: “Can you say the same?”
Yes I can, but I’m not going to get into the game of comparing the size of fallices. You’ll just have to guess.
Willis: “You’re poking a hornet’s nest with a short stick, go away before you get hurt.”
OMG. Your nakedness is complete with that kind of empty threat.
Willis: “come back when you have something substantial to say”
I’ve said everything I need to help you understand why your are wrong. It has become a waste of time and I’m done with being attacked.
Willis: “If you have plenty of other sites, well, don’t let the door hit you in the backside on the way out.”
I can see you were never in charge of the marketing department. I wonder how Anthony feels about you showing the door to his suppoters for daring to disagree with you. I’ll accept your apology or I’ll consider taking up your offer.

Jordan wrote:
“Small taxes are not controversial because people don’t notice them. But they also do nothing to change behaviour and are ineffective if the purpose is to reduce CO2 emissions.
Bob says they are not ineffective if the tax revenue is used for energy efficiency that would otherwise not happen.
Ira G says: ” If the higher costs of fuel justifies better insulation of my house, I will do so. If driving my car a long way to work now costs too much, I will decide to put up with the inconvenience of car-pooling or public transit. My money, my decision.
Bob says, if you are a renter, you won’t want to make a long term insulation investment in the landlord’s property. If you are a slumlord, you won’t care. If you want to take public transit, it might not be there without public subsidy.

Jove, yes, you got it right. Thanks. I noticed my error right after I had posted, so I posted a short message pointing out where my reply began.

Jordan you are a fake. Goodbye.

Sorry for getting Ira’s gender wrong.
Steve – your comment is incorrect.
Willis – Well I don’t know how you leapt to the view that I called you a liar. Your ability to interpret is still obscured by your emotional condition.
Willis: “You walked in the door, and the first words out of your mouth were that I was way too aggressive”
No – my first post here was “March 18, 2011 at 11:29 am” where I initially pointed out (politely) that I found your basic argument wrong because pricing in a competitive market is not simply a matter of totting-up your costs and demanding that payment from your customers.
But when I saw your dismissive tone towards Ira and others, I followed-up with a reply to you which was much more aligned to your own combatative style . And boy-oh-boy you didn’t like it did you.
First law of getting on with people – speak to others as you would like to be spoken to yourself.
And here’s one from the schoolyard: if you cannot take it, then don’t dish it out.
To repeat -in the land of idiotic businessment, it is your competitors who are the idiots for limiting your profits.
Another tip (if that’s not too patronising): shouting from authority never works. Not in science and not anywhere else. You may or may not have been CFO for a $40M company (I basically don’t know because I don’t have evidence either way). I don’t know how successful the business(es) is/was, or how tough (competitive) the market is/was, for how long you kept that post, how you performed, or why you left. Without the full context, the basic claim doesn’t add much.
In view of what I saw as an incrorrect analysis above, I was entitled to bring that to your attention. And your refusal to respond on the substance of the matter led me to questioned your competence when you started bleating in that combatative style you like to dish out (but you cannot hack when it comes back to you).
Willis: “You started to lecture me as if I were an infant.”
No – I was explaining my reasoning, and there may have been others on the thread who could have used an explanation of net current assets/liabilities to understand where I was coming from. Your emotional state coloured your vision. But your comment does say a lot about your emotional state.
Let me sum up:
Your statement on pricing and taxation is inconsistent (I’ll avoid the word “wrong” ) with generally accepted reasoning on competitive pricing. Link given above to let you see where I was coming from.
A lesser point (which came from your post to Ira), I don’t agree with your claim that business funds every dime from shareholder funds (and therefore deserves a return on assets on that amount). It is more complicated than that since the balance of current assets/liabilities is a potential source of funding, and the balance of taxation (all forms) does not necessarily leave the taxman sitting on cash (sure, it can do that, but I believe those situations are not the norm). And whether businesses earn a return on any dime has as much to do with the competitive environment than their cost base.
On taxtation, I referred to some business accounts to show how they have a large current liability for tax due. This combines with the timing of payments in current assets and liabilities to complicate the question about whether “baked-in” taxes paid on inputs are cash-negative to business.
Willis: “I hope you can learn to talk about science on science websites. ”
Your arguments on this thread were economic.
Willis: “I hope you can find a situation where you don’t have to hide behind an alias to state your opinions.”
Yes I have – it’s no longer an issue.

