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The Case for a Carbon Tax

10:31 AM, Jul 17, 2014 • By IRWIN M. STELZER
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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.

A windy day in Scotland

A windy day in Scotland

Stuart McMahan

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.”

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