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William Watson: Tories on gas — If it’s not a tax it has no effect

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If their policy affects the environment, it’s only because their tax bites. If the tax doesn’t bite, there’s no effect on the environment. In which case, why bother?

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You drive into a gas station and buy $50 worth of gas. A sign attached to the pump tells you 30 cents of every dollar you pay is tax. You go into the office and pay your $50. The sales clerk gives you $15 back, rebating you for the tax. What did the gas cost you?

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It’s not a trick question. The gas cost you $35, the $50 you paid minus the $15 you were immediately rebated.

What if the government doubles the tax? Same answer. As long as you get a full rebate, the gas costs you $35.

Does the tax affect how much gas you buy? Not if you’re thinking straight. With the full rebate, the gas will cost you $35 no matter what the tax is.

What would be the point of such a tax? Good question. It doesn’t affect your pocketbook or your behaviour and yet taking your money and processing the rebate costs real resources: your time and effort, the clerk’s time and effort, the cost of programming the cash register, the cost of accountants, the government’s cost of administering the tax, and so on and so on.

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The general point is that providing a rebate that completely covers the gas tax people pay has zero effect on their consumption of gas and therefore their production of any harmful (or for that matter beneficial) byproduct of their consumption of gas, including carbon.

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Now suppose you buy $50 worth of gas and the rebate is, not 15 cash dollars but a $15 voucher good for the purchase of cigars. Same question as before: What did the gas cost you?

This time it depends. If you’re a cigar-smoker and you spend quite a bit on cigars and the voucher is good for the brand you smoke, then, as far as you’re concerned, the voucher is basically cash. So, as before, the gas cost you $35.

But if you don’t smoke cigars, your gas tax rebate gives you the right to buy something you’re never, ever going to buy. So it’s worth basically nothing to you. Getting back a voucher with a value of $0 to you means you have paid the full $50. The tax bites.

That’s an extreme case. Maybe even a cigar voucher is worth something to you. Maybe you’ve always thought you’d like to try smoking cigars. Or maybe you know someone who smokes them. If you make a gift of your voucher to that person, he or she gets the $15 of cigar-money but you presumably get something out of having done a friend a favour. Unless you’re unusually kind-hearted, however, you don’t get a full $15 of benefit from giving the gift of cigars. (If you do, you should give such a gift without the excuse of the voucher. The cigars cost you $15. You get more than $15 of benefit from the act of giving. Do it!)

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Or there could be a secondary market for the cigar vouchers, in which case you’ll get some cash for your voucher, though likely not the full $15, as the costs of running such a market have to be recouped somehow.

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The general point this time is that if the gas tax rebate takes the form of vouchers for stuff you don’t want, then it’s not going to be a full rebate, which means the gas tax bites, and, in the long run your consumption of gas likely will respond to gasoline’s now higher price.

Why do I raise this bizarre thought-experiment? As you will have guessed, because of the Conservative party’s bizarre — there’s no other word for it — idea of replacing a genuine carbon tax on gasoline with a frequent-buyer plan in which the gas tax people pay creates a credit for them that they can spend on a prescribed list of approved products (probably not including cigars).

As we have seen, the effect on people’s consumption of gasoline will depend on their demand for the products on the list. If all products are on the list, i.e., the rebate is given in cash, there’s no effect on gasoline consumption. By contrast, the less and less desirable the listed products, the greater and greater the effect on gas consumption.

If you want to persuade people they’re not being hit by a fuel tax, which seems to be the Conservatives’ main policy goal, you will want to make the list of vouchered products as inclusive as possible, in which case the rebates will be most like cash. But then your policy will have no environmental effect at all: it won’t change people’s consumption of gas and it won’t alter their consumption of other goods and services, either. You’re simply taking their money with one hand and giving back exactly the same money with the other.

The policy will only have an effect if you do manage to tilt people’s consumption toward products that have some sort of green effect. So the list has to be narrow. Which means you’re persuading people to buy things they wouldn’t otherwise buy. Which means the tax whose existence you’re trying to deny actually does bite: people won’t value the vouchers at their face value.

The Tories are stuck in a Catch-22. If their policy affects the environment, it’s only because their tax bites. If the tax doesn’t bite, there’s no effect on the environment. In which case, why bother?

Financial Post

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