If Only The Observer’s Phillip Inman Understood Economics, Tax Or Climate Change

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A reasonable hope would be that those who wish to tell us of the economics of taxation about climate change know some modicum of each of the three subjects under discussion. This hope being dashed when we consider The Observer’s Phillip Inman on the subject(s). For he’s telling us that we still don’t know the solution to climate change here, that there’s still something we don’t know about how to tax to prevent it. More specifically, he’s whining that it’s the poor who would be hardest hit by a carbon tax and boy, isn’t that a problem?

The bit being missed here is that the knowledge of this is built into the very proposal itself for a carbon tax in the first damn place. Which really is something someone desiring to pontificate on the subject should already know.

The fuel tax wars can’t be won without a greener alternative
Phillip Inman
The major international agencies should devise a progressive tax regime that penalises the biggest carbon emitters and offsets costs for the poorest

So, apparently we need the IMF, OECD and the International Organisation Of Aunt Sallies to tell us all how to build this new taxation system. Rather than, say, just reading the Stern Review which insists that the carbon tax is the solution. Or the 30 year old work of this year’s Nobel Lauerate, William Nordhaus, who made the suggestion before that. Or perhaps the near century old work of Arthur Cecil Pigou who designed the idea of Pigou Taxes in the first place? You know, why not just use the standard economics on the point?

Assuming that those who write newspaper editorials know the standard economics of course. Sadly that, as above, not being a reasonable hope.

What is an elected politician to do? Simply slapping fuel taxes on diesel and petrol won’t work. Fuel taxes are regressive, like any sales tax, and affect the poorest the most. It is people in the bottom half of the income scale who pay a greater proportion of their wages in fuel and so would pay a greater proportion of any fuel tax. Sadly, all carbon taxes ultimately raise the price of using fossil fuels and the things that are made by burning them. And while the objective of any tax might be to encourage the use of renewables, that can mean a costly upfront investment, especially for an individual household. What is needed (to help the poor hapless politician) is for the major international agencies to devise tax schemes that win over even the most ardent fan of the combustion engine to the cause of higher taxes on petrol and diesel.

It’s a mission that the International Monetary Fund and the Organisation for Economic Cooperation and Development should devote themselves to, and quickly. These organisations are still widely respected and influential, especially with an ageing and conservative audience that clings to the old ways of doing things.

Ghastly t**ttery – ghastly ignorant t**ttery.

It’s worth pointing out that such a carbon tax doesn’t nee to be in addition to all the taxes we already have on fossil fuels. The underlying economic point is not that more money need be raised to deal with things. In fact that’s not it at all. Rather, that market prices don’t fully encapsulate the third party costs of the emissions from fossil fuels. Thus we need to raise the price of making those emissions so that prices are correctly including those third party costs.

What the revenue is spent upon and even what other justifications we might have for the same tax rate are irrelevant. Pigou Taxation works by changing market prices. If we’re already changing market prices through tax then we’re done already. So, for example, Macron doesn’t need to increase fuel taxes to beat climate change, France already changes prices enough through tax. But, you know, excuses for increasing taxation.

But this thing about carbon taxes being regressive. Yup, they are. So, the proposals for a carbon tax are that it be revenue neutral. Some other tax should be reduced at the same time the carbon tax is implemented. This turns up in all the economic proposals – no, obviously not all the campaigning ones but all the serious, yes.

And yes, again, the tax is regressive. So, we should reduce a regressive tax to keep everything revenue neutral. The usual offer is to reduce national insurance contributions – these are a regressive tax. It’s also true that booze, tabs and other excise taxes are regressive but no one does propose reducing them.

That is, Inman has this idea that there’s some great problem with the regressive nature of a carbon tax. That the vast international organisations should tell us all what to do. When reality tells us that his problem is a) recognised and b) solved in the basic and early discussions of the tax. All Inman, or any politician, has to do is ask any passing economist and they’ll get the same answer. The carbon tax should be revenue neutral, it’ll be regressive so reduce some other regressive tax, payroll taxation being a damned good choice.

But then, obviously enough, those who write the newspaper editorials telling us how the world should be run tend to know remarkably little about how the world does run. Almost as bad as politicians in this manner.

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Quentin VoleGrope_of_Big_HornJonathan HarstonRhoda Klapp Recent comment authors
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Rhoda Klapp
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Rhoda Klapp

If you really need to drive, or heat your house, you will pay. The stupid pigou tax will not significantly affect behaviour. And since it’s ‘revenue neutral’, you can’t as a punter actually affect the amount you pay anyway, only hope the arbitrary allocation of revenue neutrality might chance to leave you better off. But it won’t because it’s TAX.

It’s my hypothesis that the perennial growth advantage of the US over other western nations is due to cheap energy allowed by relatively lower tax. Don’t tax successful economic activity before it makes the money.

Grope_of_Big_Horn
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Grope_of_Big_Horn

How can a carbon tax be regressive, it’s flat – the major untaxed and undertaxed energy uses are air travel and in the UK at least, domestic energy. I’m pretty sure that the richer portion of society is consuming more of these, as well as benefitting from the subsidies and feed in tariffs for alleged renewables.

Even those who claim a carbon tax is regressive are claiming that it is less so than the alternatives
e.g. https://voxeu.org/article/carbon-tax-would-be-less-regressive-energy-efficiency-standards

Quentin Vole
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Quentin Vole

The cost of heating my home or filling the car forms a bigger proportion of my expenditure than it would for a billionaire (even though they may well spend more than I do on both of these). That’s why a flat tax on energy is regressive.

I’m not sure where you get the idea that air travel isn’t taxed. Aviation fuel may not be (because otherwise you’d get airliners flying with extra fuel from low tax to high tax countries), but there’s a substantial ‘green’ tax on tickets.

Grope_of_Big_Horn
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Grope_of_Big_Horn

You have a home and a car – you’re likely in the top half of the income distribution.
People of responsibility on low incomes heat a room, not a house.
As for Air Passenger Duty – it’s not in the same league as excise on petrol and diesel of which taxes make up around 62% of the pump price.

Quentin Vole
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Quentin Vole

I’m sure I’m in the top half of incomes worldwide. And your point would be?

The rather obvious fact that flat taxes on essentials tend to be regressive is not widely disputed. Except by you, apparently.

Grope_of_Big_Horn
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Grope_of_Big_Horn

Air travel, running a private car, even heating all of the rooms in your house, are not essentials. But apparently you have ‘obvious’ on your side.
I’ll still insist that flat taxes on energy consumption are flat until presented with evidence otherwise.

Quentin Vole
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Quentin Vole

You seem to be labouring under the delusion that a flat tax on a commodity cannot be regressive. You are wrong, as any economic textbook could tell you (and you could convince yourself if you thought about it). A flat 10p a loaf tax on bread would impact the poor (proportionately) more than the rich, because the poor spend a higher proportion of their income on bread than the rich do.

Jonathan Harston
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Jonathan Harston

They want to penalise people who use carbon fuels without… penalising people who use carbon fuels….????