Why a "Revenue Neutral" Energy Tax Isn't

Guest Post by Willis Eschenbach

Over at her excellent blog, Judith Curry is hosting a discussion that in part is about “revenue-neutral” carbon (in reality energy) taxes. This is another example of where being a generalist is an advantage. I’ve started and run businesses, so I know why revenue neutral isn’t neutral at all when it comes to an energy tax.

 

Figure 1. The money doesn’t always end up where you think it will go.

The reason that energy taxes are not revenue neutral is that although the government does indeed return the taxes to the consumers, there is a hidden effect working under the radar that most folks don’t think about.

A businessman prices any product based on how much money he has in it. A typical rule of thumb for manufactured products, for example, is that your product should sell for around twice what you have directly invested in producing it.

So a typical product cost analysis might look something like this:

Widget Production Cost = $10 materials + $10 labor + $10 energy = $30 total cost per widget

Widget Sales Price ≈ 2 * Widget Production Cost ≈ $60 per widget

The businessman has to do that, he or she has to get a percentage return on the money that they have tied up in the product. So I go in and buy a widget, I pay $60, and go home happy.

Now, remember that the deal with a “revenue-neutral tax” is that the consumer is supposed to get the money back from the government. According to the pundits, this means that a revenue-neutral tax won’t slow down the economy, since the taxes aren’t removed from circulation, instead they’re returned right back to the consumers. We’ll ignore the details on how that is supposed to happen in a fair and equitable manner, although that’s another interesting can of worms. For our present purposes, we’ll leave that worm tin hermetically sealed and just assume that the US Government in its brilliant wisdom has decided to impose a $10 tax on the energy that’s used to make widgets. To balance that out and make it all revenue neutral, they’ll give you that money back as a crisp new $10 bill when you buy a widget. Perfectly revenue neutral. What’s not to like?

Here’s the difficulty. Let’s run the new widget costing numbers including the tax.

Widget Production Cost = $10 materials + $10 labor + $20 energy = $40 total cost

Widget Sales Price = 2 * Widget Production Cost = $80 per widget

So I go in to buy another widget, I give the widget man $80, and the Government gives me $10 and says everything is for the best in this, the best of all possible worlds. It’s all balanced since the tax was $10 and I got the $10 back, so the Government and I are exactly even, shake hands and part revenue-neutral friends …

Except for the part where I’m short ten bucks, and the widget maker has made ten dollars extra for the same widget. The revenue is neutral, but despite that, in the case of energy taxes the net effect is to slow down the economy.

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.

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.

w.

PS – In addition, an energy tax is a very regressive tax. An extra $10 energy tax for the energy used to commute to work means little to the CEO, but may break the bank of the janitor. Taxing energy is a bad plan for a host of reasons.

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Barry Dwyer
March 18, 2011 1:02 am

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. Energy tax = reduced employment, lower profits, higher cost of living and thus reduced standard of living for all. Oh! you say they will provide compensation. That’s what is being said in Australia right now – no “generous compensation” is what they say – sorry its what Prime Minister Bob Brown says – Julia Gillard his Communications Secretary fronts the media.

TFN Johnson
March 18, 2011 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.

March 18, 2011 1:12 am

Superb, Willis.
You expose “Revenue Neutral” tax as an oxymoron. No tax can ever be truly revenue-neutral. I believe that a carbon tax is also utterly pointless, revenue-neutral or not.
The idea of it is to reduce carbon-dioxide emissions. Now if it were truly revenue-neutral, then generating carbon dioxide would be no more expensive, so it would not be a disincentive at all. The fact is, it will make energy more expensive. And inspite of that, will not reduce consumption one iota. The mechanics of inflation will kick in, making everyone suffer and reducing the value of their savings, and consumption will gaily gallop on.
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.

Allan M
March 18, 2011 1:23 am

Quite.
And then there’s the cost of salaries for the civil servants who administer the tax. So even more unproductive cost.
Energy taxes in the UK? Tell us about it. Road fuel is taxed at 170%

March 18, 2011 1:38 am

Willis,
In your example you have increased your return on capital. YOu may be running the same gross margin (Price/cost %), but ([price-cost]/capital employed %) has gone up.
You would find that you (and your competitors) would have their gross margins wittled down back to the point a point where the return on capital was restored to its original value. Assuming of course that there is sufficient competition, for example industries with extremely high barriers to entry might be able to maintain a higher return.
Sorry, but that is the difference between “business” and “economics”.

DaveF
March 18, 2011 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?

Editor
Reply to  DaveF
March 18, 2011 2:29 am

@Dave F

I’m probably missing something here, but won’t the widget maker be in competition with other widget makers,..

Surely that’s just it – competition, but in this case it may not keep the price down but drive the revenues from sales overseas. If a country applies this tax unilaterally and the company’s competition is from other local manufacturers, then they can each decide on their profit level and risk to their business. If the competition is from imports, either the tax becomes much more complicated to calculate/administer if it is also applied to imported goods (if legally it can be), or the imported product has an advantage and the tax is far from ‘revenue neutral’ to the overall economy.

March 18, 2011 1:52 am

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.

Spence_UK
March 18, 2011 2:00 am

There is a secondary effect as well. Think about the $20 that went to the energy company. The energy company has two choices:
1. Spend $10 on fossil fuel energy, and give $10 back to the government to redistribute to the end user
2. Spend $20 on wind / solar, and give nothing back to the government, in which case the end user gets nothing
So we have two possibilities. In the first case, which is the example Willis gives, he gets $10 back*, loses $10, and makes no change in CO2 (the whole point of the exercise). In the second case, we make an impact on CO2, but in this case, Willis is out of pocket to the tune of $20.
All of which begs the question: is the point of the tax the former (nothing to do with CO2, all about wealth redistribution), or the latter? (to do something about CO2 and make Willis pay for it through the nose)
*Oh, and you can bet of the $10 returned to Willis, there will be a $2 loss due to bureaucrats administering the scheme. So you only really get $8 back.

John Whitman
March 18, 2011 2:06 am

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

H.R.
March 18, 2011 2:11 am

Willis, don’t forget that there also will have to be a huge “Department of Carbon Revenue Neutrality” to take in and pay out the “revenue neutral” tax (and I’ll give you three guesses who pays for that).

Jimbo
March 18, 2011 2:13 am

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?

Jimbo
March 18, 2011 2:15 am

Further to my last comment many drivers in Germany are refusing to use the biofuel E10 as they are concerned that it may damage their engines. Sales of the fuel are apparently well below expectations. ;O)

George Tetley
March 18, 2011 2:18 am

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 !

Baa Humbug
March 18, 2011 2:28 am

Here in Australia, debate is raging about our governments proposed carbon (dioxide) tax.
The proposal by our Prime Minister Julia Gillard and her advisor the economist professor Ross Garnaut is as follows.
WHAT: The imposition of a tax on carbon (dioxide) of about $26 per tonne raising about $11.5 billion per annum rising by 4% plus inflation per year.
WHY: According to Gillard, it is to “transform Australia to a low carbon (dioxide) economy.”
HOW: According to Ross Garnaut, to make this tax politically palatable, the low income half of our community should be fully compensated.
In essence, using approximate figures, each year $600 will be taken from the well off half of the community, $300 of which will be given to the less well off half of the community to compensate for the $300 taken from them.
WILL IT WORK: Well let us see. The “Carbon Economy” began about 800,000 years ago when man first realised burning a fallen tree branch increases his waking hours and keeps predators at bay. Increasing his productivity in other words.
Our PM would have us believe that taking money from Peter, and giving some of it to Paul to compensate him for the money already taken from him, will transform a carbon economy that has been chugging along for 800,000 years.
We are truly led by imbeciles.

March 18, 2011 2:28 am

New Zealand also has an energy tax – the ETS, or Emissions Trading Scheme. This aims to “deliver emissions reductions in the most cost-effective manner”.
Right now, special ETS Review Panel is calling for submissions. Good thing too, you might say. New Zealand’s percentage of global CO2 emissions is 0.0078. Even if CO2 was a problem for the earth, that number is so small that the whole NZ ETS pointless. A review is definitely needed.
But don’t count on any sanity in the panels recommendations. The panel’s agenda specifically excludes any arguments over the ETS itself. The NZ Ministry of the Environment, which produced the agenda for the review, sets the terms: “In light of the panel’s terms of reference, the review will not be revisiting the need for an emissions trading scheme, or other responses to climate change outside the ETS”.
The madness is a global epidemic.

