Passing on taxes

Empirical data and theory both show that emissions taxes get passed to consumers 6

Sean asks, "If you put a price on GHG emissions, will it raise the cost of energy?" and answers, "Mostly, no." I wish he were right, because I really dislike carbon taxes and was only gradually convinced to support them by overwhelming evidence.

But pretty much every empirical study that has ever been done about sales tax and other broad-based taxes on gross revenue shows that such costs do get passed along.

A fairly typical survey of such studies would be this article (PDF) in the National Tax Journal. The pass-along ranges from two-thirds of the cost (during depressions) to more than 100 percent of the cost. (The reason businesses sometimes pass along more than 100 percent of a sales tax is that demand curves sometimes act more like step-functions. There may be no significant difference between lost sales at a price of x and a price of x+n, so if you have to raise prices by x, you may as well get the extra revenue from a rise of x+n.)

If you look at your own experience, gasoline prices have certainly followed oil prices in their rate of increase. Products of oil-intensive manufacturing processes have passed along the increased cost. Coal-based electricity producers have passed along their costs, as did natural gas based electricity producers some years back. All airline ticket prices increased as oil prices rose. Yes, long-notice booking remained cheaper than short-notice booking, but both kinds increased in price.

Why do broad-based taxes act differently than costs like labor? Because they are broad-based. If a sales tax hits your product, it hits your competition's products too -- including alternatives you normally don't think of as competition. So pass-through is restricted only by demand curve, not by a competitive market. In short, the division of cost between the producer (including workers) and the consumer is similar to the pass-through of costs in a monopoly situation. Quite often the producer can pass along almost all costs, and certainly can almost always pass along the majority of costs.

Bottom line: Conventional economic theory here is supported by the facts. Emissions taxes do get passed along. Of course, emission prices being passed along does not mean raising prices is all we need to do. That will be a future post.

Gar Lipow, a long time environmental activist and journalist with a strong technical background has spent years immersed in the subject of efficiency and renewable energy. He has written extensively on the economics of solving the global warming, and why pricing externalities (though important) cannot be the main driver of such solutions.

His on-line reference book compiling information on technology available today, “No Hair Shirt Solutions to Global Warming”, is available at http://www.nohairshirts.com.

His articles on the economics and politics of solving the climate crisis have been published in Z magazine and a number of small journals.

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  1. BILL HANNAHAN Posted 5:17 am
    01 May 2008

    It's not a tax

    The problem is with the word tax. It is a fee on the dumping of toxic harmful waste into the atmosphere. Imposing fees on the dumping of toxic waste encourages people to shop around for better options.
    Unfortunately we have doled out R&D money with an eye dropper for several decades, so there are limited options to transition to. Using the fees to accelerate the development of new options would be a good idea.



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  2. GRLCowan's avatar

    GRLCowan Posted 7:28 am
    01 May 2008

    Tax? Fee?The problem is with the word tax. It is a fee on the dumping of toxic harmful waste into the atmosphere.
    Bribe is a good word.
    One person's stick is another's carrot.
    How shall driving gain nuclear cachet?

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  3. Wolverine Posted 7:46 am
    01 May 2008

    Irrelevant Who Pays, Just Stop The PollutionSo what if taxes on bad behavior get passed down to consumers?  While it would be great to redistribute wealth downward, that's not the point of a carbon tax.  Making a behavior more expensive will usually reduce or eliminate that behavior, so let's have lots of high carbon taxes!

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  4. naturescene Posted 7:51 am
    01 May 2008

    hmm,I'm not sure that conventional economic theory really states that producers can pass on most of a tax.  Rather that the extent of a tax that can be passed relies on largely on demand elasticity, and in practice there are examples across the spectrum.
    So it's the demand elasticity that matters more whether or not a tax is "broad-based."
    The two products used in the study you provide - clothes and personal care items - are likely to have relatively inelastic demand curves for U.S. consumers so it's pretty obvious that the sales tax on those items gets passed on.  
    So compare carbon taxes to sales taxes on demand elasticity rather than the scale of the tax.  In all likeliness, you'd reach a similar conclusion but with a stronger foundation.

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  5. naturescene Posted 8:33 am
    01 May 2008

    none of thisdirectly refutes Sean's assertions that good carbon policy should provide penalties as well as incentives.

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  6. GreyFlcn Posted 9:06 am
    01 May 2008

    WellOne might question.

    Just how big of a burden are we talking about.

    http://www.ecogeek.org/content/view/1576/81/

    http://www.ecogeek.org/content/view/1600/66/
    And are we assuming that there are no positive returns to building infrastructure.

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