Liberal Party of Canada – Carbon Tax Plan

By Mike Moffatt, About.com
For a plan put together for political, rather than environmental or economic purposes it is rather strong. Overly timid and chooses progressivity over efficiency, but a solid plan nonetheless.

Basics of the Liberal Carbon Tax Plan

The Liberal plan is relatively straight-forward – a $40/tonne on carbon dioxide emissions, phased in over a 4 year period. This tax would replace a number of existing excise taxes on carbon based fuels. Since the existing federal gasoline tax is equivalent to the rate 42 dollars/tonne of carbon, gasoline taxes are not unchanged with this new tax.

Once fully implemented the carbon tax is expected to bring in 15 billion dollars. With this revenue, the Liberal plan is to reduce other taxes by 9 billion. The plan is to reduce both corporate tax rates (1 percent for both the regular and small business rates) and income tax rates (a 1 1/2 percent reduction in the lowest tax bracket, 1 percent reduction in each of the middle two tax brackets and no change to the top tax bracket).

The remaining 6 billion dollars is allocated to a grab-bag of tax rebates, largely aimed at low income families with children.

Strengths of the Liberal Carbon Tax Plan

There are a number of things to like about the Liberal plan.

  • The plan is revenue neutral, if one considers tax rebates equivalent to tax cuts. Even if you take the view that a tax rebate is a spending program in disguise (which I do), 60 percent of the revenue from the carbon tax is still allocated to tax cuts.
  • The two types of taxes being cut, corporate income taxes and income taxes are two of the most damaging taxes to the economy. Cutting these two taxes should largely offset the economic damage caused by the carbon tax.
  • Since this tax replaces a number of existing taxes, it may be possible to keep the administrative and enforcement costs of the tax relatively low.
  • The progressive nature of the plan and the fact that almost all of the benefits go to consumers (whereas much of the carbon tax will be paid by businesses) may make the idea of a carbon tax easier to swallow for consumers. Particularly if they realize that in the short-run the plan acts as a transfer of wealth from businesses to consumers.

Weaknesses of the Liberal Carbon Tax Plan

The plan is relatively timid – a higher carbon tax rate would allow for more dramatic cuts to corporate tax rates. The three most damaging marginal tax rates – the small business corporate rate, the regular corporate rate and the highest marginal income tax rate receive the smallest rate cuts (in the case of the top income tax bracket, it sees no cut at all). That, along with the tax rebates make the plan more economically damaging than it could have been.

Final Thoughts

It is far from an optimal plan, but as a plan designed to help win an election, it still contains a great deal of economic benefits.

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