Brian H
March 18, 2011 2:30 am

Allan;
yes, wouldn’t it be interesting to crank up one o’ them superduper economics models and try out the effect of eliminating “road tax” (called gasoline tax over the Pond, here).
There’d probably be a Laffer effect, and tax revenues overall would increase due to the increase in velocity of money! (Not to mention that of drivers and other consumers).
😀

steveta_uk
March 18, 2011 2:47 am

This could be avoided, by imposing that tax post-sales, as is already done in many taxation scenarios. You then get to sell your $60 widget with a declared $10 energy content, which will then attract an additional $10 ‘carbon tax’ (sorry, I had to say it).
Probably much harder to administer and collect, but possible…

Don Keiller
March 18, 2011 2:52 am

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!

DaveF
March 18, 2011 2:56 am

Verity Jones and Willis Eschenbach:
Thanks for troubling to reply; I certainly appreciate the point that taxing a business gives an advantage to foreign competitors and I’m not in favour of such taxes generally; for one thing there’s an inevitable administration charge for taking the money and giving it to someone else (which would be at least 25%, probably). The point about the businessman having to make money on his investment including an energy tax depends on whether he pays it up front or it is levied at the point of sale, like a sales tax. If the former, then he will have to recoup more than he paid out, especially if it’s on borrowed money, so, yes, I take your points. Best wishes, Dave.

John Marshall
March 18, 2011 3:00 am

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.

Frosty
March 18, 2011 3:02 am

I’ve long since gave up any notion that these taxes are really about climate.
It’s about extend and pretend, the era of cheap energy is over because collective EROEI has dropped too low, the growth paradigm as we know it is over. At a fundamental level, these taxes are about usury IMO.
I remain perplexed as to why this is still a minority view.

Carl Chapman
March 18, 2011 3:03 am

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.

Onion
March 18, 2011 3:06 am

This depends on what ‘rule of thumb’ the businessman uses. He may use a ‘cost-plus’ rule, ‘charging cost + 30’ for the widget. In that case, he charges 70, the customer pays 70 and gets back 10, which would be revenue neutral.
The other point is markets are (supposedly) competitive so that the businessman charging by your rule of thumb will lose customers to the one charging on a ‘cost-plus’ basis. He will end up changing his rule of thumb quickly or else go out of business.
I’m not buying this analysis

Alan the Brit
March 18, 2011 3:09 am

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!

John Whitman
March 18, 2011 3:25 am

Dear Moderator,
My comment to Willis of more than 1 hour ago is stll stuck in moderation.
Can you free it from the nether gods?
Thanks.
John

Allanj
March 18, 2011 3:36 am

My wife and I tried the import/wholesale business once. We thought it would be clever to reduce the markup rate to increase our sales. We found that much less than 50% margin and we were either getting less return on our investment than we could get from a bank deposit or we were working for less than minimum wage.
We moved on to other occupations not subject to fluctuating exchange rates and freight costs.
Another great post Willis.

Ian H
March 18, 2011 3:41 am

The purveyors of these taxes would probably see this as a feature not a bug. The purpose of such a tax is supposedly to discourage the use of energy. Widgets are bad, goes the logic, because they use energy. The tax is to discourage widget use. And indeed you’ve just demonstrated that they work. The economy slows – everyone gets poorer, and less widgets are produced and consumed. From a green point of view what is not to like.

Another Gareth
March 18, 2011 3:44 am

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.

Hoi Polloi
March 18, 2011 3:56 am

Has anybody calculated how much it cost to apply and control this tax monstrum? Whoz gonna pay that?

Viv Evans
March 18, 2011 4:06 am

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.

hide the decline
March 18, 2011 4:06 am

And the premis for the tax would be ….what ? Don’t tell me that the prescribed taxation bureaucrats and authority, which draw salaries and absorb administrations costs, do this for the sole purpose of giving the collected taxation back to the taxpayer for no administrative gain. What, is the tax collector now trying to participate in playground/sandpit activities ?

March 18, 2011 4:09 am

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.

Joe Lalonde
March 18, 2011 4:11 am

Willis,
You never mentioned imports from other countries use their own fuels in manufacturing, have cheaper labour, etc.
So, unless the governments slaps on a tariff, the imports would have an unfair advantage.
The tariffs would be against free-trade agreements and the added revenue from tariffs are another tax imported into the governments pocket.

Jack Simmons
March 18, 2011 4:17 am

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.

AusieDan
March 18, 2011 4:27 am

There are a few errors here in various people’s calculations.
Willis – I’m afraid you have missed something.
The businessman makes an extra $10 profit, as money can’t just get lost.
(That’s $40 – $30 = $10 extra profit).
Somebody thought that the refund would go to the businessman so he stilled charged $60 dollars. That’s not how taxes and redistribution works.
It’s the buyer who pays the full $80 and gets $10 back, so he’s a net $10 out of pocket.
Now in the case of CO2 taxes, there is NO low cost local competion.
The widget manufacture is competing with the “fairy floss” widget maker, who has to charge $80 just to scrape a poor living, because his process is so inefficient.
AND the government charges the widget maker tax on his extra $10, so the manufacturer is not quite as much in the money as the above would suggest.
What’s more, all these extra costs and taxes go to add to inflation, so up goes the prices, which set off another merry-go-round.
Finally, many psychological studies have shown that people hate additional costs, much more than they like winfall gains.
AND the extra cost comes when you pay your electricity bill or fill your car with petrol.
The tax reimbursement comes when you pick up your pay packet or at the end of the year when you get your tax refund – “mmmmm – I seem to have a bit more in my packet this week, so I go off to the pub and have a quick one on the way home”.
Get home late, get a pasting from the better half, open your electrcity bill and see that it has gone up once again.
Swear to vote for the opposition the next time around.
What’s more, the cost of widgets is built into every single article produced and service rendered.
It’s a drag on the economy.
Taxes have to be raised to pay for essential government services.
Taxing energy at the base of the production pyramid is the dumbest way to raise government income.
And do you really imagine that the fiendish foreigners will play by the same rules as your good goverment.
Naw – they’ll find a smart undetectable way to cheat.
CO2 will keep going up in the atmosphere.
Plants will continue to grow faster with more CO2.
Oh and you will be out of work because widgets are now imoprted and your employer has gone broke.
I wonder why?
Oh well, that’s life, but at least we’re “doing good”.

Smoking Frog
March 18, 2011 4:31 am

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.

steve T
March 18, 2011 4:32 am

I understood that the “tax returned” to the consumer is usually quoted “net of costs” ie all the bureaucracy.
Another extra is the tax on tax situation. In Britain we pay 20% value added tax (VAT) this is calculated on the cost of the product. If the product cost already includes a hidden energy tax, this is taxed again. This VAT on the extra energy tax is not returned in any proposal I’ve seen. In USA I presume this is equivalent to state and federal taves.

Joe Born
March 18, 2011 4:43 am

Moreover, the widget may (1) be an item characterized by demand elasticity and (2) be a labor-saving device. If so, at least some folks won’t buy it and will instead divert some of their labor from activities (such as medical research) that only humans can do to activities (such as shoveling their walks) that machines could handle. Result: less productivity, less human welfare.

Smoking Frog
March 18, 2011 4:43 am

vindsavfuktare said: I disagree. Taxing energy has the side effect of decreasing pollution (not talking CO2 here). Taxing labour has the side effect of increasing unemployment.
What do you mean by “taxing labour”? It sounds like you’re talking about a tax on employers, but I don’t think you are. Unless you are, “taxing labour” is misleading.
Any tax levied by the government will increase product cost more than the tax itself.
That’s not true. For example, except in some cases, a sales tax increase raises the retail price, but not by as much as the tax. Exactly how much it raises it depends on the slopes of the supply and demand curves. It would take too much writing for me to explain this, but I assure you I’m not making it up. It’s in economics textbooks, and it is not controversial.

Smoking Frog
March 18, 2011 4:52 am

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.

Dodgy Geezer
March 18, 2011 4:54 am

The point is well made about the administrative costs of such a carbon scheme. In fact, looking at these issues from the point of view of suppressing CO2 production is precisely the wrong way to look at them. The reason they do not seem to make sense is that the main drivers for them are not the ones that are claimed.
The first aim of government is to keep existing. To do this it needs functions. Government does not care whether a tax scheme will do what it is intended to do or not – it cares about how many jobs it will get out of it. Government proposals already have suggested levels of carbon tax which would be completely ineffective in order to try to get agreement for the big prize, which is a huge increase in government jobs, paid for by admin costs.
Traders and businessmen want to make money. They want to go for complex trading schemes where they can turn a profit. So we have these as well. The do nothing for CO2, but a lot for the operators….
The Al Gores of this world make their money out of scare stories. The last thing they want is decreasing temperatures, or, even worse, decreasing CO2 levels…
I suspect that the only people who really want CO2 levels to go down are the rank and file Greenpeace activists. And they only have the haziest conception of what CO2 is, and have no power to do anything at all….

Udar
March 18, 2011 5:07 am

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.

