16 Feb 2010

Yes on tax and rebate

(via DW) California proposes to rebate carbon taxes to citizens -- not lobbyists, energy companies or "green" firms. That's what I've said all along, and the best way to help the people while taxing their sins.

Bottom Line: The best way to handle carbon is to tax it; the best way to "spend" that money is to give it to citizens. If politicians control it, they will waste it or give it to their lobbyist buddies.


  1. If you'd been read-up on my blog, you'd have seen that posted last month, man. It was titled, "Cap & Squander Strikes Back", in reference to a bad economics anecdote.

    This recommendation comes from the EAAC proposal, and it's GREAT!

  2. Two comments on this:
    1)In the short run, shouldn't CA use the money raised to pad the deficit for a year or two so the state doesn't go bankrupt (normally I wouldn't be a fan of CA keeping the money, but their huge deficit has me thinking otherwise in the short run)?
    2) What do you think of the state lowering labor/payroll taxes instead of a lump-sum rebate? Based on Stavins arguments (and Larry Goulder's seminal papers), I tend to agree that a reduction of taxes might be more efficient.

  3. Drew, I respectfully disagree with Goulder's, and therefore Stavin's, conclusions here, as they don't seem to consider the MU of money.

    A flat rebate has a progressive impact, especially on the ability for poor folks (like me!) to afford the up-front changes to more energy efficient products and services. The big appliances and tools (cars, A/C, etc.) are cost-prohibitive (the same reason poor people do wash their clothes at a laundrymat, even though it's quickly more expensive) because many folks just don't have access to that lump of money.

    Also, I don't want our government to become addicted to yet another regressive tax.

  4. I suppose it would depend when they gave out the rebate in terms of ability to immediately cope with the change and the current rates of interest on your favorite investment (the whole time-value of money thing). A lot of suggestions I've seen (not sure about CA) seem to have the rebates given at the end of the year which doesn't seem to really help the "coping" with the new, increased cost. Thus, why I tend to agree with increasing the efficiency of incentives by lowering the payroll tax.

    Also, I agree with you on being afraid of the government becoming addicted to the tax revenue, but I just wouldn't want to see the state's debt rated any lower (there developing nations that have higher market ratings on their debt). If only there were a way to ensure they only had access to the money until the recession was over (and thus they regained some of their tax base)...(I know, wishful thinking)

  5. @Josh -- sorry, but I can't keep up with you :) (and, I've written on this topic in the past, so it wasn't so urgent :)

    @Drew/Josh -- I'd prefer rebates to payroll tax decreases. Per capita rebates go to EVERYONE (incl. kids) and taxes can be hidden in other aspects of employment costs. There *is* a belief that lower payroll taxes will boost employment -- based on economic theory of the cost of hiring/employment -- but that belief means little when employers are not hiring in a bad economy. Hence my support for rebates (per month if you like, Drew).

  6. A little help please.

    For every dollar collected by this tax how many pennies go to

    1. Rebates
    2. More government bureaucrats
    3. Programs that are underfunded and 'need money.'
    4. Interest payments on unrelated debts.
    5. Tax breaks to specific folk.
    6. Who knows?

    My guess is that a significant fraction of the tax does not end up in rebates to 'the people.'

    As usual, I would like some actual data.


  7. David, no problem. I was "kidding on the square" anyway. More broadly, read the whole EAAC report, and also see who they picked for it. I was very impressed.

    Eric, I highly, highly recommend you read the actual EAAC report, and then come back with those questions.

    The most important answer to your questions (until you read the report) is that this is a recommendation, not an actual thing, yet.

    Please, read the report.

  8. Josh,
    I started to read the 132 page report. In the last few days, I have been internalizing an academic paper presenting a Leontieff style input/output analysis of cap and trade.

    The practical holes in the EAAC proposal seem to be legion.

