Ever wonder why a consumption tax (like a carbon tax) is politically unpopular compared to a sales tax (like the GST)?

The Liberals under Jean Chretien wondered that in 1993 when they took over from the Progressive Conservatives.  Jean Chretien had promised to eliminate the GST, but of course, he didn't.  Different alternatives to the GST are discussed in this report.  It is very interesting to note what the researcher had to say about consumption taxes, and it helps understand why we still have the GST.

Of course, under a government led by Stephane Dion, we would get the worst of both worlds.

Liberal Party leader Stephane Dion wants Canadians to pay a carbon tax:

Stephane Dion is poised to unveil a carbon-tax scheme and attempt to neutralize any political damage by offering corresponding personal income tax cuts of between $10-billion and $13-billion to working Canadians, senior Liberal sources say.

The Liberal Leader wants this major environmental policy to be the centrepiece of the party's election campaign platform, according to the sources, and is anxious to reveal it this summer to give Canadians a chance to digest the idea before a federal election.

The plan, according to sources, would shift the 10-cent federal excise tax on a litre of fuel at the pumps into a broad-based carbon tax that would also apply to other fuels, such as for home heating. Sources say that the plan would not add more taxes to gasoline.

Basically, we would pay for every gram of carbon we consume, either directly in the fuel we use, or indirectly as businesses pass down the cost of the fuel they use in making products or providing services.  That makes it a form of consumption tax.  The GST is a essentially a sales tax (technically it is a value-added tax, but the consumer doesn't see that), since it is calculated based on how much the consumer pays for a good or a service, not on some intrinsic measurable quantity associated with that good or service.

So if I buy tires for my car on sale, I pay less GST than if I had bought them full price.

But tires consume a lot of carbon to produce, so regardless of the sticker price, I'll be paying the same amount in carbon tax.

I'm speculating here, of course, since we haven't seen the Liberal plan, but it does not make sense that a $150 tire costs the same in carbon as a $150 sweater.  The sheer amount of carbon in the two products is wildly different.

The GST charged on both purchases is, of course, the same.

So what of consumption taxes versus expenditure taxes?  Here is why the Liberals rejected consumption taxes as a way of replacing the GST:

Theoretically, the simplest solution for the government, taxpayers and businesses would be to tax consumption, rather than individual expenditures. If individuals consumed only non-durable goods, consumption would be defined as the difference between their income and the change in their accumulated wealth. However, if consumption by a taxpayer purchasing durable goods is to be calculated accurately, the value of the services provided by these goods must be evaluated. The value of the services provided by the durable goods - but not their purchase price - must be included in the individual's income. For example, their imputed rents, that is, the value of the services provided by their property (an amount equivalent to the rent that would have been charged) would have to be added to the income of owner-occupants. Since estimating income from the consumption of durable goods is very complex, this type of income must be excluded; instead, the value of the goods must be taxed when they are acquired.

If consumption is to be taxed, income and savings must be evaluated using the cash basis of accounting (in which such items are recorded in the fiscal year during which the transactions take place), not the accrual basis of accounting (in which expenditures incurred and income earned in advance are accrued to the appropriate year). For example, capital gains earned but not collected (such as stocks whose value increases but which are not sold) are not included in the definition of income, while inheritances and gifts are included.

This alternative gives rise to a major problem. Individuals consume more, in comparison with their income, earlier in life rather than later; they save more in the middle of their life, while their income is lower at the end of it. This means that taxing relative consumption imposes a greater tax burden on young taxpayers, and indirectly taxes consumer debt. In order to tax consumption without imposing too great a tax burden on already indebted young taxpayers, a mechanism to defer consumption of durable goods would have to be set up. For example, the purchase of a residence might be considered a form of savings, and property-related expenditures deducted from consumption. The capital gain would be taxable when the property was sold, probably late in the taxpayer's life, when he or she would be consuming less. Since reality can be so different from theory, this alternative could, however, end up being difficult to administer.

I've highlighted the relevant portion.  The whole section makes interesting reading.  It should be noted that the section is dealing with a broadly applied consumption tax, that is to say, a tax on the consumption of income.  But the highlighted section is fascinating. 

Taxing consumption imposes a greater tax burden on young taxpayers.

I would suggest that a carbon tax is doubly bad on this count.  Young taxpayers are newly married couple with one or two kids setting up in their first home in the suburbs.  They spend a fair amount on diapers and toys and, of course, food.  They also have to drive a largish vehicle (big enough for the safety seats) to use to drive to the local grocery store, maybe 10 minutes away by car.  Work is probably a 30 minute drive, at least, and possibly more.

The lawn has to mowed every week, the driveway refinished once a year or so, the roof replaced eventually -- the carbon consumption just goes on and on.  But as I've written before, everything is has a carbon cost associated with it.

The young working families are the people who consume more, especially carbon-intensive goods and services.  They will be taking on the tax burden out of proportion to taxpayers in other phases in their lives, just as with any consumption tax.

Can the Liberals afford to alienate suburban voters by telling them they are the ones who have to save the planet by paying a great deal more for everything?  Ultimately many suburbanites would be forced by the financial pressures of carbon taxation to give up on this lifestyle altogether, moving the entire family into a low-carbon communal-living apartment block, a lifestyle David Suzuki would prefer for Canadians (other than himself, of course).

I doubt the Liberals will sell it that way, of course.  These Liberals seem to like the idea of a carbon tax.  So much so that if Stephane Dion has his way, we'll have both the GST and a carbon tax to pay.

Woe to you if you are stuck with carbon-heavy expenditures related to raising a family. 

Things have changed a lot in Liberal Party thinking since 1993.

Posted by: Steve Janke at 12:37 PM | No Comments | Add Comment
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