There are three ways to view a carbon tax. Conservatives see it, or should see it, as what is called “a tax swap”—a revenue-neutral tool to shift the burden of taxation from income and other taxes that reduce economic growth and risk-taking to consumption, thereby increasing the efficiency of the tax regime. Liberals see it as they see most things: a way to raise revenues to fund the growth of an already bloated government. Greens see it as providing a “double dividend,” increasing the efficiency of the tax system and reducing the emissions that (they believe) are causing the globe to warm, or the climate to change, to use the more recently hatched phrase.
This collection of 13 essays finally provides empirical data—numbers, if you are an ordinary reader rather than a policy wonk—and analyses to help us to some reasoned conclusions. The broad conclusions to be drawn are that a carbon tax would: reduce emissions, raise revenues more efficiently than the taxes it might replace, and be relatively easy to implement, “a straightforward application of basic tax principles,” in the words of the volume’s sponsors, the International Monetary Fund, the Brookings Institution, and Resources for the Future.
A fair reading of these essays is that a carbon tax might best be set, at least initially, at somewhere between $20 and $35 per ton—toward the lower end if your goal is fiscal reform (cutting other taxes or the deficit) but toward the higher end if your goal is to honor President Obama’s pledge to reduce carbon dioxide emissions to 17 percent below 2005 levels by 2020.
My integration of their separate findings suggests that a $20-per-ton tax, after deducting emissions beyond the reach of taxation and the effect such a tax would have on reducing taxable emissions, would produce about $100 billion in annual revenue. That would generate more than enough revenue to permit a reduction in the corporate income tax rate from 35 percent to 25 percent. As one essay points out, there is little hope of eliminating enough so-called loopholes—“these [tax] preferences have organized supporters who will oppose their elimination”—to get the corporate rate down to a level that would make American businesses more competitive in our global economy and “reduce incentives to shift production to other jurisdictions.” Another essay suggests that “enacting all the specific changes in the corporate tax base that President Obama has recommended would finance a cut of only 1.5 points, to 33.5 percent. In short, trimming tax breaks has limited potential for financing significant cuts in corporate tax rates.”
Although most of the experts agree that the biggest bang for the buck (faster growth, more efficient tax structure) would come from using carbon tax revenues to lower corporate taxes, they also agree that such a policy would be regressive, since upper-income people would benefit most while those lower down the scale would pay a larger portion of their incomes in increased prices for gasoline and heating oil.
But by using some 38 percent of the revenues generated by a carbon tax to “offset distributional effects,” the regressive nature of carbon taxes can be eliminated. Indeed, “policymakers can use any number of adjustments to the tax system and social safety net programs to construct a more progressive package of reforms.” Because many low earners do not pay income taxes, a payroll tax rebate might be considered instead. Assuming a carbon tax of $28 per ton, a payroll tax rebate on the first $3,660 of earnings “would more than offset the average cost that the tax would impose on households in the two lowest income quintiles,” i.e., the bottom 40 percent, and would increase incentives to work. In any event, the net effect of using the revenues from a carbon tax to lower taxes on labor and capital “would promote economic activity.”
There is more here that policymakers should consider.
♦ For advocates of various subsidies: “Be wary of earmarking carbon tax revenues, such as for clean energy programs, climate adaptation.” They favor high-income households and distort “technology choices”; their costs tend to exceed their benefits; and, once established, they “gain constituencies that can retard appropriate phasing out of the program.”
♦ For regulators: Regulation is a less efficient means of reducing emissions than is taxing those emissions, which is one reason the EPA is allowing states to include carbon taxes in their proposed compliance plans—although this reviewer doubts that a regulatory agency will, in the end, concede that anything (taxes included) can do a better job of achieving some goal than the rules-writers at the agency.