Tuesday, May 01, 2007

A Carbon Tax Shift

The conventional wisdom is that a tax on CO2 emissions would be the most efficient way to control global warming but is not politically possible, so cap-and-trade is our only alternative.

But a carbon tax could be politically possible if it were presented as a tax shift designed to lower other taxes, such as the income tax.

There is currently one carbon tax bill in congress, introduced by Rep. Pete Stark, which would tax CO2 at $10 a ton the first year and would raise the tax by $10 a ton each year until CO2 emissions are reduced to 80% less than their 1990 level.

There is very little support for this sort of open-ended tax increase, but we could easily make it a tax shift rather than a tax increase by adding this provision: each year, the Internal Revenue Service would calculate the total revenues from the carbon tax, divide it by the number of taxpayers, and give each taxpayers a refundable tax credit that would return all the money collected by the carbon tax.

There are tremendous advantages to this sort of tax shift:

Income tax has no benefit except raising revenue. A carbon tax has the same benefit of raising revenue, and it has the additional benefit of dealing with our most pressing environmental problem. A carbon tax gives much more benefit than an income tax of the same amount.

A carbon tax could apply to imports, while cap and trade would only apply to domestic products. For example, products imported from China would have to declare how much CO2 is generated in producing them and transporting them to an American port, and they would pay the carbon tax on this amount. This would help convince the China to start building cleaner power plants rather than relying on coal. It would also favor locally produced goods over imported goods, because they are transported shorter distances. Reducing transportation distances is an important element in controlling global warming, and in a global economy, a carbon tax deals with it much more effectively than one nation's cap and trade. (For this reason, the tax should be levied on the carbon content of products, rather than being levied when the fuel is taken out of the ground, as in Stark's bill.)

A carbon tax is progressive. For example, someone who owns a 10,000 square foot house is likely to use much more energy heating and cooling it that someone who lives in a small apartment. As a general rule, a carbon tax would generally take more revenue from people who consume more, and it would return this revenue in a tax credit that is given equally to everyone.

A carbon tax shift can involve a higher tax than a plain carbon tax. For example, Pete Stark's tax of $10 per ton comes out to about 10 cents per gallon of gasoline. It would take 30 years for it to double the current price of gasoline, which would decrease driving by about 30% - and it would take a long time to influence behavior across the entire economy. This is about the largest tax increase we can demand, but we can have a much larger carbon tax if we are give that money back to every American in the form of a tax credit that they can use to pay the higher cost of gasoline. I think a reasonable amount would be $30 or $40 per ton, which would double the cost of gasoline in 10 year or less, changing people's behavior soon enough to have an important effect on global warming.

Let's move beyond the conventional wisdom by emphasizing that this is a tax shift rather than an added tax. For example, we should say that, with this sort of a plan, the majority of Americans would not pay any income tax: only the very rich would still have to pay income tax, and most Americans would get a check back from the IRS instead of paying income taxes.


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