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Jun 25, 2020 | Ireland, Politics | 0 comments

Carbon tax can’t be the solution to government finances

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Stephen Moynihan

Written by Stephen Moynihan

The prospective government suggest that pigouvian taxes could be used to fund government finances. Here, we look at how this could be an issue should a government be formed.

6min Read

Stephen Moynihan

Written by Stephen Moynihan

6min Read

The prospective government suggest that pigouvian taxes could be used to fund government finances. Here, we look at how this could be an issue should a government be formed.

The Programme for Government’s lack of clarity regarding the financing of future expenditure is problematic. Most prominently is the promise that income taxes and Universal Social Charge will not rise; instead the prospective government states that they will ‘focus any tax rises on those taxes that tax behaviours with negative externalities, such as carbon tax, sugar tax, and plastics.’

This begs the question, why exactly are these ‘Pigouvian’ taxes in place? The politically expedient answer is that they compensate for harmful behaviour – the ‘negative externalities’ – and the money recouped when people purchase fossil fuels, sugary drinks or plastic bags allows for this ‘cost to society’ to be balanced out. Ideally these taxes would function as part of a package of measures to eradicate these harmful behaviours. According to this view, the main justification for a carbon tax is to change behaviour, not necessarily for tax revenue.

Of course, the suggestion by many ordinary people is that these taxes are there primarily to add to government coffers, which is perhaps why they prove so controversial. People may have more understanding towards the implementation of a carbon tax if these taxes are seen as a way of creating a better society – they are much more likely to ‘buy in’ if they feel they are there for ethical or moral reasons.

However, this Programme for Government has betrayed the fact that taxes like these will be used at least partially with the aim of creating revenue. Any future carbon tax rise could be seen, with good reason, as a cynical attempt to fund government expenditure and not necessarily to mitigate the harmful behaviour associated with the use of fossil fuels.

Furthermore, a rise in these taxes will likely create a dilemma for the next government. A rise in carbon tax, for example, will lead to a greater disincentive associated with purchasing fossil fuel energy. However, if one of the government’s aims is to reduce our carbon footprint, while depending on the carbon tax to fund government expenditure, how will the government choose to go about this balancing act? If less carbon is purchased (a good thing) then there will be less exchequer revenue (a bad thing).

Does the government increase carbon tax in this scenario to get further revenue from the dwindling purchases of carbon? This could disincentivise carbon purchases further, potentially decreasing revenue. How about lowering carbon tax? That encourages purchase of fossil fuels, increasing our carbon footprint.

This puts any prospective government in quite the predicament.

A move towards a more progressive taxation model to fund expenditure would be preferable. Taxes on goods with ‘negative externalities’ are often regressive in nature, harming those on lower incomes rather than big business or those who are better off. Wouldn’t this be preferable to relying on the paradox of Pigouvian taxes?

This Programme for Government has raised more questions than answers when it comes to this issue. Are they there primarily to create revenue or to change behaviour? It’s impossible to tell, the waters have been further muddied. I wouldn’t bet on us getting a straight answer any time soon either.

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