Economist Robert P. Murphy shows that the tax interaction effect and political realities would combine to defeat the widely promoted economic “double-dividend” of a carbon-fighting environmental tax
OTTAWA, Oct. 30, 2014 – In a paper released today by the Macdonald-Laurier Institute, economist Robert P. Murphy challenges the common notion that a carbon tax would be beneficial to the economy as well as the environment, if the revenues were used to make a coinciding reduction in pre-existing taxes.
Tax “bads” (environmental pollution), not “goods” (investment and wages), we have been told by academics and policy-makers on both sides of the ideological spectrum, and we will benefit from both greenhouse gas reductions and improved economic growth. Unfortunately the truth is not that simple.
“Conservatives and liberals uniting behind a revenue-neutral carbon tax swap are fooling themselves if they believe a politically realistic deal will give them both what they want”, writes Murphy in the paper titled The Carbon Tax Win-Win: Too Good to be True?
Murphy focuses on the tax interaction effect to show that imposing a new tax on carbon would in fact exacerbate the efficiency losses from pre-existing taxes. This paper demonstrates that far from strengthening the case for imposing a carbon tax, the economic drag from existing taxes actually weakens the case for a new tax. Even an “optimally designed” carbon tax would have to be set much lower than the environmental considerations alone would suggest.
Furthermore, political realities tend to intrude on politicians’ claims of revenue neutrality in new taxes.
“Once we factor in the political reality that a new carbon tax will surely lead to higher government spending than would otherwise occur, the case for a carbon tax becomes weaker still”, writes Murphy.
Robert P. Murphy is Senior Economist for the Washington, D.C.-based Institute for Energy Research and president of Consulting By RPM. He is the author of hundreds of articles and several books. He is co-author with Niels Veldhuis and MLI Managing Director Brian Lee Crowley of Northern Light: Lessons for America From Canada’s Fiscal Fix.
The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.
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