Would a Carbon Tax+Dividend Scheme “Financially Benefit” Poor Households?
I point out that such claims can be misleading, even on their own terms. Excerpt:
Suppose gas is originally $3 per gallon. Our poor household in a typical week buys 10 gallons. In contrast, the rich household in a typical week buys 20 gallons, because they drive more and because they drive an SUV.
Now imagine the government imposes a draconian $4 per gallon carbon tax that more than doubles the price of a gallon of gasoline to $7. In response, the poor household practically stops driving; people take the bus whenever they can. They end up buying only 2 gallon of gas per week. So they implicitly pay 2 x $4 = $8 total in carbon taxes per week.
The rich household however is better able to shoulder the blow. They reduce their gasoline consumption to 15 gallons per week. At this level of consumption, they implicitly pay 15 x $4 = $60 in carbon taxes per week.
Now if the government took these tax receipts and then issued an even rebate, the $8 + $60 = $68 total would get split into payments of $34 each. So Schultz and Halstead would conclude that the poor household “gained” $34 – $8 = $26 per week in net dividends from the scheme, while the rich household lost $60 – $34 = $26 per week in net payments. (This makes sense: If these are the only two households, the gain to one must be the loss to the other.)
But would we conclude that the poor household in our scenario is better off? Not at all! Yes, the household would have an extra $26 per week in money, but now (by assumption) gasoline would cost $7 per gallon. This artificially high price led the household to “choose” much lower gasoline consumption, but this was a coerced choice. The extra $26 per week in monetary terms would not mean the same as it would have in the original scenario, when gasoline was cheaper.
Bob,
In your example, before the tax the poor household was spending $30 a week to buy 10 gallons of gasoline at $3 a gallon. After the tax it would cost them $70 to buy 10 gallons of gasoline, but they would get back $50 from the dividend, so it would only cost them $20 a week to buy the same amount of gas.
Of course, the family might decide that they’d rather reduce their gasoline consumption and spend the extra money on something else. But they would only do that if they preferred that situation to the one where they were spending $30 a week to buy 10 gallons of gas. The claim that they can’t afford to buy as much gas under the tax-and-dividend system or that they are being coerced into consuming less is just wrong.
Josiah,
You’re right that I left out something when considering the family’s new budget situation; I’ll adjust the numbers when I get to the office tomorrow. But in general what I’m saying is correct. Consider a case where the government levies a $100 per gallon tax on gasoline and everybody’s official demand goes to 0. (Some people still buy on the black market.) Then dividend checks are $0 and nobody pays any carbon tax. So is it a wash?
If you want, have most people buy 0 gallons and a few rich people buy a little bit of gas, so that the poor people get a little bit of dividend money. Are they better off? No, they’re not even going to have a car if gas is $100 per gallon.
Should it also be considered that the poor family is probably less likely to be able to front the full cost of the gasoline+tax and wait to be reimbursed?
Bob,
Sure, if everyone reduces their gas consumption to zero, then everyone is worse off. But that example is hardly a persuasive rebuttal to the claim that the CLC’s proposal wouldn’t leave 70% of people better off, is it?
Amber,
If the poor family can’t front the money, then they can take out a payday loan and pay it off out of the $10 a week they save over the first month or so. After that they’ll have the front money and will be saving $10 a week on gas.
Perhaps I’m misunderstanding, but this doesn’t seem to make any sense. How will a poor family that can only budget $30 per week for gasoline ever catch up to a weekly loan for an additional $40? Unless we’re assuming the tax credit is refunded on a weekly basis to allow for paying back the loan. But even then, Google and some simple math indicate that the interest on a one-week-term payday loan for $40 is likely to be about $12 – more than the per-week value of the tax credit.
Even if the credit is issued frequently enough for the family to pay off the payday loan, and even if the amount of the credit covers the loan interest plus the perceived value of the inconvenience of taking out loans to buy gas, it still seems to me the poor family is forced to choose between the two non-preferred options of reducing consumption or jumping through a lot of extra hoops to maintain consumption at its preferred level, which I would say does in fact make them worse off.
Amber,
I just looked it up, and you can get a two week payday loan of $100 for $15 in interest. The poor household is saving $10 a week net on gas, or $20 over two weeks. $20 > $15.
