Conflate two separate issues and you get one policy error. That is what too many opponents of carbon taxes are doing, getting caught up in the argument about climate change, which really has nothing to do with the case for a carbon tax. That case is that such a tax can make growth-inducing tax reform easier to achieve, and reduce the need for an expansion of the regulatory state, while protecting the competitiveness of our industries.
There is broad agreement that our tax structure is slowing economic growth and job creation. We are more at risk from tax inversion mergers than from weather inversions as our corporations flee to countries with half our stated corporate tax rate. Our payroll taxes, layered over with new taxes concealed in Obamacare, discourage work and risk-taking, and discriminate against modest earners. Our corporations sit on billions overseas rather than pay a huge fee for repatriating the cash.
A carbon tax would provide funds to make an attack on these nonsensical features of our tax code far easier. At minimum such a tax can be revenue-neutral, with the proceeds offsetting reductions in other taxes; at maximum, it might be what Wall Street calls revenue-accretive, generating new revenues by stimulating growth and job creation. Critics of such a proposal argue, first, that we can trust the government to impose a tax, but not to make it revenue-neutral. And there is no denying that Washington’s appetite for cash to spend increases by what it feeds on. No need to run that risk. Simply estimate the proceeds – something we do all of the time, albeit imperfectly – and reduce workers’ and/or employers’ payroll taxes immediately, this week, by a like amount. Get the math wrong? Fix it after a few months.
Such a tax would have the distributive consequences conservatives favor, helping those who are most in need of tax relief. It would take a malign tax-writer indeed to find ways to hurt the poor and middle class more than the current growth-stifling tax code that has millions out of work and more millions so despairing of even finding work that they have dropped out of the labor force. After all, a carbon tax “hurts” major energy consumers more than any others. And since yachts consume more fuel than row boats, Bentleys more than Chevrolets, huge mansions more than modest homes, it is far from certain than revenue-neutral carbon taxes would be regressive. Daniel Morris and Clayton Munnings of Resources for the Future, the think tank all sides agree is doing the most careful and non-partisan research on environmental issues, conclude that any regressivity “can easily be addressed in the design of carbon pricing policies…. Recent economic literature … moves away from the idea that carbon pricing is strictly a regressive policy…. Carbon pricing may have a neutral or possibly even progressive effect -- even before redistributing tax revenue.”
In fact, it is not necessary to prove that carbon taxes will not be regressive. All that is necessary is to demonstrate that such taxes would be less regressive than the payroll taxes they would replace or at least mitigate. Of that there is no doubt since earnings above $113,700 are exempt from the truly regressive taxes on take-home pay.
It is, of course, true that the energy industries that are now setting up here in America would see their tax bills and perhaps the prices of their products rise. But the savings from substituting carbon taxes for the cost of the massive regulatory apparatus that the President has selected as his alternative might well offset the rise in taxes for energy-producing industries. Besides, the gap between the cost of energy here and that in, say, Germany is so great because of the World Cup champion’s heavy reliance on the promotion of renewables: not even a sensible carbon tax can wipe out our competitive advantage. Having found renewables a costly and uncertain source of energy, and nuclear politically unacceptable, the German government is now allowing the construction of coal plants. And, as the BBC put it, “not just any old coal, but lignite, the dirtiest form of this ancient fossil fuel that is mined in vast opencast pits.”
Which brings us to China. Conservatives have long wanted to convert theoretically “free trade” with China into the reality of “fair trade.” It seems beyond the ability of our political class to do anything about China’s currency manipulation. But the tools are at hand to prevent China from using a U.S. carbon tax as an added competitive advantage for their high-polluting manufacturing industries. It would be quite legal to impose what is called a “border tax adjustment” to account for emissions attributable to imports from the People’s Republic and other nations who do not price carbon by taxing it. With China’s manufacturing sector already beset by rising labor costs and excess capacity, the regime might just decide that the border tax adjustment makes their country’s products uncompetitive in the U.S., and turn their marketing efforts elsewhere. No matter: the main point is that a carbon tax here, combined with a tariff-like, equivalent charge imposed on goods from polluting countries, would not hurt our competitive position, as some fear.
