Some time ago, I wrote a piece that discussed the notion of a tax being revenue neutral.  It occurred to me that there is no way for a carbon tax to be both revenue neutral and effective at cutting emissions at the same time.

The logic is simple.  The government taxes carbon, and get $100,000 in revenue.  The government returns $100,000 in revenue in income tax breaks.  But clever consumers like myself find a way to cut back on consumption.  The next year, the government finds itself with $75,000 in revenue from the carbon tax, a quarter of the revenue evaporating as the tax base (carbon consumption) shrinks.  But the government is on the hook for the income tax breaks.  I mean, the whole point is to reward people who use less.  What better reward than to spend less and keep more?  So the $100,000 in income tax breaks has to be paid out of $75,000 in tax revenues.

You see the problem.

In fact, this is the fundamental problem of Stephane Dion's carbon tax scheme:

How it works: In another variation on a revenue neutral carbon tax, Prof. Mintz and Nancy Olewiler, a professor at Simon Fraser University, propose transforming the existing 10¢ a litre excise tax on gasoline into a broader-based tariff on all fuels. Simply extending the existing gas tax rate to other fuels would be the equivalent of a $42 per tonne surcharge on carbon emissions, or roughly an 18% increase on home-heating costs. They suggest the new tax would generate $12-billion to $15-billion a year, which could be used to cut corporate and personal income taxes by 10%, thus mitigating the effect of low income families and corporations.

Who supports it: The plan's most enthusiastic booster may be Stephane Dion, the Liberal leader, who appears to be using the professors' work as the model for his party's plan.

What are the drawbacks: If the plan is successful in cutting emissions, the revenue generated would eventually drop, requiring a 2% tax hike in the future.

If the plan is successful, we'll pay even higher taxes!

In fact, to remain revenue neutral, the carbon tax rate has to compensate for the drop in the carbon tax base on an ongoing basis.  That means that even though we have an income tax cut, any attempt to curtail carbon usage will be punished by increasing the carbon tax.

Get that?  Stephane Dion will punish Canadians for using less carbon by increasing the carbon tax on what carbon we do use, so we can never actually enjoy some benefit of being green.

Then what's the point of being green?

Indeed, the answer is that there is no point.  This carbon tax is not about helping the environment.  A carbon tax makes sense if the goal is to shrink government.  Income tax supports stable or growing governments, because people work hard to increase their income.  Revenues from a carbon tax shrink over time, so either government shrinks, or the carbon tax goes up.

Or just as likely, all taxes go up.  Except maybe income tax, because of the bad optics.  But gas surcharges would go up (not a carbon tax on gas, Liberals will say, but an entirely unrelated tax) and the GST would go up (applied to gas, of course, and everything else).

These taxes have to go up, because a carbon tax, if it works, cannot fund income tax breaks.  It's impossible.  The size of the breaks goes up as people earn more.  The size of the carbon tax drops as people burn less.  That's the definition of deficit.

So will Canadians see the carbon tax and other taxes go up and up as Stephane Dion tries to maintain the promise to be revenue neutral?

Maybe not, and the reason is simple.  Stephane Dion and his people will see the obvious problem with this idea.  I saw it.  James Cowan of the National Post saw it.  Anyone who gives the idea a few minutes' thought will see it.

So revenue neutral will be redefined.  The Liberals will promise to spend the money on behalf of Canadians for their benefit.  See?  Revenue neutral because the government won't keep it, but Canadians will see more government-funded services.

The varying levels of carbon tax revenue is still a problem, but as long as the government spends less than it brings in (not revenue neutral in the strictest sense, but then the government promises to eventually spend the money), the dips in carbon usage can be managed, and increases in other taxes can make up the difference if needed.

In the end, I won't see my income taxes or any other taxes go down.  I won't see a real benefit in cutting back in carbon -- the carbon tax will be just another tax, like the GST.  I'll cut back on spending in general in order to pay all my taxes, new and old, and Stephane Dion will have revenue to pay for government programs directed at key Liberal constituencies, like environmentalists.  David Suzuki and Elizabeth May will praise the carbon tax, even though nothing is really changing.

This is like a magic trick.  Nothing is really different.  It just looks different.  It's an illusion.  The only different is that I'm poorer, paying for a new tax that doesn't do what it's supposed to do.

Maybe that's not fair.  Maybe the carbon tax is doing exactly what it's supposed to do.  Pay for Liberal promises and nothing more.

I guess we'll see who'll be tricked into thinking this is a good thing.