Forecast | Carbon tax set to replace the national sales tax

So there’s a big deal right now called climate change that some people are talking about (if you haven’t heard about it, this is a good primer), and whenever the talking heads on television mention the subject, the topic of a carbon tax often comes up.

The simple (Googled) definition of a carbon tax is a tax on fossil fuels, especially those used by motor vehicles or consumed during industrial processes, intended to reduce the emission of carbon dioxide. The more carbon emissions a product or service adds to the environment—either in its creation, or use, or both—the greater the tax placed on said product or service.

In theory, that sounds like a worthwhile tax, one that economists from all political leanings have supported on record as one of the best ways to save our environment. Why it never works, however, is because it’s usually proposed as an additional tax overtops an existing one: the sales tax. For tax-hating conservatives and the annually increasing base of penny-pinching voters, proposals to implement any kind of carbon tax in this way are fairly easy to shoot down. And truthfully, rightly so.

In the world we live in today, the average person already struggles to live pay check-to-pay check. Asking people to pay an additional tax to save the planet will simply never work, and if you live outside of the developing world, asking that would also be totally immoral.

So we have a pickle here: a carbon tax really is the most efficient way of addressing climate change, but implementing it as an additional tax just isn’t doable politically. Well, what if we could implement a carbon tax in a way that both lowered greenhouse gas emissions AND lowered taxes for individuals and businesses?

The sales tax and a carbon tax—one has to go

Unlike the carbon tax, we’re all very familiar with the sales tax. It’s that extra bit of money tacked onto everything you buy that goes to the government to help pay for government-y things. Of course, there are many kinds of sales (consumption) taxes, like the manufacturers' sales tax, wholesale sales tax, retail sales tax, gross receipts taxes, use tax, turnover tax, and many more. But that’s part of the problem.

There are so many sales taxes, each with a multitude of exemptions and complicated loopholes. More than that, the percentage of tax applied on everything is an arbitrary number, one that barely reflects the government’s real revenue needs, and it in no way reflects the true resource cost or value of the product or service being sold. It’s a bit of a mess.

So here’s the sell: Instead of keeping our current sales taxes, let’s replace them all with a single carbon tax—one without exemptions and loopholes, one that reflects the true cost of a product or service. That means that at any level, whenever a product or service changes hands, a single carbon tax is applied on the transaction that reflects the carbon footprint of said product or service.

To explain this in a way that hits home, let’s take a look at the advantages this idea would have on various players in the economy.

(Just a side note, the carbon tax described below won’t replace sin or pigovian taxes, nor will it replace taxes on securities. Those taxes serve particular societal purposes related to but separate from the sales tax.)

Benefits for the average taxpayer

With the carbon tax replacing the sales tax, you might pay more for some things and less for others. For the first few years, it will probably skew things more to the expensive side, but over time, the economic forces you’ll read below could eventually make your life less expensive with each passing year. Some of the key differences you’ll notice under this carbon tax include the following:

You’ll gain a greater appreciation for the impact your individual purchases have on the environment. By seeing the carbon tax rate on your purchase’s price tag, you’ll know the true cost of what you’re buying. And with that knowledge, you can make more informed buying decisions.

Related to that point, you’ll also have the opportunity to decrease the total taxes you pay on everyday purchases. Unlike the sales tax which is fairly constant across most products the carbon tax will vary based on how the product is made and where it comes from. This not only gives you more power over your finances, but also more power over the retailers you buy from. When more people buy cheaper (carbon tax-wise) goods or services, that will encourage retailers and service providers to invest more in providing low carbon purchase options.

With the carbon tax, environmentally-friendly products and services will all of a sudden appear cheaper when compared to traditional products and services, making it easier for you to switch. One example of this is that healthier, locally produced food will become more affordable compared to “normal” food that’s imported from distant parts of the world. That’s because the shipping carbon costs involved with importing food will place it at a higher carbon tax bracket, compared to locally produced food that travels only a few miles from the farm to your kitchen—again, reducing its sticker price and maybe even making it cheaper than normal food.

Finally, since buying domestic instead of imported goods will become more affordable, you’ll also have the satisfaction of supporting more local businesses and strengthening the domestic economy. And in doing so, businesses will be in a better position to hire more people or bring more jobs back from overseas. So basically, this is economic catnip.

