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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Smoking Frog says:
March 18, 2011 at 4:31 am
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
of industrial production. Those have different effects.
w.
As usual, Heinlein said it best:
–
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?
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.
Ira Glickstein, PhD says:
March 18, 2011 at 5:24 am
Have you ever been in business, real business? Tying money up in taxes to make a widget costs a businessman cash out of pocket, exactly the same as tying money up in materials to make a widget. In either case, he has to make back more than the amount invested, or he goes out of business. You don’t seem to get that it’s a profit deal.
1. The idea that a manufacturer will put money into taxes at the front end of production and will not require a payback on that money beggars all belief. If he does not make a profit on every dime invested in the product, he will LOSE MONEY on that dime, and businessmen don’t do that if they can help it. The stockholders would have him out on his ear.
2. Since all manufacturers will want a profit on the money that they have tied up in taxes, the idea that competition will mean that they will not “pass on more than the actual tax amount to the consumer” is a non-starter … and even without that, when did a businessman ever not add a little bit to his “straight pass throught” costs?
I have to assume you live in the land of idiotic businessmen, if they actually act like that where you live.
w.
sHx says:
March 18, 2011 at 7:03 am
So your plan is, since the tax you put on the widget has made even more money for the widgetmaker, that you’ll increase the tax on the widget to make up for that?
Ummm … errr … oh, never mind. I’ll just point out that if you do that it’s no longer even nominally revenue-neutral, since now the government is making money out of the deal … increase government taxes, yeah, that’s the way to help the consumer, mate.
w.
PS – will “labor just meekly accept the $10 offered by the businessman”? How the heck should I know, I’ve never been able to predict what the Australian unions will do, and besides it’s meaningless to the example.
John Brookes says:
March 18, 2011 at 7:27 am
John, your faith and trust in the accuracy and the honesty of climate scientists is a tribute to your heart and your humanity, but says rather less of your eyesight and insight.
Parsing your post, it appears that you don’t have a single objection to what I wrote, other than the obvious fact I’m not an economist.
So how about you stop doing “amateur hour” here? If you want to write a post about how my claims are wrong, bring in an economist for your side of the discussion.
Because it’s obvious that, since the only thing you can find wrong with my post is that I’m not an economist, you clearly need some professional help if you want to analyze the actual content of the post rather than just attack the author …
w.
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
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
Gotta Love this!
http://abetz.com.au/news/its-not-easy-being-green
John Brookes says:
March 18, 2011 at 7:27 am
[Sadly, this post shows exactly what is wrong with “skeptics”.—————-
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
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.
‘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?
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.