Ken Boessenkool: Want lower, flatter taxes? Embrace the carbon tax.
They're not just good for climate change.
As a small-c conservative I favour lower taxes, flatter taxes and consumption taxes rather than higher taxes, steeply progressive taxes and income taxes. You’d not be much of a conservative if you disagreed.
Yet most Canadian big-C Conservative parties have spent the past decade or more fighting against all of these things. In fact, they have made fighting against all of these things a centrepiece of numerous election campaigns, to their detriment.
Maybe Big-C Conservatives need to think like small-c conservatives and embrace a revenue-neutral shift to carbon taxes — not as a way to address climate change, but as a way to get lower taxes overall.
Hear me out.
Canadian governments raise the bulk of their revenues by taxing three things: there are personal income taxes, corporate income taxes, and there are sales taxes on consumption.
All three of these things — personal income, corporate income and consumption —have been growing in real per person terms for decades — and by real, I mean adjusted for inflation. Since 1999, consumption has grown by 42 per cent per person. Personal income has grown by 25 per cent per person. And corporate income has grown by 18 percent per person.
So a flat tax on all consumption since 1999 would produce 42 percent more revenue per person today than in 1999. A flat tax on personal income would produce 25 per cent more per person, and a corporate income tax 18 per cent more.
Of course, we don’t tax people with lower incomes at the same rate as people who make higher incomes, as our tax system is progressive. But this just exacerbates the automatic growth of our personal income tax system.
Higher incomes have grown faster than lower incomes, and we tax those higher incomes at higher rates. Therefore, a progressive income tax will grow government faster than a flatter income tax.
Once again, I am not making this up.
Let’s be clear about what this means: the revenue our governments collect automatically grows in per person terms over time even if we do nothing. Or put another way, our governments are automatically collecting more revenue per person, no effort required.
Now maybe that’s what we want. Governments pay a lot of salaries and spend a lot of money bolstering those with low incomes, so maybe their revenues should grow in per person terms to cover rising incomes.
But should government revenues automatically grow faster than the economy? In the extreme, the answer has to be no. Yet both consumption and personal incomes have been growing faster per person than the economy.
Carbon taxes aren’t like that. In fact the very purpose of a carbon tax is to get the thing that is taxed to shrink, not grow.
Shifting taxes onto carbon offers conservatives a once-in-a-generation, perhaps once-in-a-century, opportunity to put government on a diet that will cause government (by design!) to slim down over time.
And this is true even if carbon taxes are slated to steadily increase in the future. If every increase in carbon taxes is accomplished by cutting and equal amount of consumption or income taxes, a larger and larger portion of government revenues will shift from an upward trajectory to a downward trajectory.
In case you’ve missed the point, let me be blunt: the more government we can fund with carbon taxes rather than income or consumption taxes, the slower it will grow.
On this argument, conservatives should be at the front of the pack arguing for rapid increases in carbon taxes paid for by large cuts in income and consumption taxes.
A shift from personal income taxes to carbon taxes is also an opportunity for conservatives to flatten the overall tax system.
Carbon taxes are also flat taxes — how much carbon tax you pay on a litre of gasoline is the same whether you are a teller at a Canadian bank or its CEO. Now the CEO may purchase more gasoline for her new Bentley Bentayga than the teller does for his used Toyota Tercel. But the CEO will spend the same amount on carbon taxes if she spends her next dollar filling the Bentayga as the teller will if he spends his next dollar filling the Tercel.
And another thing.
It’s much more difficult for the CEO to drive her Bentayga to a low-carbon-tax jurisdiction to avoid carbon taxes than it is for her to create an offshore tax haven to avoid income taxes. Dodging taxes on consumption is more difficult.
Further, a carbon tax is a tax on what we consume, not a tax on what we save or invest, which incentivizes the latter activity.
As the carbon tax will drive up costs on business, there is a strong argument that a portion of a rising carbon tax should be used to cut to corporate income taxes. And corporate income taxes tend to discourage re-investment — every dollar a company pays in taxes is a dollar it cannot invest in capital or employees or return to its shareholders.
Again, conservatives should leap at the opportunity to shift taxes from investment to consumption, which is what a shift from corporate income taxes to carbon taxes would accomplish.
At this point our friends on the left may (once they get over the shock that they’ve been proposing a way to shrink government and flatten taxes) be rubbing their hands with glee because thus far I have ignored the question of fairness.
Clearly a massive increase in the carbon tax with a massive reduction in income and consumption taxes might create a less fair overall tax system. But just because a change to the tax system makes it less fair (or less progressive) doesn’t mean that change should be abandoned. It might mean, instead, that we use some of the revenues from that tax system to address those fairness challenges.
Which is precisely what nearly every Canadian jurisdiction that has introduced a carbon tax has done through rebates.
I’ll conclude with this.
If you are one of those conservatives that secretly thinks climate change is a hoax perpetrated by the Chinese, you should still jump on the carbon tax bandwagon. A large shift to carbon taxes may be the only chance you’ll ever get to put government on a starvation diet, flatten taxes and reduce taxes on investment. And don’t worry, your secret will be safe with me.
For the rest of us, a tax shift to a rising carbon tax is a credible climate-change policy that uses the ingenuity of markets, not the ingenuity of governments, to reduce emissions. And we can do so while remaining committed to smaller government, lower and flatter taxes and consumption taxes.
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This argument is fine on the face of it except for one thing: the carbon tax is being imposed in addition to income taxes and I see zero evidence that this will change.