October 3, 2013


How to Tax Carbon : Conservatives can fight climate change without growing government. (ANDREW MOYLAN, October 2, 2013, American Conservative)

A conservative carbon tax has three key components: revenue neutrality, elimination of existing taxes, and regulatory reform. When combined, these policies would yield a smaller, less powerful government; a tax code more conducive to investment and growth; and the emissions reductions the law says we must achieve.

The first and arguably most important component is absolute, bona fide revenue neutrality. The federal government is already too large and expensive. Conservatives routinely oppose efforts by the left to raise revenue in order to shore up lavish spending and broken entitlement programs. A carbon tax should no more be used to fund bigger government than any other tax. Every single dollar raised by a carbon tax must be devoted to tax reductions elsewhere in the code.

There are alternative carbon-tax proposals that make bogus claims of revenue neutrality. For example, the so-called "fee and dividend" model pushed by some climate advocates and members of Congress would levy a fee on carbon dioxide emissions that then would be returned to citizens through some sort of flat dividend payment. Such a scheme easily could prove vulnerable to abuse: one can imagine dividends would be suspended in years of high deficits or that the program would morph into a slush fund that flows to progressives' pet projects.

Instead of empowering government to generate a pot of money and relying on the beneficence of elected officials to return it to the people, reform must devote every dime of carbon-tax revenue to reducing other tax rates or abolishing other taxes altogether. Turning on one revenue stream while turning off others is how we prevent growth in government.

Which brings us to the second component of a conservative carbon tax: outright elimination of some of the most damaging and anti-growth levies on the books. For example, a Massachusetts Institute of Technology analysis estimates that a $20 per ton tax on carbon dioxide emissions could generate roughly $1.5 trillion in revenue over ten years. That's enough to allow for the complete elimination of several levies that conservatives rightly regard as structurally deficient or duplicative: capital gains and dividends taxes, the death tax and tariffs.

If the average economist sat down to draft an ideal tax code from scratch, it's unlikely that any of the aforementioned levies would exist. Capital gains and dividends already are taxed at the corporate level, and taxing them again when received by individuals is duplicative. Similarly, the death tax places a new levy on assets on which taxes already were paid. And tariffs, though they now produce a relatively small share of federal revenue, erect substantial barriers to international trade.

The consensus of conservative economic thought today is that governments should reform taxation to focus on consumption rather than income or investment. In other words, governments should target taxation on "bads" like pollution rather than on good things like labor, wages, and profits in order to raise revenue with as light a touch on economic growth as possible. This is why such prominent conservative economists as Kevin Hassett, Glenn Hubbard, Greg Mankiw, and Art Laffer have expressed support for a carbon tax swap. (The way this philosophy has manifested itself on the state level is in ongoing efforts, primarily driven by Republicans in places like North Carolina, to reduce or eliminate income taxation in favor of expanded sales taxes.)

The final component of a conservative carbon tax plan is wholesale reform of regulations that are intended to reduce greenhouse gas emissions. Because of its cost and complexity, a carbon tax should not be layered atop an existing regime to regulate carbon emissions. Instead, we should preempt the EPA's ability to regulate emissions from power plants while also considering elimination of policies like Corporate Average Fuel Economy standards for automobiles. In short, the carbon tax should supplant entirely the myriad regulations that exist to reduce emissions. After all, if the tax on carbon is priced properly so that it "internalizes the externality" posed by emitting a ton of the gas, there is no need for other policies to achieve reductions.

Posted by at October 3, 2013 2:55 PM

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