    Here are a few:

    1. The WSJ article says that for every new dollar taken from CA residents in a disguised tax in their utility bills 75 cents will come back to certain CA residents (my guess is that this happens through poor people taking hours to fill out forms to allow them to get 75 cents of their initial dollar back). The other 25 cents will go to incentives to power companies (it is unclear what these incentives might be).

    Conspicuous by its absence is a single nickel allocated to state employees to oversee this program.

    Also conspicuous by absence is the creation of electricity in Arizona or farther East and shipping of this electricity to CA over a smart grid being built by San Francisco's Google.

    Finally, on this abbreviated list, the incentives are likely to drive manufacturing to China where power will continue to be cheap.

    There are more unintended consequences of this proposal but, once I put in even low level economics, including leakage economics, to me at least, this dog don't hunt.

  9. Eric - wow, dude. I didn't expect you'd respond to my plea to read the actual report with an "I don't have time, but I can pretend I already know what it says because the Wall Street Journal told me."

    I think, based on your problems with what you think the proposal is, that there are two basic questions: 1) do you believe that human-caused global warming through the emissions of these gases is actually happening? 2) if you do, what is your proposal for curbing these emissions?

    I answer 'yes' to 1, and to 2, I believe that the best way to curb them is through pricing in the value of their impact, with revenues going to non-market third parties (i.e. habitat) and to alleviate the pricing-in's regressive impacts.

    How 'bout you?

  10. Josh,
    The report is 132 pages. Why would I have time to read it especially since the authors seem to make fatal errors in the first few pages.

    1) I believe that there is excessive global warming and that we have to stop it.
    2) My answer to how to stop it is currently more than 100 pages. The part that I am working on at the moment is economic/political reality. The answers that I have seen, as in the EAAC report, seem to have endless and bad unintended consequences, for instance leakage economics, as I said in the last comment.

    Do you have solutions to each of the unintended consequences? If so, please share these solutions.


  11. @Eric -- I don't know what the government is proposing, but I'd rebate 95% to people based on either tax records or voter registrations (good incentives there :), and this method would have low overhead (<5%). Note that the IRS probably has an overhead of <1% -- I checked once...

  12. TR says "I dont see what the value is in a tax that just gets rebated. So you take taxes from a company, they in turn charge citizens more, then you rebate the money to citizens. So in essence you are just putting government in the middle of a money cycle...sounds bad... :S" and CK says "I'd prefer to lower distortionary taxes instead of just rebates..."

    to which, I say "If you tax pollution, then you lower the distortionary behavior. High polluters get SOME money back, but low polluters get a LOT -- relative to amount paid. It's progressive if you think that polluters should pay..."

  13. David,
    Please talk about the expected bureaucratic behavior that would siphon the new revenues off to other uses. This is the Principal-Agent-Beneficiary problem where the Agents are California Legislators, who have different priorities than the ones that you stated.

    Good luck

  14. @Eric -- check with the IRS. They do not siphon, b/c revenues are transparent. It's the politicians that waste the money on "stimulus" and other pork and misdirected ("green") projects. Better to rebate the $$.

  15. Good try.

    But doesn't the IRS give the money that they collect to the politicians. Isn't that where the politicians get the money to use in interesting ways.

    Also, I am pretty sure that both the IRS and the politicians are part of one government and can't be separated arbitrarily.

  16. Eric, I don't see your "leakage economics" as a problem here. I do understand your near-fatalistic worry over government abuses of money, but right now we are experiencing a massive market failure leading to global catastrophe.

    The purpose of direct rebates is to avoid the very problems about which you are worried. There exists no market solution to greenhouse gas emissions, so long as they remain unpriced externalities. It's that simple.

    In a broader context, I am shaken by your dismissal of some of the greatest minds in current environmental economic thought, without even reading their work. I wouldn't do that to chemists, first because I have no background in chemistry - but even if I were a chemist, I don't think I'd dismiss ideas from the most prominent minds in chemistry without having read their material.

  17. @Eric -- yes you are right. The politicians waste the money. That's why rebates are a better idea.

    And, yes, they can be separated.

