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Wall Street Journal Market Watch

 

Carbon Tax: An Idea Whose Time Should Not Come

May 03, 2013

By Diana Furchtgott-Roth

Senate Finance Committee Chairman Max Baucus has announced his retirement, and he wants to see Congress pass major tax legislation before he leaves in 2014. Here’s one piece of advice: stay away from a carbon tax.

It’s troubling that the Senate Finance Committee staff tax reform options on infrastructure, energy, and natural resources, published last week, offer as an option a carbon tax.

What is a carbon tax? Why do so many academics love it? And why will Congress be unable to enact such a tax effectively?

The love affair with carbon taxes comes from a concern that energy use is raising global temperatures and causing global warming.

No matter that only 16% of global emissions are caused by America, and that by many measures global temperatures have not increased over the past decade. No matter than unless China and India reduce their carbon emissions, U.S. unilateral efforts will have no practical effect on global temperature.

In taxing carbon dioxide, which some believe causes rising global temperatures, Congress would take action to reduce fossil-fuel energy use, while raising revenue that might permit a reduction of income-tax rates.

As the Senate Finance Committee document shows, the carbon tax is a favorite of many academic economists for restructuring the tax system. Proponents include a bipartisan group of professors such as Tuft University’s Gilbert Metcalf, now deputy assistant secretary for environment and energy at the Department of the Treasury; Harvard University’s Martin Feldstein, Edward Glaeser, and Gregory Mankiw; and Columbia University’s Joseph Stiglitz.

However, as tax practitioners know, a carbon tax is complex to set up. It requires adjustments to make sure that the tax is not unduly regressive and does not encourage consumption of imports relative to domestic production.

But, as we saw from the passage of the American Taxpayer Relief Act, the tax bill that passed on Jan. 1 2013, after only a day’s negotiation between Vice President Joe Biden and Senate Minority Leader Mitch McConnell, Congress does not think deeply before it passes major tax bills.

Rather, political expediency always triumphs over academic elegance. Congress is incapable of thoughtful tax solutions, no matter how many are offered by well-intentioned professors. Despite years of notice that the Bush tax rates were due to expire, Congress passed permanent tax laws at the last moment, without reading the bill.

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.

Many academics see a carbon tax as an alternative to an individual income tax, a corporate income tax, or a European-style cap-and-trade system.

Research by scientists Allen Fawcett of the Environmental Protection Agency, Leon Clarke of Joint Global Change Research Institute, and John Weyant of Stanford’s Energy Modeling Forum, proposed using a carbon tax, rather than cap and trade, to achieve greenhouse gas emissions reductions of 50% by 2050.

A carbon tax raises the price of energy and so discourages consumption without regulation. 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.

A tax of $15 per ton, as suggested by Metcalf, 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%, a response suggested by the government’s Energy Information Administration, the tax would raise about $74 billion per year.

What are the problems with a carbon tax?

Everyone would want to spend the revenue. Some people would want to use it to reduce the deficit. Others would want to use carbon-tax revenues to lower other taxes, such as income taxes. And since high income tax rates reduce incentives to work, this could conceivably add to economic efficiency.

Carbon taxes are regressive. Since low-income people use more energy as a percentage of their income than high-income people, a switch to a carbon tax would have to be accompanied by transfers to low-income groups.

Academics suggest that offsets be returned to taxpayers through lower income taxes, perhaps with the proceeds going chiefly to low-income households (individuals and families), which are disproportionately hurt by what is in essence an energy consumption tax.

This could theoretically be done by adjustments to the income tax. However, low-income earners are not required to file returns, and they would have to do so in order to be identified and compensated. That means extra work for them, and for the Internal Revenue Service which will already be overworked calculating and collecting penalties from Obamacare violators.

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

The new-found shale oil and gas that are attracting energy-intensive manufacturing back to America would be taxed, to the detriment of these new industries and their employees.

Some industries, such as coal, would be big losers. Politicians from coal-producing regions are influential in Congress and they would demand a share of revenues.

So for a carbon tax to make our tax system more efficient, its revenues would have to be used to offset other taxes in the economy. Its negative effects on low-income Americans and on energy-intensive regions would have to be ameliorated. Some border adjustments would have to be made so that domestic goods were not disfavored.

But Congress is incapable of crafting a carbon tax with these attributes. Any tax on carbon would be an additional tax, without the offsets that make it so attractive to university professors. It would hurt the poor and raise domestic prices relative to prices of imports.

Sen. Baucus has a year to shepherd tax reform through Congress before the 2014 midterm elections kick into gear. He shouldn’t waste his time on a carbon tax.

Original Source: http://www.marketwatch.com/story/carbon-tax-an-idea-whose-time-should-not-come-2013-05-03

 

 
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