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

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

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.

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

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%

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

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?

@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.

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

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

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.

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

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

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

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

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.

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

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).
😀

Willis Eschenbach

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?

The problem is that it would be imposed nationwide, so the other widget makers would do the same thing, raise their prices to cover their costs. And as Verity Jones points out, that may drive people to buy their products overseas … and that’s about as non-neutral as an economic decision might be.
Regarding the rule of thumb, of course you can set your prices wherever you wish. The rule of thumb is there as a general guideline, and also to illustrate the fact that a businessman needs to make money on every penny that’s tied up in products. That includes money spent (directly or indirectly) on energy. The principle is the same whether the multiplier is 2 or 1.5 or 2.5.
Thanks,
w.

steveta_uk

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

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

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

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

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

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

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

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

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

Willis Eschenbach

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.

You miss an important linkage. Energy is development. Taxing energy is taxing development, which discourages development. Which means people have less food and less medicine and less clothes and less shelter … and why on earth would you want to do that?
You don’t even have to make the choice, since you can decrease pollution without decreasing energy use … why not focus on that instead? Because we can have both increased energy use and decreasing pollution, the US has proven that for years.
Next, you say “Any tax levied by the government will increase product cost more than the tax itself.” This is not true. If you tax the output of production (say via a sales tax), this doesn’t increase the product cost by one penny more than the tax.
This is because where you tax is as important as how much you tax. Any tax is like a weight on the economy. But it’s like a person carrying a weight. It’s easier to walk with forty pounds (18 kg) strapped to your back than with forty pounds strapped to your ankle. Taxing the inputs to production, as opposed to the outputs of production, is like strapping the weight to your ankle. Taxing inputs (whether of materials, labor or energy) slows down the economic cycle more than taxing the outputs. It may be the same weight, but it’s around your ankle.
w.

Allanj

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.

Willis Eschenbach

George Tetley says:
March 18, 2011 at 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 !

Yeah, five bucks is lost in each transaction, but it doesn’t matter because the government makes up the loss by the sheer volume of transactions …
w.

Ian H

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

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

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

Viv Evans

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

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 ?

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

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

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

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

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

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.

jhborn

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

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

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

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

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

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.

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

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

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

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.