Benefits for small businesses

Like you may have guessed by now, replacing the sales tax with the carbon tax could also be a huge benefit for small, local businesses. Just as this carbon tax allows individuals to reduce their tax on the products or services they buy, so too does it allow small businesses to reduce their total tax burden in a variety of ways:

For retailers, they can reduce their inventory costs by stocking their shelves with more products from a lower carbon tax bracket over products at a higher carbon tax bracket.

For small, domestic product manufacturers, they can also take advantage of the same cost savings by sourcing materials with lower carbon taxes for use in their product manufacturing.

These domestic manufacturers will also see a boost in sales, since their products will fall under a smaller carbon tax bracket than imported goods from other parts of the world. The shorter the distance between their production plant and their end retailer, the lower the tax on their products and the more they can compete on price with traditionally cheaper imported goods.

In this same way, smaller domestic manufacturers could see larger orders from big retailers—the Walmart’s and Costco’s of the world—who will want to reduce their tax expenditures by sourcing more of their products domestically.

Benefits for big corporations

Large corporations, the ones with expensive accounting departments and massive buying power, could become the biggest winners under this new carbon tax system. Over time, they will crunch their big data numbers to see where they can save the most tax dollars and make their product or raw material purchases accordingly. And if this tax system were adopted internationally, these companies could maximize their tax savings that much more, thereby reducing their total tax expenses to a fraction of what they pay today.

But as hinted previously, the corporations’ biggest impact will lie in their buying power. They can place substantial pressure on their suppliers to produce goods and raw materials in more environmentally sound ways, thereby reducing the total carbon costs associated with said goods and raw materials. The savings from this pressure will then flow up the buying chain to the end consumer, saving money for everyone and helping the environment to boot.

Benefits for governments

Alright, so replacing the sales tax with a carbon tax will obviously be a headache for governments (and this I will cover shortly), but there are some serious advantages for governments to take this on.

First, past attempts to propose a carbon tax usually fell flat because they were proposed as an additional tax overtop an existing one. But by replacing the sales tax with a carbon tax, you lose that conceptual weakness. And since this carbon tax-only system gives consumers and businesses more control over their tax expenditure (versus the current sales tax), it becomes an easier sell to conservatives and to the average voter who is living pay check-to-pay check.

Now for the first two to five years after what we’ll now call the “carbon sales tax” comes into effect, the government will see an increase in the total amount of tax revenue it collects. This is because it will take time for people and businesses to get used to the new system and learn how to adjust their buying habits to maximize their tax savings. This surplus can and should be invested in replacing the nation’s aging infrastructure with efficient, green infrastructure that will serve society for the next several decades.

However, in the long term, revenues from the carbon sales tax will fall substantially once buyers at all levels learn how to buy tax efficiently. But here’s where the beauty of the carbon sales tax comes into play: the carbon sales tax will incentivize the entire economy to gradually become more energy (carbon) efficient, pushing costs down across the board (especially when combined with the density tax). An economy that’s more energy efficient doesn’t need as much government resources to operate, and a government that costs less requires less tax revenue to operate, thereby allowing governments to reduce taxes across the board.

Oh yeah, this system will also help governments worldwide meet their carbon reduction commitments and save the world’s environment, without having to spend a fortune doing so.

Temporary downsides for international trade

For those who have read this far, you’re probably beginning to ask what the downsides of this system might be. Simply, the biggest loser of the carbon sales tax is international trade.

There’s no way around it. As much as the carbon sales tax will help boost the domestic economy by incentivizing the sale and creation of local goods and jobs, this tax structure will also act as an indirect tariff on all imported goods. In fact, it could very well replace tariffs altogether, as it will have the same effect but in a less arbitrary manner.

For example, export- and manufacturing-driven economies like Germany, China, India, and many South Asian countries hoping to sell to the US market will see their products sold at a higher carbon tax bracket than US products made domestically. Even if these exporting countries adopted the same carbon sales tax system to place a similar carbon tax disadvantage on US exports (which they should), their economies would still feel the sting more so than countries not as export dependant.

That said, this pain will be temporary, as it will force export-driven economies to invest more heavily in greener manufacturing and transport technologies. Imagine this scenario:

● Factory A loses business when country B implements a carbon sales tax that makes its products more expensive than products from factory B, which operates inside country B.