What it might do is achieve another aim of conservatives: help to shrink government, or at least reduce the rate at which it is metastasizing. The president says he favors a carbon tax, and it would be worth the not insubstantial risk of taking him at his word by proposing a carbon tax as a substitute for two things conservatives should be opposing. The first are the wasteful subsidies, many flowing to major campaign contributors, to fund uneconomic energy sources. Middle-income taxpayers are in effect subsidizing the development of $85,000 Tesla electric cars for Hollywood stars and other high-income buyers, and watching their energy bills soar as electric utilities spend millions to connect remote wind machines to their grids. Environmentalists argue that subsidies merely offset the competitive advantage of fossil fuels that do not bear the social cost of their carbon emissions. Tax carbon and that argument for distorting and, if truth be told, corrupting subsidies disappears.
The second abomination in the eyes of conservatives is the growth of regulation. The president says he is proposing his new, complicated, agency-growing regulations to reduce emissions only because Congress has denied him a carbon tax. The administration’s hench- economist Paul Krugman helpfully chimed in with support: if we can’t have what Krugman joins the president in believing is the first-best solution of a carbon tax, well then, let’s live with the second-best solution, a regulation-heavy restructuring of the energy sector. The president’s flaccid support for a carbon tax and Krugman’s gleeful acceptance of a second-best solution have to make one wonder whether advocates of more centrally directed regulation actually prefer second- to first-best, more efficient solutions. After all, the health care sector has already been “transformed,” “core” standards have education en route to transformation from local to Washington control, and government control of the energy sector would make it three-out-of-three successes for Obama’s plan to “fundamentally transform … the United States of America” from a market-based to a government-directed, European style economy.
Here is an opportunity to give the president what he says he wants, and at the same time strike a blow for less regulation and smaller government. Impose carbon taxes, but in legislation that repeals the mare’s nest of admittedly second-best regulations and gives our coal industry a better chance of surviving. Carbon taxes are market-based, regulations are growth killers, with the victims subject to the whims of unaccountable regulators.
Carbon taxes, then, can help conservatives to achieve many of their, our, objectives:
· Revenues with which to replace growth-stifling taxes on work and risk-taking;
· Reduction of the regressive nature of the current tax system to help the middle class increase take-home pay by reducing payroll taxes or developing some other efficient and equitable means of instantaneous tax-cut offsets to carbon taxes;
· Removing the reason offered for subsidizing inefficient energy sources by eliminating the alleged competitive advantage fossil fuels have by virtue of not paying the social cost of their production and use;
· Reducing the growth of government by eliminating the justification for the web of regulations the administration is weaving around the energy sector;
· Protecting and enhancing the competitiveness of American industry by linking a carbon tax with border adjustments that impose equivalent costs on goods from China and other countries that refuse to impose comparable taxes. Hard cash costs beat “moral leadership” every time when dealing with the Chinese regime.
There will be a price to pay: listening to the greens who will claim that the tax forestalls global warming. Long-time environmental activist Charles Komanoff, no friend of what he calls the “dirty-energy lobby,” and similarly inclined advocates are arguing that a carbon tax will do more to keep the earth cool than Obama’s regulatory scheme. If that makes him and other climate change believers happy, so be it. We can always use a little help from our non-friends. Conservatives know that whatever effect, if any, the climate-warming theoreticians believe a carbon tax might have on the incidence of floods (or is it droughts?) has nothing to do with the advance of the conservative economic agenda that carbon taxes can produce. We can remain skeptical about the so-called settled science of climate change, allow a few chortles from the greens, and get on with stimulative tax and economic reform.
The good news is that pressure is building for tax reform to stanch the overseas flight of our companies, remove impediments to economic growth, and reduce the regressive features that are adding to middle-class woes. Some conservative law makers are passing the word that, with a bit of legitimizing help from respected conservative columnists and opinion makers, they would be willing to put a carbon tax into the bargaining mix after this year’s congressional elections or perhaps after new drapes are hung in the White House. Whether or not the climate is changing (in fact, it does that hourly in many places), whether or not the Chinese and the Indians choose to follow our lead or to bear the economic cost of refusing to do so, a carbon tax would advance the conservative agenda.