Craig
March 18, 2011 5:15 am

Willis,
Most successful businesses don’t price based on cost. Not that it doesn’t happen, but it is almost never the best way. Successful business price based on value (charging the customer the maximum willingness to pay), and taxes add no value.
Also, if the tax is applied to all businesses, even if they do price based on cost, it is unlikely the tax will be included. To do so would be somewhat like trying to charge a premium for a commodity. If some businesses tried to add a mark-up to the tax, others will see an opportunity to capture market share by not adding a mark-up to the tax. Those marking up the tax will be forced to follow or lose market share.
There may be some measure of the effect you describe, but I think it will be much smaller than you expect.
In any case, please don’t confuse this with support for the tax. I agree no good comes from taxing energy.

March 18, 2011 5:24 am

Sorry, Willis, but, for the first time here at WUWT, I have to disagree with you.
As was pointed out earlier in this thread, competition will prevent manufacturers and distributors from passing on more than the actual tax amount to the consumer, and that exact amount will be returned in the form of a prebate. (Only citizens and legal residents will get the prebate so, indirectly, the carbon tax will penalize and thus discourage illegal aliens.) Thus, the economy will not suffer.
The revenue-neutral carbon tax that for example, Charles Krauthammer, the conservative opinion leader (and, James Hansen, pardon the expression, but even a stopped clockis correct twice a day) have in mind would be charged at the port of entry, mine, or well for all fossil fuels, based simply on their carbon content. This will cost very little to administer because the government already imposes taxes at that level and the carbon tax will be an add-on.
A big advantage of a revenue-neutral carbon tax over the cap and trade scam, is that there will be no need for the government to monitor actual carbon emissions. Just tax the carbon going in to the system and let industry and consumers figure out what is in their own best self interest. No government snoops looking for gas in our underwear or accountants calculating our wind power credits and other “green” stuff – just carbon in – tax money out – distribute the money to all citizens and legal residents!
As we saw when world events pushed gasoline to $4 and $5, people will adjust their behavior when the money is coming out of their own pockets. Some will car pool, or take public transit, or move closer to work, or bicycle, or vacation closer to home, etc. Some industries will make energy-saving capital investments, if that is in their own interests. Others will pay the tax – according to their own calculations of self-interest.
See Carbon Tax YES! – Cap&Trade NO!.

Don K
March 18, 2011 5:28 am

Economists have these things called Supply-Demand charts that (purport to) show that prices are not set by merchants, cost of production, markup, etc they are set by supply and demand. They draw a line that (purports to) show cost vs supply and another that (purports to) show cost vs demand. They assert that prices will fall around the “equilibrium” point where the two lines cross.
http://en.wikipedia.org/wiki/Supply_and_demand
I have some doubts about this stuff, but economists don’t. And in fairness to economists, although they don’t usually run experiments even when they could, in this case, there really is is experimental evidence that prices do converge to a point. Who knows, it might be the equilibrium point.
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.

Bloke down the pub
March 18, 2011 5:31 am

I don’t know how your sales tax system works in the US, but in the UK we have VAT currently at 20%. This is calculated after all other duties and taxes have been added. Thus if £10 energy tax was levied, £12 would be added to the cost even without the seller restoring his margin. If we ever saw the £10 returned in a rebate we would still be £2 out of pocket.

Tom in Florida
March 18, 2011 5:40 am

Let’s not forget sales tax. I would be paying $4.20 sales tax on the $60 price, $5.60 on the $80 price. So much for neutrality.

D. J. Hawkins
March 18, 2011 5:48 am

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.

Rubbish back at you T.F. The rebate goes to the consumer not the producer. The producer is pricing at cost-of-goods-sold (COGS). Since the tax is part of the COGS, it goes into the multiplier. Sheesh.

John B
March 18, 2011 5:53 am

It depends surely at which point the tax is applied. I understand that carbon taxes are supposed to be an end user tax in order to change behaviour.
In that case they can be applied, like value added tax, after the supplier has built his price. Also, as with VAT, carbon tax paid by a supplier on anything purchased in connexion with his business could be netted off against carbon tax collected, the difference remitted to Government, or refunded by Government depending whether positive or negative.
In that way carbon tax would not be a cascade tax and play no part in the selling price of goods or services at the end of the chain.
To make it revenue neutral, the public would, at least in theory, receive it back through the taxation system in the form of credits or reduction in taxes somewhere else.
This was the proposed legislation in France where I live but was ruled unconstitutional by the Constitutional Court and struck down, because it would be impossible to ensure all citizens were treated equally in terms of the application of the tax in the first instance – country-dwellers more reliant on fossil fuels than town dwellers for example – and refund of taxes elsewhere would be complex and unlikely to be fair, in the second place.
The Court also found that so many exemptions and exceptions were required so as not to destroy the economy, that the proposed tax could never achieve what it was supposed to.
The French Government bemoaned the fact this would leave a 4 billion euro hole in the budget – so much for intended revenue neutrality.
Meanwhile a 3% de facto carbon tax has been imposed on electricity this January to compensate EDF for the cost of the high feed-in tariffs it has to pay to buy back electricity from solar installations, and to comply with EU rules that carbon taxes must fall on the end user.
France of course makes about 90% of its electricity from non-fossil fuels – mostly nuclear – the balance being from gas, has an overcapacity and sells off 18% of its production to other European Countries, and still has its generating capacity underutilised.
It has just stopped subsidising new solar installations but it is ironic that those heating their homes with oil-fired boilers are paying no green tax, but those using ‘clean/green’ electricity are; and France now has even more and expensive electricity that it cannot use.
Funny old World.

Orkneygal
March 18, 2011 5:53 am

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

March 18, 2011 5:56 am

Regardless of how a tax is applied it has the same result, increased price to the consumer and a negative effect on the economy. The key difference is with hidden taxes the consumer incorrectly blames the producer while with visible sales taxes they correctly blame the government. This is the key reason governments want hidden energy taxes and things like the VAT, the cost is still passed on to the consumer but the government escapes the brunt of the blame since the consumer thinks the producer is “gouging” them.
Even without taxes you can have the same problem as we are now with government interference in energy markets (such as restrictions on supply from regulations and monetary inflation) which result in higher energy prices (gas costs more). The consumer will shortly be attacking evil oil companies and speculators for “price gouging”.
There is no such thing as “price gouging” BTW, it is an emotional construct that is based on subjective interpretation of people’s “feelings”.

March 18, 2011 6:01 am

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.

Bruce Cobb
March 18, 2011 6:03 am

As a glass craftsman/Artist (with fairly high energy useage) 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).
Now, about that $10 energy tax, and why I hate it. Firstly, the reason I would have to include it in my production cost, which gets doubled (at least) to arrive at the wholesale is because 1) each “widget” gets charged that, whether or not it makes it to the shipping room, and 2) that money is now tied up in inventory, which is an investment, and another cost factor. As has been mentioned, that 2x cost factor (for wholesale) isn’t set in stone, so maybe I could reduce it a little bit, as I am just trying to recoup my costs, not gouge my customers. So, maybe I could cop $5 off of that wholesale price, making the wholesale price $15 higher, instead of $20. Now, what happens to the wholesale price? It depends on the industry, and the cost of sales in that industry, but to get the retail, you would need to at least double it (I won’t go into why), so the $15 energy cost increase has now become $30. The retail customer would probably balk at that, even though they’d (supposedly) get $10 back. Perhaps they’d buy something lower-priced of mine, or even someone else’s “widgets”, or something made overseas, or just go without (widgets not really being a necessity, but nice to have nonetheless). I’d write more on this, but have to go and make my own “widgets”.

March 18, 2011 6:12 am

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.

Gary
March 18, 2011 6:15 am

Does anyone really think the government is going to distribute the tax revenue fairly? Of course not. It won’t be two seconds before it’s diverted to vote-buying pork. A completely “fair” and frictionless revenue return scheme is nonsense anyway if the objective is to limit energy use. If the net cost is zero, why not continue as if nothing has changed? It’s all PR for the economically clueless.

SideShowBob
March 18, 2011 6:15 am

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

mkelly
March 18, 2011 6:19 am

Ira Glickstein, PhD says:
March 18, 2011 at 5:24 am
Any tax based on a lie (AWG) should not even be considered.
Let’s not ignore opportunity cost to the consumer. Consumers would pay at the pump, home heat, all products they buy, etc ergo would have less pocket money to buy other products, put in savings/IRA, give to charity, better food etc. Getting the money back at the end of some time interval does not negate the harm prior.
Taxing energy is the worst. We need more less expensive energy.