Alternatively, the family could just put the extra $40 on a credit card and pay it back out of the $40 saved over the course of the month when the bill comes due.
I’ve tried to post a more mathy comment but it seems to be getting eaten by the spam filter.
You are suggesting a one-time solution to a reoccurring problem. In order to keep its gasoline consumption constant the poor family must spend $40 over its budget every single week. Meeting this spending requirement by taking on additional debt will mean that the debt keeps snowballing until the dividend check comes in to pay it off.
Using your numbers for a payday loan and positing a quarterly dividend, the family will have accumulated more than $200 in debt *beyond* what they get in the dividend check by the end of the quarter. Average credit card rates also appear to be in the 15% range, so the family will hardly be better off going that route.
The financial reality for a poor family just scraping by is that a dividend later will need to be very high to cover the cost of the higher price today and the incovenience of figuring out how to absorb that cost. Notwithstanding all of the other considerations that others have posted here, a substantial number of people live this paycheck-to-paycheck existence and they will be worse off under such a scheme.
No, he is not suggesting a “one time solution to a recurring problem.” He is not, and so you are confused.
He is pointing out that there are lots of ways to finance the initial “float” needed and come out ahead.
Craw, my point is that a family with a zero-sum budget *can’t* finance that initial float and come out ahead under the conditions presented.
Since when is catching the bus free?
The bus company needs to pay the tax as much as anyone else, so bus tickets will also go up. The poor family ends up traveling a lot less so they don’t visit Auntie anymore, and the kids sit home and watch garbage on the TV. What’s the cost of that?
Given that the household can continue to buy 10 gallons of gas a week for $20 net, if they decide to take the bus instead then the bus presumably doesn’t cost that much.
In Australia typical bus trip is between $3 and $5 depending on how far you go. Then again, petrol is already insanely taxed here, and the dollars are smaller to start with. At any rate $20 per week would not be sufficient for one person to travel to work at a full time job. The only reason anyone catches a bus in Sydney is because in large parts of the city there is absolutely no parking and traffic congestion is atrocious. When the other choice is nothing at all, people will pay.
Remember that the bus company has to both pay for the fuel, and the wages of the driver, even for those times when the bus runs empty. They do catch it up during peak periods but not every route is popular. Try catching the bus every day for a while and tally up the cost, I think you will be somewhat surprised.
Tel,
Dude, according to the example, the poor household prefers taking the bus and keeping the extra cash to driving and being $10 richer than before. So by definition they are better off taking the bus. Bob himself has admitted this. In law school they called what you’re doing “fighting the hypothetical.”
Josiah wrote:
Dude, according to the example, the poor household prefers taking the bus and keeping the extra cash to driving and being $10 richer than before. So by definition they are better off taking the bus. Bob himself has admitted this. In law school they called what you’re doing “fighting the hypothetical.”
Dude, I wrote no such thing. I admitted I left out one piece of the analysis, but my conclusion still holds. I then tried to exaggerate it to make sure you got my point, to which you replied (paraphrasing), “Sure, my argument 10x makes no sense, but my argument 2x is bulletproof. And I have no need to explain why.”
Bob,
Which part don’t you admit: that spending $20 on net for gasoline is better than spending $30 for the same amount of gasoline, or that if a person chooses to buy less gasoline and keep more money that means he prefers that to spending $20 net on gasoline?
They probably would prefer to catch the bus under the unrealistic assumptions that bus fares are free and bus companies get access to free fuel and drivers don’t get paid.
But I’m not happy with those assumptions, which brings me back to my original point above.
I’m not happy with those assumptions, which brings me back to my original point above.
If you don’t like the assumptions then your problem is with Bob, not me. He’s the one who said the poor household preferred to take the bus and keep the extra cash.
I mean, I sort of agree the situation Bob posits is implausible. Why would someone reduce his gasoline consumption by 80% when he could maintain his old rate of consumption for less money on net than he was paying before.
But that’s the example that was given. If I say that Bob prefers chocolate to strawberry and strawberry to vanilla and therefore that he prefers chocolate to vanilla, it’s no response to say that he really prefers vanilla because chocolate tastes disgusting.
Josiah: The point of a carbon tax is that it influences your behavior. In a society of 300 million people, you don’t think, “If I buy more carbon-intensive goods, I get a bigger dividend.” The whole point is to make you think the true relative price of carbon-intensive goods is higher, so you buy less of them. Then the dividend check is to (in theory) keep the government from using up more resources, if the ostensible point of the Pigovian tax is to alter behavior, not raise revenue.
