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Don't Be Fooled By the Meritless Carbon Tax

January 15, 2013

By Diana Furchtgott-Roth

The American Taxpayer Relief Act, passed by Congress on January 1 after a day’s negotiation between Vice President Joe Biden and Senate Minority Leader Mitch McConnell, should be the death knell for the carbon tax, the favorite of many academic economists for restructuring the tax system.

The method by which the new tax law was passed offers little hope that Congress is capable, much less likely, to craft thoughtful tax solutions. Since the Bush tax cuts were passed in 2001, politicians have known that taxes were scheduled to rise. Surely, one might imagine, years of careful planning would inform the next tax law.

Yet Congress passed permanent tax laws at the last moment, without reading the bill. One must wonder what Senators and House members knew of the detailed language of the new tax law, such as provisions favoring special interests such as Hollywood, Nascar, and green energy.

In the past, Congress considered carefully new tax laws such as the Bush tax cuts in 2001 or the Tax Reform Act of 1986. No longer.

This is especially relevant to the carbon tax, because a quickly-passed carbon tax in the hands of Congress would be just another add-on levy, with exemptions for friends and punishments for enemies.

Proponents of the carbon tax include a bipartisan group of economic professors such as University of California’s Robert Reich, Harvard’s Martin Feldstein, Edward Glaeser, and Gregory Mankiw, Columbia University’s Joseph Stiglitz, and Cornell University’s Robert Frank. More names can be found here.

The conservative American Enterprise Institute has held several conferences on the merits of the carbon tax, the latest on November 13. It featured Gilbert Metcalf, Deputy Assistant Secretary for Environment and Energy at the Department of the Treasury, who has written extensively on the design of a carbon tax while a professor at Tufts University.

What is a carbon tax? Why do so many academics love it? And why does the new tax law prove that it’s an idea whose time has not come?

The love affair with carbon taxes comes from a concern that energy use is raising global temperatures and causing global warming. No matter that by many measures global temperatures have not increased over the past decade. No matter that American emissions in 2012 were the lowest since 1992. No matter that only 16 percent of global carbon emissions are caused by America, and that reductions would have little effect on global temperatures.

America has substantial energy reserves, and our air is continually getting cleaner as newer technology takes the place of old. Energy in its many forms confers benefits of comfort and mobility, and if consumers are willing to pay the price, they should use it.

Proponents claim that in taxing carbon dioxide, Congress would take action to reduce energy use, while raising revenue that would permit a reduction of income tax rates.

A carbon tax, which would discourage energy consumption, would be simpler and less intrusive than a cap-and-trade system, considered in the 111th Congress. Under that approach, the government would set limits on the emissions of individual plants-electric utilities, petrochemicals, and others. Emitters would have to buy permits from the government. Plants emitting less than their allowance could sell unneeded permits to those exceeding their limits.

In contrast, a carbon tax raises the price of energy and so discourages consumption without regulation. Some claim that carbon tax rates could be calibrated to be revenue neutral or to yield a net rise in federal tax receipts, with the increment possibly dedicated to reducing deficits.

Treasury Department official Metcalf concluded that a 10 percent rise in the price of energy would result in a 3 percent reduction in consumption. He suggested a tax rate of $15 per ton of CO2.

U.S. carbon emissions in 2012 were about 5.2 billion metric tons, so the Metcalf proposed tax would raise about $78 billion a year, assuming that industrial consumers used the same amount of energy. If, on the other hand, consumers reduced consumption by about 5 percent, a response suggested by the government’s Energy Information Administration, the tax would raise about $74 billion per year.

Such a revenue stream could potentially be used to reduce the deficit, to lower individual tax rates, or to pay off sectors of the economy, such as coal, that are unduly harmed by carbon taxes. Since high income tax rates reduce incentives to work, this could conceivably add to economic efficiency.

While many academic economists see carbon taxes as a substitute for the income tax, many tax policy analysts see the carbon tax as an additional source of revenue. Historically, the income tax has not been lowered as new excise taxes have been brought online. There is little reason to expect the carbon tax will lower income taxes where other new tax revenues have failed.

Moreover, carbon taxes are regressive. Since low-income people use more energy as a percentage of their income than high-income people, low-income households were bear a higher share of the carbon tax burden. Those policymakers who seek to avoid regressive taxes, including much of Congress, might add complex income transfers to low-income groups to lessen their tax burden.

This is not simple, because many low-income earners are not required to file returns, and they would have to do so in order to be identified and compensated.

Another problem is that carbon-intensive sectors, such as coal, would be the biggest losers under the new tax. Politicians from coal-producing regions are influential in Congress and they would demand a share of revenues.

Finally, a carbon tax in America raises the prices of energy-intensive goods relative to imports from countries without carbon taxes. One effect of a carbon tax is that Americans would increasingly prefer to buy imports of energy-intensive goods, and American firms would correspondingly lose business. Proponents of the tax suggest putting tariffs on imports in proportion to their carbon content so that American companies would not be at a disadvantage. But the precise quantities are complex to calculate, and tariffs might be illegal under World Trade Organization regulations.

So, for a carbon tax to make our tax system more efficient, many fine-tuned adjustments would be necessary. First, its revenues would have to be used to lower income taxes. Second, its negative effects on low-income Americans and on energy-intensive regions would have to be ameliorated. Third, border adjustments would have to be made so that domestic goods were not disfavored. Each of these adjustments would require careful analysis and formulation.

But the lesson from the American Taxpayer Relief Act of 2012 shows that Congress is incapable of crafting a carbon tax with these attributes, even if they are given a decade’s warning. Under our system of government, any tax on carbon would be an additional tax, without the offsets that make it so attractive to academics. It would hurt the poor and raise prices in America compared to overseas.

A carbon tax would just be another regressive revenue raiser, costing $75 billion a year, hurting the poor, disadvantaging American manufactures, and all without any effect on global temperatures. After the American Taxpayer Relief Act of 2012, anyone who thinks otherwise is naïve.

Original Source: http://www.realclearmarkets.com/articles/2013/01/15/dont_be_fooled_by_the_meritless_carbon_tax_100091.html

 

 
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