Chad Woodburn
March 18, 2011 6:20 am

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.

bwanajohn
March 18, 2011 6:34 am

Revenue neutral tax is the gov’ts perpetual motion machine. Every engineer learns in basic thermo that there are losses associated with every process, NOTHING is 100% efficient. This is the same principal central to lean manufacturing, every time there is movement, storage or operation there is a cost and waste associated with it. This “tax” is no different, it is the movement of money from one place to another. There has to be a system to move the money, people to account for the money, people to audit the accountants, people to regulate the auditors etc etc etc. Every one of those people have to be paid so every one takes a chunk. Finally, who gets the rebate? The consumer who bought the widget? Or someone the gov’t feels “needs” the rebate more?
Its a scam, there is no such thing.

Steve from Rockwood
March 18, 2011 6:48 am

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…

pyromancer76
March 18, 2011 6:56 am

NO ENERGY TAXES NOHOW NOWHERE. We must stop this nonsense and stop finding excuses why both energy companies and the government should be gifted any of our hard earned income. Like Willis says taxing energy is taxing development. And there are much better ways to “solve” pollution problems — do it directly. After all this discussion about CAGW and the many sciences about which we have been priviledged to renew knowledge/learn for the first time (Anthony, I am as grateful for this opportunity as for any other), we must stop this stupidity about the damage “people”/”developed societies” do to Earth. Our eyes have been opened widely as to what Earth does to us: constant plate movements with 9.0 earthquakes, massive tsunamies, destructive volcanic eruptions; also cold periods as well as warm (and now we know a cold one is coming soon), droughts, floods, etc. Not only adapting for Earth’s vagaries is essential, but the consequenses of our Sun’s path through the Milky Way needs research.
We must give these “Third Way” people who are arguing for a version of fascism (see E.M. Smith, Fascist Doctrine, 3/15 — http://chiefio.wordpress.com/page/2/– very important reading for everyone here) that gives elites (including crony corporations) our money and prevents democratic affluence and stops our ability to prepare for the worst Earth can bring us. No government (elites and their “control”) can help us plan wisely and develop “democratically”. They are all in it for themselves and their (thuggish) followers with only the dregs left for us. Yeah, free market entrepreneurs want control, too, but competition prevents this. No energy taxes.

Joe Born
March 18, 2011 7:02 am

I’m largely in agreement with Dr. Glickstein regarding the superiority of a “carbon” tax over a cap-and-trade as a practical matter , but the most charitable thing that could be said about his conclusion “Thus, the economy will not suffer” is that it is based on an unstated assumption.
As I explained above, such taxes tend to displace capital and labor toward less productivity and thus less progress and human welfare–unless, that is, they accurately price in an erstwhile externality (damage caused by CO2 enrichment of the atmosphere). Dr. Glickstein’s implicit assumption is that the tax will do so.
But many of us believe that CO2 enrichment actually is a benefit, in which case the proper way to price in the externality would be to subsidize (although, for the reason given below, I do not favor that, either) fossil-fuel use rather than tax it.
Even if you believe that CO2 enrichment is a net harm, you have way too much faith in politicians if you believe they will come anywhere near to pricing the externality correctly.

sHx
March 18, 2011 7:03 am

Willis,
Unlike all your other articles, I am not buying this one, mate. Not for $80, not for $60, not even for free. Yours is the kind of lopsided (in favour of the capitalist) thinking that enrages Labor unions and causes socialist revolutions.
In your calculation, you seem to think the labor will just meekly accept the $10 offered by the businessman as the wage part of the production, whereas both the consumers (who are mostly labourers and small businessmen anyway) will not be happy to pay the new $80 price for the widget. And the only one to blame for this will be the government and the energy/carbon tax, not the businessmen who act unconscionably and jack up the price to $80 instead of $70 at the most.
No thanks, mate. This would not happen in Australia. If it were to happen, the government would be perfectly justified to jack up the tax rate imposed on the businesmen’s profits in order to ensure the businessmen don’t enrich themselves out of a scheme that’s supposed to aid the consumer.

Steve Reynolds
March 18, 2011 7:11 am

Willis, why not this:
Widget Production Cost = $10 materials + $5 labor + $15 energy = $30 total cost
Widget Sales Price = 2 * Widget Production Cost = $60 per widget
where the reduction in labor cost is from eliminating payroll taxes.

1DandyTroll
March 18, 2011 7:14 am

Then add that as prices go up due to inflation rate the value of the $10 rebate go down since it’s a fix number and not a percentage.
So by every year the government’s “kind hearted” hand out of a fixed number earns the government more and more, partly by handing out less and partly by raking in more from taxing company earnings. And after five years the government can scrap the subsidy without anyone giving a damn since by then the subsidy is so small percentage wise compared to the now inflated futuristic price.
The off-set of carbon tax in EU is the trade market of carbon rights. Which, of course, just happens to be, to the glee of any coke snorting yuppy puppy, very unregulated.
A rough translation from my language calls it the green hippie socialist tax redistribution trick. By taxing the “evil doers” more they can “kind heartedly” “reduce” tax for the “do gooders”. Of course then they just go right a head and make sure that the “evil doers” can off-set their tax cost, twice, no less, once from charging more per unit, and once from some new and approved made up trade market that’s ever so good for society. One could call it the Red Hood society, i.e. good old communists centralization of money to a few really “honest” and “trustworthy” organizations and companies, in which they themselves tend to end up working for. One knows that ones society has gone socalistic when you can’t remember if the person being interview on telly this term is the honcho politician of the ruling body, or head of some government body, or the VP of some financial institute or some other authoritative organization or some such. It’s like greedy people can’t but convert to some sort of authoritarian socialism.

John Brookes
March 18, 2011 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.
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.

Patrick Davis
March 18, 2011 7:33 am

Only politicians and Govn’t will benefit from this tax. Just another “hand” in our pockets! IMO it’s like GST and VAT. I was a GST collector in New Zealand, and once earlier a VAT collector in the UK. No benefit to me as a “producer”, it was a cost and no benefit to my customers as a “consumer”, they could have gone elsewhere (Cheaper). Simply put, an indirect tax collecting and redistributing system aimed at slowing economies down, read reducing “carbon” emissions. The economy slows, emissions fall (Apparently. Doesn’t seem to be happening in the EU) but tax revenue streams are maintained or, likely, increased.
I have no problem with taxes, provided the Govn’t does what it should with them (Yeah we know it doesn’t) however, I would support a “carbon” tax, which is after all a consumption tax, if all other taxes were abolished.
Lets have a referendum PM Brown, errrr….I mean Gillard, our “PM”…lol…

eadler
March 18, 2011 7:36 am

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.

Tucci78
March 18, 2011 8:05 am

Mr. Eschenbach writes:

It’s basic economics.


Yeah, but the politicians are all on acid.

Mike G
March 18, 2011 8:09 am

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.

March 18, 2011 8:13 am

Tax anything, and you’ll get less of it. The Watermelons want to tax ‘carbon’ in order to force people to use other, less-efficient, more costly forms of energy (like windmills and solar panels), because of the dogma that carbon dioxide is bad for the Earth. The socialist politicians never met a tax (or a tax-collecting bureaucracy) they didn’t like. That’s a match made in Hades. Were it not for the obvious fact that more expensive, less efficient energy means more expensive products and services, i.e. fewer of them, and that means a drag on the economy as a whole—were it not for that, and a few elected representatives who understand it, we would already be saddled with such taxes.
The concept of ‘revenue neutrality’ applies only to government: what the left hand taketh, the right hand giveth away (not counting the cost of administration). But unless the right hand gives the tax back to the same pocket the left hand took it from (in which case, what’s the point?), the effect on the overall economy can’t be neutral; the increased costs of goods and services, multiplied down through the chain, are not going to be simply offset by a rebate to consumers. Yes, the tax cost on business might depress economic activity, and a tax rebate to consumers might increase it, but they act in different ways. There is no one-to-one relationship, and the net effect overall would be hard to calculate.
It’s up to us to convince our elected representatives that we don’t want less energy at higher cost. We want more energy at lower cost, because that’s the key to growth and prosperity. And we must fight the Watermelons who, if the truth be told, want growth and prosperity stopped in their tracks, in order to return to some mythical bucolic days of yore.
/Mr Lynn

TerryS
March 18, 2011 8:14 am

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?

BlondieBC
March 18, 2011 8:22 am

Business do tend to price in percentages and do try to pass double the cost though. I have worked at a couple of hard good manufactures/distributes and so will try to explain why it is percentage based.
First, A retailer such as Dillards will oftend demand a say 10% rebate to cover advertising-costs/stocking-fee/shelf rental-fee. The name changes, but the backcharges are normally there.
Second, you can easily lose 5% to early payment discounts (2%/10, net 60) and short pays. The short pays are for various causes such as broken merchandise, customer returns, violations of shipping policies.
Thirdy, you have a sales or broke to sell your product. He is paid a % of gross margin, and i have often seen 25% to 35% of gross margin. So, this translates to say 15%.
So, 30% of my 50% markup is variable and usually in written contracts. This encourages business to agressively defend the 2 to 1 markup over the manufacturing costs. There are mostly fixed costs such as freight, adminstrative costs, warehouse costs, but the internal financial reports often show them as % of sales, not as fixed/variable costs breakout, so management thinks of them as variable.