Now it’s true, I reduced it to two households, but that was to keep the math simple. If you want, think of the poor household representing 150 million poor people, and the rich household representing 150 million rich people.
So originally the poor household spent $30 on gas. Then after the $4 per gallon carbon tax, they reduced their purchases to 2 gallons, meaning they spent $14 on gas, meaning they freed up $16. (Right?)
Then in addition, each week they get a dividend check from the government for $34.
So, they have an extra $16 + $34 = $50 per week to play with. However, they have to take the bus, which isn’t free. So really they have an extra $50-B to play with each week.
The question is, can they buy 8 gallons of gas, at $7 per gallon, with this extra $50-B? If they could, then they are clearly better off with the scheme, because they can afford their original consumption bundle but choose to move to a different one.
But nope, they can’t. The 8 gallons of gas would cost them $56. But they only have $50-B extra. Even if the bus were free, they couldn’t maintain their original lifestyle.
(To repeat, the whole point of the carbon tax is to make you think the goods are that much more expensive. If someone thought, “For every gallon of gas I buy, my dividend check goes up by $2,” then really the carbon tax would only be $2 per gallon. To assume the people take dividend checks as fixed makes sense in the real world, when millions of people are being taxed. It’s like saying a wheat farmer takes the world price of wheat as given.)
The even poorer household that does not have a car is certainly better off.
This is my understanding, but please correct me where I am wrong. One aspect of a tax is that it has deadweight loss, that is it alters behavior so people spend money on things they prefer less. The point of a Pigouvian tax is that this deadweight loss is not actually a loss, because it corrects exactly for the deadweight loss of an externality. We end up back at the position with no deadweight loss.
“To repeat, the whole point of the carbon tax is to make you think the goods are that much more expensive.” This is indeed the case. If we do not want to reduce consumption for another reason it would be senseless to say that a tax makes people better off on average.
So it is fairly clear that without the externality, a tax will have a net cost. That does not mean that it could not be re-distributive. The very poor family without a car demonstrates that. There is certainly some level of poverty (or fuel use) where the winners turn into losers, and without accounting for the externality or benefits of redistribution there must be more losses than gains.
So in your example the consumer of zero gallons is better off. the original consumer of 1 gallon is better off. At some point the consumer if a certain amount of gallons is not better off. Whether the poor are better off depends on the level of consumption we call poor.
If we change the parameters so the rich household uses 100 gallons and the poor household uses 10 gallons, we find a different outcome. The poor family cuts back to 2 gallons. The rich cut back the same proportion as before to 80 gallons. The poor family pays $8 in tax and receives a cheque for $164. They could then buy the original gas and still be better off.
So unless there s some reason I missed for selecting these particular numbers, you seem to be pointing out that tax has a deadweight loss, which we sort of knew already.
“The point of a Pigouvian tax is that this deadweight loss is not actually a loss, because it corrects exactly for the deadweight loss of an externality.”
Profits and losses are based on an individual’s subjective goals.
Since taxes force people to spend on what they prefer less, it’s not logically possible for a tax to correct exactly for subjective losses.
If a tax affects you, you’re either a loser or a crony.
There are no positive or negative externalities because only individuals profit or take losses, and no one is entitled to another person’s wealth.
If a bunch of people take losses due to the valuations of a few individuals, that’s not a negative externality, but a failure on the part of the many [individuals] to correctly anticipate consumer demand.
There’s nothing to correct for, except by the individuals for themselves.
It is not controversial to add up those little triangles. We are just minimising the area of the triangle. It is pretty widely accepted as a first approximation.
I am not quite sure where you are coming from, so let me know if I have summed up your position.
So in your view, if your pollution costs me money directly or causes me to make a choice I would not otherwise have made, although it is clear that I have suffered a loss, that is not an externality and this loss does not exist, or does not need to be accounted for in any way. Yet I am an individual and I have taken a loss.
Yet if a tax costs me money directly or causes me to make a choice I would not otherwise have made, then that loss is real.
Perhaps you can explain why there is no such thing as an externality as I don’t understand that.
Or are you saying that the losses from the externality are real, but there is no way to measure that loss, so we can’t off-set it?
