Is a Carbon Tax a “Tax on Everything?”

June 10, 2008

While the cap-and-trade debate has essentially died for the time being in the United States (as long as Bush remains in the White House), it is interesting to check out the debate on the carbon tax that our friends north of the border are having. From CTV:

A political “air war” has been launched over a policy proposal that hasn’t yet been released.

The Conservative Government is attacking the Opposition Liberals’ looming carbon tax proposal with a series of ads, including a now-foiled plan to play them at gas pumps. The Tories are portraying the Grits’ move as a giant tax grab.

Opposition to a carbon tax also comes from the left side of the spectrum. The NDP has come out against it, putting that party at odds with both the Liberals and the Green Party.

So is it true that a carbon tax is a tax on everything? Technically yes. But if you ask any economist, he/she would tell you that almost any tax is a tax on everything. That’s because economists think in a general equilibrium world where a tax on apples raises prices on consumers, lowers wages for workers involved in the production of apples, and lowers the return to investment in the apples sector. That tax in turn would increase the demand for oranges, thereby raising the price of oranges while lowering the demand for apple juice and thereby the wages of those who work in the apple juice sector, ceteris paribus. Lower investment in apples means higher investment in other sectors, which lowers the return that investors in those other sectors receives due to the increased supply of capital in the sector. It goes on forever. Every tax affects everybody in some way, even though one may not notice it or it may be so small that it’s impossible to notice.

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