Tucci78
March 18, 2011 8:26 am

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.

Malaga View
March 18, 2011 8:31 am

Don’t be a sucker…
Don’t believe Willis…
Send me that ten bucks instead…
I promise I’ll give it right back..
[and if you believe that you will believe anything]

Marc77
March 18, 2011 8:33 am

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.

Paul C
March 18, 2011 8:46 am

The tax ends up to be a compound tax on energy.
For example, I will use the Natural Gas production and transportation system.
Producer extracts the Natural Gas from the ground , and pays a Carbon Tax on the energy he use’s , he add’s tax to price of Natural Gas.
Processor , who removes impurities from the Narural Gas pays Carbon Tax on the energy he use’s , he add’s tax to price of Natural Gas.
Transportor provides the energy required to move the Natural Gas to market , he pays a Carbon Tax on the energy he use’s , he add’s tax to price of Natural Gas.
Distribution company delivers Natural Gas to end user , and pays a Carbon Tax on the energy he use’s , he add’s tax to price of Natural Gas.
End user and pays a Carbon Tax on the energy he use’s , he can not pass this Carbon Tax on , which has compounded in price , but may receive a unknown value in form of a rebate , as decided by the Tax collector.
What Tax collector would not buy into this Carbon Neutural Tax system ?
[I’m sorry, Paul, but I have to turn you in to the apostrophe police. Every apostrophe in your post should be deleted. Otherwise, good comments. ~dbs]

Malaga View
March 18, 2011 8:49 am

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.

JAE
March 18, 2011 8:59 am

“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.”
Please keep saying this as often as possible.
Even dumber is the idea of taking part of the tax and giving it to the government for more research on “green energy” and “sustainable energy” frauds.

BlondieBC
March 18, 2011 9:01 am

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.

harrywr2
March 18, 2011 9:03 am

There is another ‘unintended cost’.
If you want to make energy efficient vehicles then you need to use lightweight materials.
Making Aluminum and Carbon Fiber takes a lot more energy than making steel.
So by taxing energy, we increase the price differential between vehicles made with lightweight materials and those made with steel.
In effect, we end up discouraging energy consumption today at the cost of increased energy consumption tomorrow.

tom in indy
March 18, 2011 9:03 am

@ 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.

Greg Holmes
March 18, 2011 9:14 am

The only neutral tax I am aware of is NO tax.

mkelly
March 18, 2011 9:33 am

“based simply on their carbon content.”
bioenergy.ornl.gov/papers/misc/energy_conv.html –
coal (average) = 25.4 metric tonnes carbon per terajoule (TJ)
oil (average) = 19.9 metric tonnes carbon / TJ
natural gas (methane) = 14.4 metric tonnes carbon / TJ
You would immediately drive up the cost of electricity for 1/2 the population. This coupled with the just as dumb renewable energy requirements, that drove up electricity prices in various states, would put living expenses very high.
This idea of making the cost of energy higher to control how people live is nothing short of totalitarian. You cannot put a price on freedom/liberty. That is what many luke warmers don’t get. Control the cost and amount of energy people can have and you control the people and that is not acceptable. More energy less expenive = prosperity and freedom.

John Endicott
March 18, 2011 9:38 am

Willis, why not this:
Widget Production Cost = $10 materials + $5 labor + $15 energy = $30 total cost
Widget Sales Price = 2 * Widget Production Cost = $60 per widget
where the reduction in labor cost is from eliminating payroll taxes.
=======================
first thing wrong with your alternate scenario is that the “energy tax” is $10 (“the US Government in its brilliant wisdom has decided to impose a $10 tax on the energy that’s used to make widgets”) so energy price will rise from $10 to $20 (not stopping at $15 as you try to do). So that alone makes your formula:
Widget Production Cost = $10 materials + $5 labor + $20 energy = $25 total cost
which is still and increase in total costs.
Presumably you did the $15 energy because you were attempting to “shave off” the cost of the tax with a matching reduction in payroll. In which case you’d have to shave off $10 in payroll to match the $10 increase in energy . Clearly that can’t happen, as the manufactur’s cost of labour is much more that the (relative) small portion that goes to the government in the form of the employers portion of the payroll tax (hint: it’s not anywhere near 50% of labour costs, as your formula has it) and as such could not possibly be $0 unless you are proposing that the goverment subsidizes the widget manufacturer for his labour costs.
And really, if the goverment is giving back to the widget manufacturer exactly as much as it’s taking away from him, then there’s *ZERO* point in taking it away from him in the first place.

TerryS
March 18, 2011 9:39 am

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.

March 18, 2011 10:07 am

eadler says:
“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.”
That’s the cover story, my communist friend, but it isn’t true. The true agenda is to expand government power, and to increase dependence on the government. The predicted runaway global warming has not only failed to appear, there has been no statistically significant warming at all over the past decade, when harmless CO2 levels ramped up.
Therefore, the CO2 scare is a proven false alarm and the government should admit it. But since higher taxes and increased government regulation of the economy are the unspoken objectives, the government still demands more taxes and regulation, despite there being no legitimate reason for them. Further, it won’t make a bit of difference because China, India and a hundred other countries are ramping up their CO2 emissions, while U.S. emissions are declining – without the proposed government meddling, increased bureaucracy and taxation.
In your class envy and hatred of anyone who has earned more than you, you state:
“…the wealthy capitalist has been getting the main benefit of the improvement in productivity in the US economy, while general public has lost ground.”
Almost identical comments were made by Adolf Hitler in the 1920’s. Instead of pining away for totalitarianism, do what lots of folks do: buy shares in companies that that pay dividends. Then you can benefit from improved productivity in the economy, instead of sniveling that someone who works harder than you do earns more money.

PeterB in indianapolis
March 18, 2011 10:14 am

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.

Alan Clark of Dirty Oil-berta
March 18, 2011 10:25 am

The old “revenue-neutral” shell game… True enough. Unfortunately, it’s never “cost neutral”. As a business, whether one person or 1000, I still have a cost to collect, account and file/remit the “revenue-neutral” tax. The government has a cost to collect, account and distribute rebates. The $10 in – $10 out scenario is bollocks. The economy suffers because at the end of the day my business is poorer for having to do my end and the government is poorer after paying for their end.
Soon enough the people see the ridiculousness of the whole proposition and decide to cut-out the middle-man. This is how underground economies are founded and where-in they flourish.

March 18, 2011 10:30 am

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?

Nuke
March 18, 2011 10:38 am

Forget all that Willis — do you trust Congress to reduce other taxes by the same amount?
This country needs real tax reform and the only way that will come about is through a constitutional amendment.

paddylol
March 18, 2011 10:51 am

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.

Bruckner8
March 18, 2011 10:56 am

If it’s truly neutral, how can any benefit be maintained? Is there an investment scheme somewhere? Unless the govt is investing the collection in a CD, I don’t see any benefit. And the cost of the “management” is huge (Admin fees, in Mutual fund parlance), esp when govt is involved!
I always translate “neutral” as “transfer.”

Larry in Texas
March 18, 2011 11:19 am

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?

Jordan
March 18, 2011 11:29 am

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”.

Larry in Texas
March 18, 2011 11:30 am

Craig says:
March 18, 2011 at 5:15 am
“Most successful businesses don’t price based on cost. Not that it doesn’t happen, but it is almost never the best way. Successful business price based on value (charging the customer the maximum willingness to pay), and taxes add no value.”
I don’t agree with this observation. A price decision is often mitigated by value as established in the market, but there is no businessman I know who is going to price their product below cost, unless it is used as a “loss leader” to induce buyers to obtain other products of reasonable cost and value to the buyer. And businessmen are VERY careful about what they use as “loss leaders.”

Tucci78
March 18, 2011 11:37 am

As usual, Heinlein said it best:

Taxes are not levied for the benefit of the taxed.


The ostensible objective of such “energy tax” enactments is to compel private citizens to incur costs, suffer impediments, and generally undergo degradation of quality in their lives.
That the malevolent jobholders of civil government would find this idiocy “revenue neutral” says abso-goddam-lutely nothing about the costs of the bloody scheme, all of which must be borne by the people whom these politicians and bureaucrats are supposed to be “serving.”
Instead of focus upon the “revenue” – the extortion gouged by government from the productive sector of American society – what must more appropriately be discerned are the costs imposed and the benefit to be gained thereby.
Okay, the purpose of these “energy tax” rip-offs is to induce people to use less energy. What’s the benefit of that?