Jordan,
As you are savvy with financial statements check out the government of Canada return for 2010.
Most people don’t know they have “energy tax” as a line item under revenue having raised over $7 billion last year.
It would be interesting to note how they would show a new energy tax.
BTW that line item under revenue shows up in the many corporate financial statements under cost of production.
A few other tid-bits: the cost of running the government is about 17.5% of revenue.
Crown corporations cost more money to run than they take in – they operate at a loss.
It would be interesting to see how a revenue neutral tax could be implemented knowing this.

Steve:
“Anything that shows up on the liability side of a financial statement has negative cash flow issues. If you doubt that, just stop paying your liabilities and then let me know how that worked out for you.”
You mentioned accruals. Without trying to lecture, accruals are due to the matching principle: businesses report revenue and profit for a reporting period which is not the same as the timing of cashflows. A current liability sits on the balance sheet to show the business has the benefit of cash not paid out (and therefore not cash provided by shareholders).
The other side of this is current assets (typically trade debtors) for payments due to be made to the business. Basically other people sitting on your cash. It’s great to have the sales and profit, but even better to have the cash as early as possible.
So – in terms of how you are funding your business … a current liability is “cash positive” and a current asset is “cash negative” (excuse the jargon).
A really fortunate business (with no competition) could simply pass a new tax into its prices with no loss of volume. Reported profit could be neutral. The change in cashflow position would depend on relative payment terms for trade creditors and debtors (and perhaps change in stock).
A more realistic case is a business that cannot pass the tax straight onto customers due to competitive pressures (including product substitution). Reported profit will fall because the increase in cost was not simply passed onto customers. But the net cash position depends on relative payment terms. If it has increased its prices by some amount there will be more money due to come in. Change in net cash position after the tax is introduced is then dependent on when it is due to pay its trade creditors – it could even be cash-positive (but, I should stress – profit negative).
There is another point worth making. There will be a “taxable event” where the taxman identifies a tax collector business at some point in the supply chain. This is the point where the taxman intervenes to calculate and then collect taxes. Everything else is a knock-on consequence along the supply chain. Tax is usually due after the taxable event – so the tax collector business will have a creditor for the new tax due (they get the cash for a while). The tax collector business may well suffer its share in reduced profits, but it is likely to be cash-positive and its accounts will have a large tax charge in its current assets to show it.
After all of that, I do absolutely agree that a carbon tax is bad for both businesses and their customers – especially when it is being raised for some notion of saving the planet from something which (I firmly believe) is essentially harmless.

Jordan,
Thanks for your post. Sorry for the fake statement.
I could quibble a bit about corporate taxes factoring into cash flow but there are tricky things happening out there, such as carrying losses forward. We never had that problem.
Cheers.

Willis – I will reply to your post this evening UK time (no time right now).
If you get the chance,you still have not explained were it was in the above text that I called you a liar. I would appreciate an explanation.
Thanks.

Willis – sir, I respect you for your last post.
I thought I had been turfed out when you showed me the door and Anthony stepped in to give me a shove.
Please don’t think I’m posh or an academic. I’m from ordinary stock , I work in the private sector and I don’t have a PhD. Like everybody else who shows up here on WUWT, I come with my own particular package of background, experience and knowledge.
I accept your points about cultural differences. But please keep in mind that you present the face of WUWT to the world. Style and presentation can count for a lot.
I don’t mind hard-fought battles. But WUWT needs to keep a cap on acrimony:
To the convinced, acrimonious debate sings to the gallery and doesn’t change much. It might even encourage a gang mentality and a closing of minds.
To the unconvinced, it is likely to be a turn-off.
To opponents, it is a spoiling tactic whihc can be used to deflect the arguments.
I know that I was winding you up and I am sorry for doing that. But there came a point when I though WUWT should have a glimpse in the mirror.
I have a great deal of admiration for what people like you, Anthony and Steve are doing. For the personal quality of your last post Willis – I will say that you have a friend in me.
On the subject of the thread, I have added further explanations in answer to Steve. We could discuss it more, or we could move on. Personally, I’d prefer to move on.