Evidence suggests it’s too good to be true

Will households be better off under a carbon tax and dividend plan? A new report from Canadians for Clean Prosperity, a procarbon pricing advocacy group, claims they will, based on an analysis by David Sawyer of Enviroeconomics.org. It suggests that across income levels and provinces, households will pay less in carbon taxes than they receive in rebates, resulting in a net gain for everyone.

It sounds too good to be true — and it probably is.

The overly-favourable result arises from under-counting two types of costs: lost earnings in the business sector and driving away new investment. Crucially, the report does not use a proper tax policy model (a general equilibrium model). Instead, it’s a simplified, ad hoc empirical analysis that tries to capture some key effects. The things that are left out, however, matter.

Think for a moment about what the report’s model implies. Suppose the federal government imposes a carbon tax on households and businesses, then rebates the money just to households. On average, every household would get a bigger rebate than their tax bill, because the system creates a net transfer from businesses to households. The assumption, in much of the media coverage and the report’s promotional rhetoric, is that this means nearly all households would be better off. Hooray! The policy would become a source of economic growth and increased net income.

But if that’s true, why stop at carbon taxes? Let’s impose lots of new taxes on businesses and rebate the money to households. With each new tax-rebate system, we’d see a net increase in household income, making the economy better off. And we could engineer unlimited economic growth. What’s not to like?

It should be intuitively clear that this couldn’t work. New taxes on businesses drive away jobs and investment. Plenty of work by tax policy analysts clearly shows this is a risk for Canada. So why does the