March 18, 2011 11:48 am

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.

kramer
March 18, 2011 12:19 pm

If the price of carbon is raised, it’ll raise the prices on the following items:
http://www.texasalliance.org/admin/assets/PDFs/The_many_uses_of_Petroleum.pdf

Jordan
March 18, 2011 12:26 pm

Too aggressive Willis.
Willis: “Tying money up in taxes to make a widget costs a businessman cash out of pocket”
Not the case. At least in the UK business taxation does not generally require busnesses to tie-up money in the hands of the taxman.
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.
Producers therefore have quite a lot unpaid taxes hanging around in their businesses most of the time. That’s not to say that some taxes might be cash-negative, but it doesn’t follow that businesses must have a return on their net cash position related to tax.
A businessman would love to have a straight pass through costs, but it depends on competitive pressures. In the land of idiotic businessmen, it is your competitors who are the idiots – after all, they keep reducing your profits.
Take a deep breath Willis and count to 10. While you are doing that, here’s something you might like to study:
http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price

John
March 18, 2011 12:35 pm
Douglas
March 18, 2011 12:39 pm

John Brookes says:
March 18, 2011 at 7:27 am
[Sadly, this post shows exactly what is wrong with “skeptics”.—————-
So, how about you stop doing “amateur hour” here.——–]
—————————————————————————–
John Brookes. What a pitiful item you are. Your statement is simply a bit of ad hominem. You add nothing. Go away.
Douglas

March 18, 2011 1:03 pm

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.

Warrick
March 18, 2011 1:30 pm

‘Revenue neutral” surely means no net increase in revenue to the taxing authority? It surely has nothing to do with the financial status of individuals. Extra revenue in will be balanced exactly by extra costs – the cost of collecting and administering as well as the “cost” of whoever gets the remainder. Where the money is collected from and who it goes to is of no consequence to be revenue neutral.
It’s all in the point of view.
Have you noticed politicians always refer to tax cuts as a cost to government, and increases in benefits are a cost to government?

Vince Causey
March 18, 2011 1:32 pm

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.

George E. Smith
March 18, 2011 1:45 pm

Nutz !
First off; the government has a very costly process for collecting the tax (any tax); that isn’t going to be returned to the taxpayer.
Second; the Government has a very costly process for returning the tax (any tax); that isn’t going to be returned to the taxpayer.
Third, the government has a very efficient till skimming process; to reward those who pushed for the tax (any tax); that isn’t going to be returned to the taxpayers.
What is the rationale behind taking money from the taxpayer, if you are going to return it. Well obviously, you aren’t going to return it; you may of course give it to someone else who did not earn it; and who usually isn’t a taxpayer either.
A tax on energy, is like having a leak in the gas tank, or the oil well, or the nuclear containment vessel; it wastes energy.
The Congress has the authority to lay and collect taxes, duties, imposts, and excises,……… to pay the debts, and provide for the common Defence and general Welfare OF THE UNITED STATES;……………..but all duties, imposts and excises, shall be uniform throughout the United States.
Nowhere are they authorised to put a tax on energy; and because of the last clause on uniformity, they aren’t authorised to use the tax code to redistribute wealth.
Note they are not authorised to tax, for the purpose of providing for the (general) welfare of every tom, dick and harry; just of The United States, which is basically that corrupt operation in Washington DC.

Vince Causey
March 18, 2011 1:45 pm

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.

Douglas
March 18, 2011 2:13 pm

Vince Causey says:
March 18, 2011 at 1:45 pm
[Douglas,——–
Yes, but a quite skillful example of sleight of hand, though.]
———————————————————-
Vince Causey. Yes I’ll concede that —-but — who does he convince other than himself? –I suppose sowing seeds of doubt in other’s minds perhaps. But what a twit!!
Douglas

March 18, 2011 2:31 pm

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.

Joe Prins
March 18, 2011 2:37 pm

To put it nicely, one can assume correctly that my economic understandings are somewhat “challenged”, to be polite. Thinking about unintended consequences, I am just wondering how all this revenue neutral tax ends up being reflected in the CPI. Since it does seem counter- intuitive to establish a tax anywhere without it showing up as an increased cost to someone, it would seem that such would eventually manifest itself in the various indices that in turn determine level of benefits to the “socially” disadvantaged. Other problems one can think of is the armed forces energy use and the “neutrality” aspect, native “home rule” reservations, charitable organizaions and foundations etc. etc. In fact, come to think of it, would the individual states get money back on any energy tax included purchase? If any of these type of organizations are exluded I can see another Enron in the making.

Pompous Git
March 18, 2011 2:48 pm

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.

Jim K
March 18, 2011 3:06 pm

Willis Eschenbach says:
March 18, 2011 at 12:00 pm
Willis you took on a subject that most don’t understand. You did an excellent job of simplifying the process. I believe most that don’t agree with you have not run a business. You have to make a profit like that or more to stay in business.
When the widget machine breaks you have to pay for that. If your building needs repair you pay. Tools for the job you pay. You make more sales you pay more insuarance. Unemployment insur., workmans comp all depends on gross sales and your costs. You also had to aquire the real estate, tools, equipment, insurance, the know how, inventory, before you made anything. Most employees see their take home pay but you payed taxes, insurance, 2x their Social Security, unemployment, etc. also.
Plus taxes,taxes and more taxes.

Jordan
March 18, 2011 3:08 pm

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.

March 18, 2011 3:22 pm

Willis Eschenbach says:
March 18, 2011 at 12:10 pm
John Brookes says:
March 18, 2011 at 7:27 am
Sadly, this post shows exactly what is wrong with “skeptics”. . .

Further to Willis’s reply, how about some actual evidence that anthropogenic global warming is (a) really occurring, and (b) an imminent threat to human civilization and the Earth?
Or is this just another variation on the tired old Appeal to Authority?
/Mr Lynn

Bob Maginnis
March 18, 2011 3:57 pm

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.

Peter
March 18, 2011 4:11 pm

Sorry, but prices are set by market competition not producers doubling their costs. The reasons an energy tax is bad is that it encourages less productive energy sources. Forget the money for a moment, production (and wealth) is about stuff. If we produce less stuff by pouring resources into less productive energy sources will will necessarily be less wealthy.

Jordan
March 18, 2011 4:23 pm

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.

Fergus Mclean
March 18, 2011 6:17 pm

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.

March 18, 2011 8:58 pm

Willis, an economist’s perspective on adopting a “revenue neutral” carbon tax follows.
First, I would like to note that there is no such thing as a “neutral” tax. Second, I note that “neutral tax” and “revenue neutral tax” are two decidedly different concepts.
A “revenue neutral” tax is one designed to generate the same amount of revenue as a tax targeted for replacement. A “revenue neutral carbon tax” is one assessed on carbon instead of some other identifiable factor such as labor.
Substituting a tax on fossil-derived carbon fuels for an existing employer payroll tax on labor would alter your analytic dynamics in material ways. Energy intensive industries would face higher costs while labor intensive industries could realize production cost reductions. Robust assessment of the effects of a carbon tax requires consideration of industrial, commercial, and consumer demand responses to relative price changes of goods and services produced. All “widgets” are not created equal in the market place due to wide disparities among products in their respective income and price elasticities of demand. Economic dislocations of sudden displacement of an existing tax with a carbon tax could be severe in some industries and for the economy at large while a gradual, measured transition on a defined, publicly disclosed time line of five – ten years might be hardly noticed. The outcome would be a relatively more labor intensive and less energy intensive economy with effect on national output level determined by international competitiveness.
FWIW
Revenue neutral carbon taxation is feasible in this country and could be implemented relatively easily and inexpensively by collecting carbon taxes through energy suppliers rather than from energy consumers. Motivations/rationales for considering restructuring of tax systems to widen the tax wedge between user (consumer) and producer costs of carbon fuels are many with AGW alarmism ranking dead last in my book.

JRR Canada
March 18, 2011 9:03 pm

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?

March 18, 2011 9:57 pm

Bob Maginnis says:
March 18, 2011 at 3:57 pm
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.

I agree Bob Maginnis with the first part of your comment, the added cost for most widgets will be a relatively small percentage of the price. However, I do not favor having the government pick winners, such as “home insulation” or “passenger rail” or any other, because they almost always screw up and pick the ones that are in the interests of the most politically-connected. There is also the cost, and likely corruption, of the government checking up that you actually purchased and installed the insulation or whatever is required to get the subsidy.
Just distribute the money equally to every citizen and legal resident taxpayer, and let them decide what is in their own best self-inerest. 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. If the higher cost of fossil fuel justifies a switch to fuels made of biowaste from farms and food industries, or nuclear power, let them make that decision, etc.

chuck Bradley
March 18, 2011 10:29 pm

Willis, the conclusion is correct, but the model is bad. Most prices are not 2 times cost. Your analysis would change only in detail if 2 was replaced by 2.5 or 10, or 1.o5, and the conclusion would still be right. But many prices are not set proportional to cost. The politicians have got to be convinced that a CO2 tax is a bad idea. To do that, the reasoning must be sound. There are many ways to set prices, probably dozens. The skimming pricing model with the tax hurts the folks the politicians want to hurt. However the price is set, and however the price changes over time, and however the costs change over time, at every moment there will still be a number such that price = cost times that number. HTH.