Or are you saying that whilst positive and negative externalities are perfectly reasonable concepts there are none in this case?
If the latter it is not relevant because the intention of the law tax was to reduce demand – the externality does not have to be real for that to still be the case.
“Perhaps you can explain why there is no such thing as an externality as I don’t understand that.”
Rothbard explains:
“… the very concept of “collective goods” is a highly dubious one. How, first of all, can a “collective” want, think, or act? Only an individual exists, and can do these things. There is no existential referent of the “collective” that supposedly wants and then receives goods. ”
“So in your view, if your pollution costs me money directly or causes me to make a choice I would not otherwise have made, although it is clear that I have suffered a loss, that is not an externality and this loss does not exist, or does not need to be accounted for in any way. Yet I am an individual and I have taken a loss.”
You have taken a loss in pursuit of an end to which you were not entitled: the restriction of someone else’s right to use his property as he sees fit.
That is, your rights end where another’s begins.
If you grow a garden, and your neighbor builds extra floors on his house such that it deprives your garden of sun, you must bear the loss of your investment because your neighbor has every right to build on his property.
Same thing with pollution, in my view (but apparently not that of Ron Paul, who I consider to be a fine Austrian). Unless the person invades your property, you have no right to prohibit your neighbor’s use of his own.
(As a courtesy, given that you’ve engaged my argument, I feel I should say that circumstances don’t permit me to respond to further comments at the moment.
(I appreciate your time, and hope to have made a positive contribution.)
Which is saying that corporations don’t exist, and indeed cannot possibly ever exist… and that’s kind of weird when you look at the corporate world today. Seems like one of those cases where observation fails to match theory, but don’t worry, just add in a bit of dark matter to sort it out. Prevents the universe from flying apart (which is what happens when people are confronted with the idea their theory might be wrong).
That completely depends on the definition of property and how it is created and how those rights are enforced. If you follow the standard libertarian definition then first use is what creates a property right, so the garden wins, but only because libertarians are polite all the time since no one enforces the outcome.
If you follow a more traditional Anglo-Saxon legal definition, the original property right comes from conquest and the parcels of land get divided up by the conquering party, in which case the garden generally loses although there’s appeal to whatever powerful entity exists to enforce those property rights.
“Which is saying that corporations don’t exist, and indeed cannot possibly ever exist… and that’s kind of weird when you look at the corporate world today. Seems like one of those cases where observation fails to match theory, but don’t worry, just add in a bit of dark matter to sort it out. ”
No, this is similar to when you objected to the word “government” being used as a term of convenience, as in “government does this or that”, when we really mean certain individuals in government.
Same with corporations. “the Corporation” doesn’t do anything as a collective. Individuals in the corporate structure do.
“That completely depends on the definition of property and how it is created and how those rights are enforced. If you follow the standard libertarian definition then first use is what creates a property right, so the garden wins, but only because libertarians are polite all the time since no one enforces the outcome.”
A thing has to be transformed by the homesteader. I only say this to cover anything missed by the word “use [of]”.
The garden owner owns the land he worked. His rights end there, and are therefore naturally limited by any transformation of a neighboring homestead.
“If you follow a more traditional Anglo-Saxon legal definition, the original property right comes from conquest …”
The problem with this theory is that it requires disagreement, so it’s internally inconsistent.
A right is a universal law. That’s why that word is used, rather than “duration of use”, or some such.
Property rights and enforcement are two different issues.
Rights being universal laws, they have to be based on something.
The conquest theory is based on “might makes right”, which is no right at all – it can justly be taken from you by someone more powerful.
But that doesn’t establish a right, that just establishes who’s using the property at any given moment. You don’t need to couch conquest in terms of property rights to assess who’s using something.
The homesteading right is not a theory of defense but of just claim.
Any violent defense against conquest, or the conquest (reacquisition) of stolen property has a laws to which it must conform if it is to be a preservation of a right.
Guest, but your pollution is blowing onto my property. You have no right to trespass under these rules, so must cease producing the pollution entirely if I say so.
The pollution is owned by no one, unless there’s an agreement in place to assign ownership.
“The pollution is owned by no one, unless there’s an agreement in place to assign ownership”
The pollution is derived from materials that were explicitly owned by the polluter. If I buy coal for my fire and produce ash then I own the ash. I cannot simply dump the stuff on my neighbors lawn without taking responsibility.