    Seems that you are suffering from a failure of BOTH imagination and reality. Or do you think that carbon/GHGs should not be taxed at all?

    (Josh is right, in different ways...)

  18. TR says: "But the taxes get passed on to consumers. Are the rebates smaller than the taxes? How does the government make any revenue otherwise.

    Are you saying that by virtue of a tax people will do less of something even if they can pass that cost on to someone else, and that someone else just gets the money back in the end? I would disagree.

    Unless you are just going between two choices, tax n spend vs tax and rebate. How about no tax?"

    CK replies: "Ah, but Thomas, the beauty of pollution taxes over just about every other tax we use, is that they are welfare *improving*. That's right, things are worse for society if they don't exist.

    The goal would be to try to raise all of the required revenue from these sorts of taxes, and set "distortionary" taxes like income and sales taxes to zero. That's why the money is best used to lower other taxes, rather than give it back in the form of a rebate. You double your dividend..."

    TR replies: "Its sounds a little geo-libertarian to me :)"

  19. Pollution taxes, with few exceptions, use sales as their medium, and so are regressive. Using a regressive tax structure to lower progressively-structured taxes is bad economics as well as unfair.

  20. @Josh -- not so fast! Rich people use disproportionately more energy, so they may pay MORE as a % of income. Further, per capita rebates are progressive.

  21. David, where the wealthy pay a higher percentage of their income on energy, I'll say that's progressive, but I think you'll be hard pressed to ever see that actually happen. Ever.

    Also, by definition, per capita rebates are proportional. They do have a disproportionately bigger impact on poorer folks, but they are not regressive, by definition.

  22. Also, David, a tax is typically categorized 'regressive', 'proportional', or 'progressive' by its per-unit impact on the consumer. For example, rich people pay more for cars, but a sales tax on cars is still regressive (leaving out luxury taxes, which is why they were instituted). Any tax on sales, because it is a tax per dollar of consumption, is necessarily regressive.

    Without behavior-distorting or highly inefficient credits or scales, there is no way around this on the front-end; hence, my support for rebates.

  23. David, I'd like to add that all sales taxes are regressive by definition, too, because the tax is per dollar of consumption. So, even though wealthier people spend a disproportionately higher amount on, say, SUV's, the car tax is still regressive, because it's a tax on each dollar of consumption, and so poor people pay a higher percentage of their income than rich people.

    Since Pigovian taxes are taxes on consumption, they are regressive by definition, even before you take into account the greater MU of individual dollars for poor folks. Unless you build into the tax a tier at the time of purchase (highly inefficient), the only way to alleviate this is on the back-end, which is why I support rebates.

  24. @Josh -- a per capita rebate does NOT vary with income, so rich and poor get the same amount. That's progressive -- as % of income.

    As for your claim of rich/poor energy consumption -- I'd like to see some #s to back your claim. (Do me the favor, since I am on the road :)

  25. Woops, you are right about rebate. My mistake.

    As for energy numbers, I'll do some poking around, and get back to you.

    You are just making me like rebates even more.

  26. Energy consumption by households and income here:


    Unfortunately, I'm correct. For example, houses making $10-$30K used 90 million Btu's, while houses over $50k used 134 million Btu's of electricity (per house average).

    It's my understanding that for wealthier people to use disproportionately more energy than poor folks, they would have had to at least have an average of more than double the lower income averages, but that doesn't happen at any level in this report, and it doesn't even come close. In fact, the reverse occurs for kerosene and wood.

    I do wish they'd shown wealthy folks, instead of just $50k+.

  27. @Josh -- excellent source, but note that it does not include transport (airplanes and cars), nor the embedded energy in consumption products.

    Even so, a tax of $1/million BTU would cost the poor $90/yr and rich $134/yr. If the average was $91 (b/c of distributions) and that average was rebated, then the poor would STILL be better off.

    You with me yet? :)

  28. ps/also note that renewables (wood) would be exempted, since they are carbon neutral.


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