Capn Jack Walker
March 18, 2011 10:37 pm

Master class hapooner.

March 18, 2011 10:44 pm

Dave says:
March 18, 2011 at 8:58 pm
Willis, an economist’s perspective on adopting a “revenue neutral” carbon tax follows.
First, I would like to note that there is no such thing as a “neutral” tax. Second, I note that “neutral tax” and “revenue neutral tax” are two decidedly different concepts.
A “revenue neutral” tax is one designed to generate the same amount of revenue as a tax targeted for replacement. A “revenue neutral carbon tax” is one assessed on carbon instead of some other identifiable factor such as labor.
Substituting a tax on fossil-derived carbon fuels for an existing employer payroll tax on labor would alter your analytic dynamics in material ways. Energy intensive industries would face higher costs while labor intensive industries could realize production cost reductions. Robust assessment of the effects of a carbon tax requires consideration of industrial, commercial, and consumer demand responses to relative price changes of goods and services produced. All “widgets” are not created equal in the market place due to wide disparities among products in their respective income and price elasticities of demand. Economic dislocations of sudden displacement of an existing tax with a carbon tax could be severe in some industries and for the economy at large while a gradual, measured transition on a defined, publicly disclosed time line of five – ten years might be hardly noticed. …
… Motivations/rationales for considering restructuring of tax systems to widen the tax wedge between user (consumer) and producer costs of carbon fuels are many with AGW alarmism ranking dead last in my book.

Well said, Dave! The tax would be applied across-the-board to fossil fuels and products containing high levels of fossil fuels at the port of entry, and on fossil fuels at US coal mines, and US oil and gas wells. The feds already impose taxes at these points, so the Carbon Tax would be a straight adder, easy to calculate and hard to cheat on.
The revenue would be distributed equally to every US citizen and legal resident who is required to file a federal tax return. Their bank account info is already available to the feds, and the distribution would be inexpensive to administer. Illegal aliens and others who do not file federal returns would not get any of the prebate, which would amount to a penalty for their illegal activity, since they, along with everyone else, would have to pay higher prices for products with high fossil fuel content.
The Carbon Tax, as Dave suggests, would start at a low level, but have a clearly defined ramp-up to more effective levels. Individuals and businesses would thus be encouraged to plan long-term to make investments in energy efficiency, according to their own judgment of self-interest, and not at the whim of some bureaucrat (such as the bunch that decided to subsidize Ethanol or the other civil servants who came up with the idea to give away golf carts).
At first, the additional costs would hardly be noticed. The defined ramp-up, over the long-term, would give businesses and individuals time to adjust their energy usage, which would soften the bite when the Carbon Tax reached the specified end point.
My motivation, like Dave’s, is not based on any kind of what he called “AGW alarmism” or what I call Catastrophic “CAGW”. As a lukewarmer-skeptic I accept that human activities are responsible for some minor part of the warming of the past century, but natural processes are the main cause. It looks as if natural cycles may revert back to Global Cooling if the Sunspot/Galactic Cosmic Ray theory is correct. We may come to thank previous AGW and recognize CO2 as the plant food it is.
I favor the revenue-neutral Carbon Tax because, by encouraging energy efficiency, and alternative sources (including nuclear), it will reduce our dependence on petroleum from unstable foreign sources. I want to relieve the cost, in blood and treasure, we have been paying to protect our access to those critical resources.
We also need something to counter the dangerous Cap & Trade scam that is a politicians delight selling carbon indulgences. Cap & Trade is already law in several countries and has been proposed by powerful interests in the US. You can’t fight something with nothing, so lets fight it with a lesser evil, the Carbon Tax, that may actually work at intended.

Jordan
March 18, 2011 11:15 pm

Willis – Too agressive? Absolutely you were! Your condescending response to Ira was basically offensive – addded to the fact that you were plain wrong. There are plenty of other sites where we can go to for that kind of crap.
My point about VAT and corporation tax (tax on profit) was in reply to your incorrect comment that businesses fund every tax dime from their own working capital. No need for the veiled threats to ban me on that point Willis.
With regard to the net cash position on business taxation, have a look at the recent Q4 balance sheet of a multinational, like BP:
http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/B/bp_fourth_quarter_2010_results.pdf
Page 16 – Balance Sheet, Current Liabilities ….. $3bn Current Tax Payable.
But maybe BP is not the best example, they had a bad year. Royal Dutch Shell’s 2010 Balance sheet has $10bn current liability for taxes payable. And it’s not just oil companies, you can have a look at GE and Microsoft’s balance on “income tax”.
These companies owe money to the taxman. Their shareholders have no reason to consider that they are owed a single dime for return on capital on that money.
Even if their net taxes due is zero, what about those “baked in taxes” that are levied on business expenses and input costs. Again, this is a bad point and your general complaint is not supported.
A business will have a balance of creditors (money it owes, including payments to its suppliers) and debtors (typically payments owed to the business by its customers). To try to maxmise funding from other sources, businesses will usually try to minimise current debtors (cash into the business ASAP) and maximise curent creditors (hang onto it as long as possible).
Now I’m not going to make any claim that every business is always successful in maintaining a healthy balance of current creditors over debtors. But it is what they try to do and they tend to be successful at it.
Your point about net “baked in” tax payments being early net payment to the taxman only applies to businesses who -for whatever reason – are not so successful at cash management.
Therefore I call BS on the assertion that we may conclude -unconditionally – that “baked in” taxes necessarily leaves a business in tax-negative cash position on those taxes.
I guess you will have had a look at that link I posted and learned something new about how taxes (and subsidies) are expected to be shared between businesses and their customers according to basic economic theories. Those principles say precisely NOTHING about whether the tax (or subsidy) is a CO2 tax or an energy tax, or where the tax is levied.
Those basic principles apply where there is competition and other forms of choice which defines a balance of bargaining power between business and their customers. Your claim that businesses are in the fortunate position of simply adding a mark-up onto tax and then passing it onto customers is only consistent with basic economics if you are granted the assumption that the customer has no bargaining power. It might occasionally happen, but it is usually not the case.
Businesses and customers end up SHARING the burden of business taxation.
I might take the opportunity to respond in your own words Willis – your claim that tax DOES “tie-up money with the taxman” is, well, nonsense. Yeah, Willis, I’d say you are way too aggressive with your fantasies about taxes on business and your claims about whether money would be tied up.
PS – take another deep breath and count to ten. And the next time you reply to me, feel free to adopt a far more temperate and conciliatory tone.

GAZ
March 18, 2011 11:23 pm

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?

Pompous Git
March 19, 2011 12:29 am

Jordan said @ March 18, 2011 at 11:15 pm “Willis – your claim that tax DOES “tie-up money with the taxman” is, well, nonsense. Yeah, Willis, I’d say you are way too aggressive with your fantasies about taxes on business and your claims about whether money would be tied up.”
I live in Oz and I can tell you that the Australian Taxation Commissioner sent me a provisional tax bill in the late 90s for several thousand dollars more than my anticipated gross income. He charged me interest on the unpaid amount owing even though he sent me a refund at the end of that FY as I had paid as much as I could afford to keep the interest payment as low as possible.
You are talking through your anus if you think the tax eaters don’t tie up business capital!

John Brookes
March 19, 2011 1:32 am

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.

Jordan
March 19, 2011 3:05 am

Pompous Git says: “.. the Australian Taxation Commissioner sent me a provisional tax bill in the late 90s for several thousand dollars more than my anticipated gross income. He charged me interest on the unpaid amount owing even though he sent me a refund at the end of that FY…. ”
I sympathise, and have been in a similar position. But you cannot extrapolate from one (unexplained) example to calim that businesses necessarily fund any CO2/energy tax out of their own working capital. That just doesn’t follow.
For the situation you described, my guess would be one of the following:
Some form of enforcement measure had been invoked by the taxaman. Perhaps your tax return had passed a deadline, or there was something anomalous with your tax return. It’s not nice, but the taxman often then has punitive remedies at his disposal on the principle that the taxpayer’s interests will come first when businesses “step out of line”.
Another possibility is tax charge was based on some form of rolling assessment of business performance (like last year’s turnover) and the next year’s peformance was lower. Tax principles would normally expect you to make adequate provision (current tax liability) because you should have been aware of the situation. The difference in timing (tax due on a previous year’s measure) would be viewed as cash positive and you should have been reporting a current tax liability.
Or the tax office made a bad mistake and you were unfairly treated. This type of thing can happen, but there is a limit before it becomes politcal and the legistlation is changed.
However, I would echo your own phraseology: you are talking through your anus if you think tieing up business capital is an ordinary principle of business taxation.
If in doubt, look at some reported accounts and see how many businesses are routinely sitting on a large tax debtor.

