Double Blind

When valuing shares of a company, it is very dangerous to use just the next years’ earnings as a basis of your valuation – earnings may change beyond 2009 and these changes would have great influence on what your present value calculations are.

Likewise, I get very frustrated when people say that the carbon tax is 2.41 cents per litre of gasoline – while it is on July 1, 2008, it increases by 1.2 cents per litre for the next four years, up to 7.23 cents per litre on July 1, 2012. So when people talk about the $100 cheque they receive in context of the initial 2.41 cents per litre carbon tax, they are clearly not looking ahead.

In addition, the carbon tax is more than just a tax on gasoline – it will affect natural gas, heating oil and coal, each of which will have separate consequences for the people that use such resources. For those that want to look strictly at the next 12 months and say “2.4 cents per litre is nothing”, I would also like to ask them whether the reduction in GST from 7% to 5% is nothing as well. BC Liberal partisans don’t particularly present this side of the argument very well. The NDP, of course, aren’t doing much better, but they’ve always been economically in the loonie bin.

Raven summarizes the net effect of the tax with the following snippet:

Let’s restate things one more time to be really clear: A bunch of money is collected. The BC Government takes a small slice off the top to pay for the salaries of the people that administer the program (or other tax dollars have to be diverted for that purpose – same difference). Whatever is left is given back to the people that paid the tax to begin with so that they can afford to by more carbon based products. Oh, and all the companies that have to collect the tax raise their prices a tiny bit to compensate for the extra overhead.

The sell job is that the carbon tax is “revenue neutral”, and of course it will not be just through the reasoning given above. It will also not be revenue neutral because the purported intent of the tax is to reduce itself to zero, which of course will not be happening. I would also exercise the reader to perform a thought experiment on a carbon tax that is 10 times higher than current and ask whether the entire slice of the economic pie will shrink due to capital leaving the province.

Switching from a political to an analytical view, this is the net effect of the carbon tax, discounting the Climate Action Dividend, which is actually irrelevant to the “revenue neutral” calculation.

First, we will calculate the money that people will no longer have to pay in taxes due to the “revenue neutral” component of the Carbon tax, and the percentage of revenues that the action is dedicated to:

1. (39%) Personal Income Tax: If you make $35,000/yr, you will save $28 in provincial income taxes. If you make $70,000/yr (or above), you will save $85 in provincial income taxes. In 2009, the tax savings will be an additional $46 and $139, respectively. Note that as the lowest tax bracket goes lower, the value of tax credits also declines proportionally.

2. (23%) The corporate tax rate will decrease from 12% to 11% on July 1, 2008. The effect of this tax reduction is difficult to model, but in theory you would see slightly reduced prices. On January 1, 2010, this rate will decrease to 10.5%, and to 10% on January 1, 2011.

3. (14%) The small business tax rate will decrease from 4.5% to 3.5% on July 1, 2008. Again, the effect of this tax reduction is difficult to model. As a side note, this decline is proportionally the largest tax decrease out of all; a reduction of 22% of provincial small business taxes. Oddly enough, it affects me the most as I do generate small business revenue. On January 1, 2010, this rate will decrease to 3%, and to 2.5% on January 1, 2011.

4. (25%) Additional Climate Action Cheques – if you make less than $30,000/yr, you will receive an extra $100/yr with your GST credit.

Then we factor in the additional expenses of having the carbon tax around. Unfortunately, it is likely the bulk of expenses will be “trickle up” due to the costs being passed onto the consumer. The only directly calculable cost is at the fuel pump. Last year, I did about 2500 litres of fuel and this would result in about $60 in extra taxation in the first year.

The trickle-down effects from items such as increased municipal taxes, business costs, heating/hot water expenses (which will be passed down as increased rental expenses) are very difficult to estimate. Just as a proxy, I would estimate that such trickle-down costs would amount to an increase of 0.5% of my total expenses; assuming I spent $20,000 in a year, that would amount to an extra $100/yr in indirectly paid carbon taxes. This would also be offset by (completely guessing) half due to the corporate tax decreases, so that nets out to $50/yr in indirect carbon taxes.

So modelling my own situation, I would pay about $110/yr in carbon taxes, direct and indirect.

My quick conclusion here is that I will end up ahead solely due to the reduction in small business taxation. But for a regular person making a salary just above the $100 low-income threshold (e.g. $35,000/yr), they will likely end up paying a lot more than they will get out of the “revenue neutral” carbon tax. The carbon tax will likely represent a net expense for those working regular jobs making more than $30,000/yr and for those that cannot post their income through a small business corporation.

This entry was posted on Saturday, July 5th, 2008 and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.