So under your rules I can claim ownership of not only the air currently in my lungs, but also all the air that has ever passed through my lungs. Since statistically at least one or two particles of my air are in your lungs right now, you do seem to have just agreed to pay me for rent of my property. You can send the cheque to the Mises Institute, a worthy cause.
But wait… property has never worked that way. If a $10 note falls out of my pocket and someone else picks it up an hour later after I’ve walked away then the money has a new owner and all ownership history is erased.
If a fisherman catches two fish, and then decides one is too small so he throws it back, ownership of the returned fish has been extinguished. If the big fish manages to flip-flop out of the boat while the fisherman’s back is turned then the fisherman now owns zero fish.
Should the fisherman give up and turn to drinking beer, then take a piss over the side of the boat, that also has no owner… exactly the same as the fish.
This has been the case for almost all of human history, and applied to everything from a flu virus passed on by sneezing, to smoke from a camp fires, to stray animals escaped from their enclosure (which might sometimes get returned but very often not), to lost goods fallen by the roadside, even maritime salvage laws worked that way.
Only in the very recent history did any nation get rich enough to start worrying about “pollution” as a consequence of being so rich they ran out of other things to worry about. At that point, new laws were created that never existed before, new restrictions, and new perspectives on property.
Tel, I don’t think you ever owned the air in your lungs. You do own the coal you buy.
Just to clarify, you are in favor of me dumping ash over your garden as I don’t own the ash?
From wikipedia:
” The general rule attaching to the three types of property may be summarized as: A finder of property acquires no rights in mislaid property, is entitled to possession of lost property against everyone except the true owner, and is entitled to keep abandoned property.”
So the property I lose and you find actually still belongs to me.
Your case collapses.
If the poor husband and wife split up and each one registers as a separate “household” then they each buy 5 gallons for individual total of $35 price at the pump. The total tax collection is $100 of which the husband household gets $33.33, the wife household gets $33.33 and the rich household gets $33.33 . Now the poor families are only paying $1.67 per week for gasoline, they would probably buy more.
However, on the margin, the poor husband now pays $5.67 per gallon for each additional purchase, so if you believe the incentive is driven by what happens on the margin, then effectively the price has still gone up.
Yeah, but if the rich couple split up too we are back to square one.
Maybe the rich couple enjoy each others company and don’t want to split up. They can afford it.
But maybe the rich guy falls in love with the now separated poor woman and sets up a new household.
Ur an evil man.
Aisling said she was tortured: [Methods of torture removed. –RPM]
And then ur fan made fun of her for it: ‘You might as well be on a physics blog posting quotes from people denying gravity, and talking about how your personal experiences with falling on your head makes you more capable of understanding gravity than those dummies studying physics text books and numbers and stuff.’
Fuck capitalism. Fuck slavery. Fuck torture. Fuck all libertarians who r like u.
Aisling told me not to promote violence in her name so I mean fuck in a symbolic way.
Maybe you should be angry at whoever [inflicted the torture].
I can b angry at as many ppl as I wanna b angry at!!!!!!!!!!!!!!!!!!
Aisling says capitalism causes torture. And so does socialism. So fuck the ppl who tortured her, fuck capitalism, fuck socialism, fuck torturers, fuck slavers, fuck ppl who want capitalism and torture, and fuck Bob Murphy and ppl like him.
Symbolic fucks not violent fucks.
Please tell me if I have made a mistake in the following analysis, because it reaches what appears to be the opposite conclusion to Bob, and that seems unlikely.
The claim originally was that 70% of Americans would be better off. Bob’s point I think is that this is exaggerates the number of people that benefit because it does not include the fact that they must make different choices with the same amount of money, and they prefer the original, so they are worse off.
It might make it easier if we pick the case where the person is exactly as well off in money terms- that is the marginal case. The point that we cannot include the returns from their own payment is well taken. This leads me to the opposite conclusion, but I am not sure about this, so input would be welcome.
1) Before the tax we have a person that used to spend say $50 a week on fuel. The tax increases the price by 10%. If he were to maintain his consumption as before he would spend $55 a week, so needs a rebate of $5 to make him exactly as well off as before. If I am right Schultz and Halstead would have it that he is as well off as before.
