Revenue neutrality not a fairy tale
There is a conservative position on climate change whose chief opponents are other conservatives. It is to tax carbon, not on top of existing programs for reducing emissions, as those on the left would do, but as a replacement for them — and not on top of existing taxes but as a replacement for them. This is the proposal Michael Chong has put before the Conservative party, but the same approach has been suggested by a number of other prominent conservatives.
Nevertheless the idea has been heavily criticized by Chong’s rivals in the Conservative leadership race. Their objections range from the scientifically dubious (climate change isn’t humancaused) to the economically illiterate ( prices don’t affect behaviour). But the crowdpleaser is simply to dismiss the whole premise of the exercise: that any revenues raised would be given back in tax cuts, or in other words that it would be “revenue neutral.”
No less an authority than Kevin O’Leary denounces the idea as “B. S.” Andrew Scheer recites a convoluted story involving Santa Claus and the tooth fairy, while Steven Blaney is content with the logically unassailable “a tax is a tax is a tax.” All rely heavily on eye-rolling appeals to what “everybody knows,” time- honoured slogan of the clued- in and the wised- up. As in: everybody knows there’s no such thing as a revenue- neutral tax reform.
This would be at least conventional, if the politicians in question were in another party: if Conservatives were warning the public that Liberals could not be trusted to bring in one tax without cutting another. It’s somewhat bizarre to hear Conservatives say that of themselves. Surely it would be within the Conservatives’ power to decide whether such a tax were revenue neutral or not. The logic of their position is not only that Chong is lying, but that if he were elected leader, the party would be powerl ess to pursue any other course.
I can’t think they mean revenue neutrality is impossible: it’s a simple enough matter to cut taxes — simpler, and more popular, than imposing new ones. So instead they must mean it is unlikely. And the evidence for that, presumably, is that it has not been so in similar situations in the past. Why, remember when the GST was brought in — by the Tories, if memory serves — how it was supposed to be “revenue neutral.” How did that turn out, huh?
Interesting question. The GST was indeed not a new tax but a replacement for the old Manufacturers’ Sales Tax. And contrary to mythology, it took less out of Canadians’ pockets, proportionately, than the tax it replaced. You could look it up: In its last year in operation, fiscal 1990, the 14 per cent MST accounted for 15.3 per cent of federal revenues, equal to about 2.7 per cent of GDP. At its height in fiscal 2006, the seven per cent GST — it has since been cut to five per cent — added up to 14.9 per cent of revenues, or 2.4 per cent of GDP.
Still, the notion that revenue neutrality is a myth seemed to get a boost recently from a study by the Fraser Institute. It looked at the most famous living example of a revenue- neutral carbon tax, the one brought in by British Columbia in 2008. Sure enough, the institute found that in its first five years, the tax was indeed revenue neutral: personal, corporate and small- business taxes were cut by at least enough to offset any extra revenues collected.
More recently, however, the same could not be said. The government had only been able to claim continued revenue neutrality by including as tax cuts a raft of narrowly targeted tax credits, some of which had already been in place for years at the time the carbon tax was introduced. Aha, say critics, such as the Canadian Taxpayers Federation’s Christine Van Geyn, writing in the Financial Post. You see? “Revenue neutrality doesn’t happen.”
But here’s the thing: even if you exclude those preexisting tax credits, the carbon tax has still turned out almost exactly revenue neutral overall. The government may have collected more revenues from it than it gave up in tax cuts in recent years, but the reverse was true in those first years. Over the entire period studied, from 2008- 09 to 2018-19, carbon tax revenues are projected to sum to $ 11.065 billion; revenue forgone from tax cuts, $ 10.917 billion. That’s a difference, over 11 years, of $148 million, or less than $14 million a year — on average annual revenues of roughly $44 billion. This is trivial. The government of B.C. loses $14 million every year behind the seat cushions.
Even if you exclude all of the new tax credits, on the grounds that these are more in the nature of spending programs than tax cuts, you still only get a net revenue gain of $ 134 million annually, or roughly three- tenths of one per cent of annual revenues. This is not even a rounding error. Moreover, in its latest budget, the government has unveiled a further cut in the small business tax, to preserve revenue neutrality into the future.
What is different is the revenue mix. Thanks in large part to the carbon tax, B.C. has the lowest corporate and personal income tax rates in the country. Moreover, while B.C.’s plan is revenue neutral, Chong’s plan is strongly revenue negative. Revenues collected from the tax would not even begin to match revenues forgone from his $ 18- billion annual income tax cut until the 10th year. But God forbid the Tories should use one tax to cut another. Because “everybody knows” that never happens.