Smoking Frog
March 19, 2011 5:16 am

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]

donkeygod
March 19, 2011 5:49 am

Here’s a pretty comprehensive demolition of the carbon tax concept as a measure for reducing emissions. Pretty obvious, when you think about it.
http://www.theaustralian.com.au/news/opinion/crisis-removes-easy-path-to-low-carbon-world/story-e6frg6zo-1226023501327

Jordan
March 19, 2011 6:16 am

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.

Steve from rockwood
March 19, 2011 7:39 am

I don’t understand any of Jordan’s posts especially the point about companies making money holding onto their due taxes.
Let me give Jordan a real example from a real company.
We have a business that uses helicopters. Helicopters use jet fuel. A carbon tax would add to my direct costs which reduces my margins.
We have a large building heated with natural gas. A carbon tax would increase the cost of heating.
We have trucks and trailers to transport our equipment.
So everything we do or use would increase in costs if a carbon tax were introduced.
So where is the revenue neutral in my business?
Of course I can raise my prices but I won’t be making any extra money holding onto those unpaid taxes.
When we file our corporate returns with the government we have a certain period of time to pay our taxes. Of course we keep this money aside because it isn’t ours, it belongs to the government.
But when I buy 42,000 liters of jet fuel it’s cash on delivery.
Sorry Jordan but you make no sense at all and posting links to bp isn’t helping a guy who has run two revenue generating corporations for years that are heavily into energy use understand how a co2 tax can be revenue neutral.
I’m happy to pay, I’m happy to charge, but don’t ask an economist to try and explain what a revenue neutral tax is. It’s like communism. Great in theory…

Bob Maginnis
March 19, 2011 7:42 am

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.

R. de Haan
March 19, 2011 6:08 pm

vindsavfuktare says:
“March 18, 2011 at 1:52 am
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”.
An economy which is throttled down due to reduced energy use is a dead.
Taxes don’t do anything to reduce any pollution.
Our modern engines and factories are already operating ‘clean’.
This is legalized theft.

Smoking Frog
March 20, 2011 1:59 am

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.

March 20, 2011 8:52 am

Willis,
I appreciate your efforts to keep it simple, but you seem to have gotten a bit carried away. You have increased the sale price of widgets without any thought for the unavoidable corresponding increase in the purchase cost of the materials with which to make them. Surely that would ensure a downward spiral of negative wealth-creation.

Jordan
March 20, 2011 4:47 pm

Anthony and Willis
I’d prefer not to hide behind an alias, but the alternative could be seriously bad for me personally. Please bear in mind the need for privacy is not necessarily cowardice or sinister. I wish it were different, but it isn’t.
I would confirm that $40M is not a significant value to what I do (M&A). Understanding what makes businesses tick, where they get their cash, their liabilities, the impact of taxation and so forth is quite important when evaluating an acquisition. I’ll leave it at that as it shouldn’t be necessary to justify myself.
Somewhere along the line we failed to communicate. But I found myself very quickly under an unwarranted attack for speaking up when I saw failings and weaknesses in the arguments put up here. And when I tried to speak-up for the sarcastic treatment of others. For example when Ira got this classic “I have to assume you live in the land of idiotic businessmen, if they actually act like that where you live.”
That’s just too sarcastic. Ira had posted a thoughtful and polite comment. And she did make a good point (that businesses and their customers share taxes in a competitive market). I would urge you both to think about how that looks, and how it can hand amunition to your opponents.
If you had any issues with what I had to say, you could have politely asked me to explain to examine what I had to say in more detail. Asking questions is kinda important for learning. I did set out my case and I gave examples. I would have gone into more detail, if there had been any serious attempt to communicate.
But it’s hard to do that with the megaphone blaring out the likes of ” you are way too aggressive with your fantasies about VAT and your claims about whether money would be tied up”
I came to WUWT because I felt sites like RC and Tamino are closed-minded. I don’t like their forthright aggresion towards disagreement. I have heard others say that WUWT is intolerant towards those who disagree, and it took only a small point of difference for me to discover that for myself.
Of course it’s up to WUWT to set the agenda and drive the culture. And if I don’t like it here, then I’m free to go elsewhere.
So that’s what I will do. I accept your kind offer, and hope the door doesn’t hit me on the way out.
I wish you success in the future and bid you farewell.
[Reply: I don’t think Ira is a “she.” ~dbs, mod.]

Steve from rockwood
March 20, 2011 8:26 pm

Jordan you are a fake. Goodbye.

Jordan
March 21, 2011 12:48 am

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.

Steve from rockwood
March 21, 2011 5:08 am

Jordan,
I respect your need for an alias when posting into the blogosphere.
On reading your paragraph above on liabilities and taxation you need to go do some homework.
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.

Steve from rockwood
March 21, 2011 5:21 am

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 from rockwood
March 21, 2011 5:46 am

Jordan,
I’m sure you know this already, but companies need to estimate their tax liabilities and these show up as accruals. When the tax bill comes – and it always does – hopefully they have set aside some cash (this reduces their cash flow but you know that) to pay the bill.
In a hidden tax, which is what Willis was talking about I believe, the tax is present inside the product. Using an obvious example such as gasoline, if the government implemented another tax the cost of goods would go up. Because business owners generally use a markup when pricing, the actual price paid by the consumer now includes both the tax and the markup on the tax. I think this was Willis’ point.
This is basic stuff. In fact my government used to have a manufacturers sales tax that was buried in the price of goods sold. It was seen as an inefficient tax because of the markup and the government eliminated it, replacing it with a tax that was charged only when you bought the product.
If you embed a tax in a product, the price paid by the consumer will be higher than just the tax added. You don’t need to hide behind tax liability accruals to understand this.

Jordan
March 21, 2011 12:38 pm

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
March 21, 2011 2:04 pm

Oops – I meant to say: “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 liabilities to show it.” (not current asssets)
(Steve – I came back to post as you deserved the courtesy of a reply to a fair question. )

Steve from rockwood
March 21, 2011 3:55 pm

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.

Jordan
March 22, 2011 12:43 am

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.

Jordan
March 22, 2011 12:06 pm

Willis –
Still no retraction or explanation of your accusation that I called you a liar. I’ll put that down to difference in time zones. Don’t feel shy about fessing up when you get around to it.
You cannot harp-on about me intervening in a discussion between you and Ira. This place is nothing like a forum for private conversations. How often do you see people chiming-in when they have something to add to the general flow of the thread?
You attacked Ira and others in a public place. And a passer-by intervened to pull you up on your bad behaviour.
I decided it would be interesting to approach the matter with a similar demeanour to your own direct and uncompromising style. When I said “too agressive … count to 10”, it wasn’t particularly rude or hurtful compared to your own posts.
The problem may have been lack of the respect you might think you deserve. And because of that, you completely erupted. One of the most extraordinary displays of articulated handwaving and rage I have ever seen on the internet.
A sight to behold. Enough to make Tamino blush.
If you had stopped to pay attention and ask questions, you might have stopped making an AR_SE of yourself. But you had the red goggles on and you kept going. Spluttering gobshite like “you-picked-the-wrong-guy” and “poked-a-hornet’s-nest”. Plus your own version of that old favourite: “don’t-you-know-who-I-am”. (Answer: err, no I don’t, and I’ll judge you on my own experience of you).
It was unmitigated school bullyboy stuff – what an impression!
That classic bit about picking teeth up off the floor of some random bar is worthy of further comment.
Think about it Willis, I came here for years because I found generally sober discussion. Your analogy reduces WUWT to something akin to a bar full of inadequate and emotional failures, where alchohol-induced violence is the norm.
If this is the future of WUWT, I should imagin you’ll eventually learn a thing or two about elasitcity of demand. It’s a pity, because WUWT used to be much better than this.
There is a saying “if you cannot beat them, join them”. Right now WUWT is beating them, but I fail to understand why you seem to want to join them.
Not for me, thanks.

D. J. Hawkins
March 24, 2011 3:16 pm

@ Jordan

I might take the opportunity to respond in your own words Willis – your claim that tax DOES “tie-up money with the taxman” is, well, nonsense. Yeah, Willis, I’d say you are way too aggressive with your fantasies about taxes on business and your claims about whether money would be tied up.
PS – take another deep breath and count to ten. And the next time you reply to me, feel free to adopt a far more temperate and conciliatory tone.

You seem to think the business world ends at the Welsh coast. You still haven’t had the grace to take your ‘umble pie on the issue of VAT. I will ask you directly, since the issue as posed by Willis is a US “wellhead” levy, if you want to retract that bit of nonsense analysis?

Jordan
March 24, 2011 4:47 pm

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.

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