2) However, we know that he will actually not spend as before, because the amount he gets in rebate is not affected by his own consumption. So the increased price will cause him to shift his spending to preferred options at the new price. Lets say he reduces consumption to $45 a week. At this higher price he prefers to spend the $5 on something else than gas. So the new situation is that when he spends his $50 he is getting a better basked of goods than if he spent is all on gas at the new price.
3) After the tax rebate, he gets the new basket of goods at $50 plus the $5 rebate. We know he values the new basket of goods at higher than $50 of gas at the new price.
4) If he was exactly as well of as before when he spends $50 on gas at the new price, he is now better off, because he has a better basket plus the $5
5) This leads me to conclude that there will actually be more people who are better off than Schultz and Halstead say.
I am not 100% sure about this, but can’t see where I have gone wrong. It seems a good principle to take the marginal case because we don’t have to worry about how much the bus costs etc. We just ned to knw that he prefers to reduce gas consumption at the new price.
I am in the middle of “day job” stuff but Harold: Suppose government passes a law saying, “Harold alone is forbidden from buying food. But we will send him a check for $50 per week.” According to Schultz and Halstead, you benefit economically from that arrangement. Do you agree?
No, but I don’t think that offers an explanation. If government learns I spend $10 a week on apples, then forbids me alone from buying apples but sends me $10 a week, I am certainly better off because I can buy pears, which I like almost as much. I am not quite $10 a week better off, because I marginally prefer apples, so I suffer that deadweight loss, but I am certainly better off. Society as a whole is worse off because I get slightly less than $10 benefit for $10 cost.
That was why I tried to pick the marginal person who was considered to be just as well off as before. Then we don’t have to consider how much I prefer apples to pears or how much the bus costs.
I think it is obvious that given an even distribution of the rebate, some people would be better off – those that spent nothing on gas for example. Also some people will be worse off. Deadweight loss tells us that there will be more loss than gain overall, but that was not the claim. It was that 70% of Americans would be better off.
Your analysis says that this is misleading. My analysis says that actually more people would be better off IF the 70% was accurately worked out by assuming consumption for those individuals stayed the same.
Harold wrote: If government learns I spend $10 a week on apples, then forbids me alone from buying apples but sends me $10 a week, I am certainly better off because I can buy pears, which I like almost as much.
No I think you’re misunderstanding my modest point. Those writers weren’t saying, “Hey for all we know, it’s entirely possible that the people who get more in the dividend check than they pay in higher energy prices, will prefer the new arrangement.” No, they said BECAUSE the 70% (or whatever) would get more in dividend checks than they paid in higher energy prices, that they’d be “better off economically” (I think was the exact phrase).
So no, that’s a bad argument. I demonstrate why it’s bad with exaggerated examples to make the point.
If someone says, “Getting shot twice is good, because I heard someone say ‘two is better than one,'” then that is a terrible argument. Even if you come up with a scenario with a terminally ill patient who actually would prefer to get shot twice.
I see I think. Putting it in terms of identifying the individual that is just as well off before and after the tax. My “marginal case” was someone who got back the same as he paid before the tax. You say the marginal case that the writers were pointing to would be the person that got he same back as they were paying after the tax. OK, I can go with that. My marginal case person is at least as well off as before, but the other one may be worse off. Indeed, I think they must be worse off.
I have also spotted the error in my analysis. If price goes up, you will consume less but you will pay more. I put post tax fuel spending at $45 but that was wrong, it would be more like $53 for less fuel.
Harold, sorry, I’m spread really thin because of my DC trip. It’s possible I am misunderstanding your position, but I’m not able to sit down and read these comments carefully right now.
Bob, My last comment was basically agreeing with your point – you could have more dollars but not be better off economically. Point taken, no problems.
I spotted an error in my analysis eventually, so not need to even look at it.
Problem: Amber is too poor to buy lattes.
Josiah promises to pay Amber $40 a week if she keeps $30 on cash in the house at all times.
Amber objects that she doesn’t have $30.
Harold offers to lend her $30 for a week if she pays back $35.
Can Amber improve her circumstances?
Depsite being a middle-aged white woman, Amber is not dumb enough to go into debt to buy lattes.
But what if Josiah only offers to pay up at the end of a year?
yes
Somehow my comment became added to my name, so after moderation we may see a similar comment by yesharold.