EnviroEconomics.ca

Tax interaction is where taxes add distortions to the economy (economist raises hands to checks, gasps “inefficiency!” and moans “ooooohhhhh”), and either reinforce each other as bads, or can be used to offset existing bads. The double dividend theory instructs that the hit from abatement costs and payments on emissions (tax on remaining emissions or permits auctioned) can be offset by reducing existing distortionary taxes on capital and labour. (see paper here). A strong double dividend means the economy is better off since the inefficiencies introduced by the carbon costs are smaller than the existing tax distortions that have been removed. A weak dividend means the carbon cost inefficiencies are larger than the existing distorions that were offset with carbon revenue. Most of the literature on this falls into the weak double dividend camp.

So what to make of BC (here):

I have just carefully read my Terasen Gas bill and became aware that I am paying GST on the carbon tax that was implemented recently. I contacted the provincial government tax department and was told “that is just the way it has been set up … the only exemption from GST is PST.” So when the harmonized sales tax (HST) is implemented, will we pay both on the carbon tax if part of the HST is PST? Just one of those questions one asks when considering the next government.

BC has been under fiscal pressure given the economic downturn, no question, which has been exacerbated by offsetting existing taxes with carbon tax revenue. But, has the incentive function of the tax given way to a fiscal function? Not sure, but certainly a tax on a tax on a tax can’t be good.