● To save its business, factory A takes a government loan from country A to make its factory more carbon neutral by sourcing more carbon neutral materials, investing in more efficient machinery, and installing enough renewable energy generation (solar, wind, geothermal) on its premises to make its factory’s energy consumption completely carbon neutral.

● Country A, with the support of a consortium of other exporting countries and big corporations, also invests in next generation, carbon neutral transport trucks, cargo ships and planes. Transport trucks will eventually be fuelled entirely by electricity or by gas made from algae. Cargo ships will be fuelled by nuclear generators (like all current US aircraft carriers) or by safer thorium or fusion generators. Meanwhile, planes will be completely powered by electricity through the use of advanced energy storage technology. (Many of these low-to-zero carbon emitting transport innovations are only five to ten years away.)

● Through these investments, factory A will be able to ship its products overseas in a carbon neutral manner. This will allow it to sell its products in country B at a carbon tax bracket that’s very close to the carbon tax applied on factory B’s products. And if factory A has lower workforce costs than factory B, then it could once again beat out factory B on price and win back the business it lost when this entire carbon tax transition first started.

● Whew, that was a mouthful!

To conclude: yes, international trade will take a hit, but in the long run, things will even out again through smart investments in green transport and logistics.

Domestic challenges with implementing the carbon sales tax

As mentioned earlier, implementing this carbon sales tax system will be tricky. First off, huge investments have already been made to create and maintain the current, basic sales tax system; justifying the extra investment of converting to a carbon sales tax system might be a hard sell for some.

There’s also the problem with the classification and measurement of … well, everything! Most countries already have detailed records in place to keep track of most products and services sold within their border—to more effectively tax them. The trick is, under the new system, we’ll have to assign specific products and services with a specific carbon tax, or bundle groups of products and services by class and place them within a specific tax bracket (explained below).

How much carbon is emitted in the production, use and transportation of a product or service needs to be calculated for every product or service to fairly and accurately tax them. This will be a challenge to say the least. That said, in today’s big data world, a lot of this data already exists, it’s just a painstaking process to put it all together.

For this reason, from the onset of the carbon sales tax, governments will introduce it in a simplified form, where it will announce three to six rough carbon tax brackets that different product and service categories will fall into, based on the estimated negative environmental costs associated with their production and delivery. But, as this tax matures, new accounting systems will be created to more accurately account for the carbon costs of everything in a more detailed manner.

New accounting systems will also be created to account for the distances different products and services travel between their source and end consumer. Basically, the carbon sales tax needs to price products and services from outside states/provinces and countries higher than products and services produced locally within a given state/province. This will be a challenge, but one that’s totally doable, since many states/provinces already track and tax outside products.

Finally, one of the biggest challenges to the adoption of the carbon sales tax is that in some countries or regions, the carbon sales tax may be phased in over a span of years instead of an outright switch. This will give the opponents of this change (particularly exporters and exporting countries) enough time to demonize it through public advertising and through corporate funded lobbying. But in reality, this system shouldn’t take too long to implement in most advanced nations. As well, given the fact that this tax system could lead to lower tax expenses for most businesses and voters, it should insulate the shift from most political attacks. But no matter what, exporting businesses and countries that will take a short term hit by this tax will angrily fight against it.

The environment and humanity wins

Big picture time: the carbon sales tax could be one of humanity’s best tools in its fight against climate change.

As the world operates today, the capitalist system places no value on the impact it has on the Earth. It’s basically a free lunch. If a company finds a spot of land that has a valuable resource, it’s basically theirs to take and make a profit from (with a few fees to the government of course). But by adding a carbon tax that accurately accounts for how we extract resources from the Earth, how we transform those resources into useful products and services, and how we transport those useful goods around the world, we will finally place a real value on the environment we all share.

And when we place a value on something, only then are we able to care for it. Through this carbon sales tax, we can change the very DNA of the capitalist system to actually care for and serve the environment, while also growing the economy and providing for every human being on this planet.

If you found this idea interesting on any level, please share it with those you care about. Action on this issue will only come about when the more people talk about it.

Likelihood of happening rating 
Moderate (3/5)
importance rating 
Massive (5/5)
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March 1, 2019. Last updated March 1, 2017.
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