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Challenge accepted. I no longer have the pleasure of pestering Wintercow in his office hours, but I can still do that here 🙂

This is an email excerpt to Wintercow that I haven’t published:

I was thinking about carbon taxes and looking up estimates of the damage per ton of CO2, and there’s a lot of variability depending on assumptions (big surprise). I found a meta-analysis surveying estimates all over the place, and a bunch seem a bit high.

Naturally, we’re worried about getting the price right in order to avoid distortions from overtaxing, even if it’s overtaxing a “bad thing”…but we already have not only high taxes, but high taxes on good things! We tax work and investment! We’re already past the margin of charging terrible and inefficient taxes. So I was thinking, what if we don’t focus on the epistemically challenging task of finding the “perfect price” of carbon and choose instead a first-order revenue target that allows us to eliminate a tax on a good thing, subject to the constraint of meeting at least the low end consensus of the damage per ton of CO2?

Since one of the most common arguments against carbon taxes is regressivity, what’s our biggest, baddest regressive tax that we already have? FICA payroll taxes! They’re charged only on the first ~$100,000 of income, and they brought in  $870 billion in FY 2007. In 2007 we emitted 7.2528 billion tons** of CO2 and equivalents (I choose 2007 as a business cycle/emissions peak to show the “worst” year). So if we replaced it with a revenue-neutral carbon tax (temporarily neglecting behavioral elasticity), we’d be looking at a price of ~$140/ton of CO2! That’s up there with the estimates by the stone-age-loving, “Earth would be better if people were dead” biotic ethicist totalitarians. It’s beyond the wildest dreams of the more pragmatic policy-oriented environmental lobbyists, who talk about $20-$40/ton.

Better yet, it would then be reasonable to cut the Energy Dept and EPA subsidy budgets and the hybrid vehicle/solar/wind/geothermal income tax credits accordingly, since we’re taking care of the argued externality on the taxing side. Importantly, these steps will help accommodate the revenue loss from behavioral elasticity over time as people cut carbon use. Behavioral distortion will shift from earning too little to polluting too little. (And I say “too little” assuming from a skeptic’s view that the low-end CO2 externality estimates are more correct than the high-end ones).

On the political side, Democrats would get the climate change action they want in addition to cushioning the regressivity. Republicans get to hold the line on taxes while cutting government in the executive branch, particularly those widely hated department budgets (see: Solyndra debacle). It would make Congressional Republicans look momentarily reasonable and make Congressional Democrats look momentarily competent. The most dramatic failure could only be its greatest success–that is, if CO2 abatement is far cheaper than expected, the tax could be so successful in its pollution internalization goals that it would fail in its accounting goal of bringing in revenue. 50 years from now, it’ll probably constitute a significant tax cut compared to current law since carbon demand, thanks to technological adaptation, is surely more elastic in the long run than labor supply all else equal. If that becomes serious enough maybe we could pair a Paul Ryan Medicare voucher with big defense cuts to close the gap.

It all sounds too good to be true.  I realize that we normally seek the least-elastic things to tax, but in this case the responsiveness is adaptive. Even if $120/ton is likely too much, there is still a chance that it approximates the efficient price (whereas we know that payroll taxes are frightfully inefficient). Yes, advocates of a truly small government make the case that we should just cut the taxes, subsidies, and defense spending without a replacement tax, but we live in a pluralist democracy and we can’t make everybody march behind that vision. So why not have bad taxes instead of worst taxes?

 Focusing on the maximum possible revenue-neutral tax, as the Master Resource did, seems misguided. Is there even one person who has advocated carbon taxes at 20% of GDP? And the incentives driving progressivity in income taxes are totally different! In a democracy there’s an institutional temptation to tax other groups to the benefit of a given in-group–i.e. to tax somebody else for my goodies. But carbon taxes are regressive! They’re incident on the masses! Considering the success of Congressional Republicans, it’s actually more probable (well, less wildly improbable) that Democrats should worry about a Republican temptation to cut top income tax rates and boost regressive carbon taxes on the poor instead.

It’s remarkable to me that endogenously declining tax revenues are seen as a problem. Seriously! Imagine if income tax receipts were always falling, and Congress constantly had to make politically difficult votes to raise all marginal tax rates–not on the rich, but on everybody. A carbon tax in need of constant raising works like the debt ceiling: it empowers those who want to maintain the status quo on low tax rates/a low debt ceiling. It’s far less likely to face creeping government ratchet than top marginal income tax rates, it’s less incident on the rich, and its total revenues are always declining. If there’s ever been a truly Republican tax, this is one of them.


Further objections to be addressed, and some not so well addressed, to be continued…

**These are gross emissions, not net of carbon sinks.  I imagine we’d need carbon tax credits for provable sinks in order to symmetrically internalize the benefits of carbon sinks.

5 Responses to “Revenue Neutral Carbon Tax, Continued”

  1. coyote says:

    I supported the idea of a substitution of a carbon tax for payroll taxes several years ago when Jeff Flake put a bill forth in Congress to that effect. As you said, it just substitutes one regressive consumption tax for another. Also, taxing labor seems the worst possible sort of consumption tax, so substituting an energy tax for a labor tax is probably a net positive, but I can’t prove it.

    But one problem this has is pointed to by the tobacco settlement. In that, states got massive new taxes and revenues from cigarettes, nominally from a settlement and new taxes that were supposed to reduce cigarette use. But the revenue was so large that state governments started counting on it, and then states had an incentive to partner with tobacco companies in a variety of ways to make sure the revenue kept coming. So a tax that was nominally to reduce use and demand created an incentive for the state to promote use and demand.

  2. Wintercow20 says:

    My favorite part of the tobacco settlement is that states have used derivatives and sold off rights to streams which have not materialized and are now faced with the prospect of raising taxes on productive stuff or some version of default.

  3. Harry says:

    Every day, 24/7, a whale thinks, “How am I going to get enough krill?”

    This is the same way Chris Van Hollen, D, MD, thinks, only he does not do it 24/7. Tax carbon, impose payroll taxes on investment income, tax estates, tax married couples earning over $250K extra, raise the FICA limit to over a million, tax medical device makers, raise tariffs and duties, tax ’em for the mice, tax ’em for the lice, tax ’em for looking in the mirror twice. Get the krill wherever you can, and if you swim through a part of the ocean that krill have avoided, print a few trillion krill, whatever it takes to feed the leviathan.

    It is indeed difficult to quantify the damage done by humans as agents of combustion, burning hydrocarbons; in the end, hardly any of the power players care. The point of “broad-based” carbon taxes has been (1) it is really big money, and (b) carbon taxes are easily concealed, even better than VAT taxes, which also are big money raisers.

    This brings us back to Wintercow’s photo of that gas pump in North Dakota.

    Taxes for what? To pay for that guy who lost his job at the steel mill and ergo could not pay for his own health insurance? So poof, your job as an operator at the slitting machine is eliminated? How about finding a job elsewhere (I think he is from Kansas City)? Why not as a banker issuing sub-prime loans, or as a corn detasseler?

  4. Harry says:

    Or, to continue Wintercow’s thought, he could have tried working on the side as a cold-calling assistant to a broker selling tax-anticipation notes.

  5. aarmlovi says:

    Wintercow’s derivatives example in combination with Coyote’s would be hilarious if it were hypothetical. It’s pretty much the definition of irony: a state sets out to curb smoking, issues revenue bonds on the basis of those measures (and synthetics from the sound of it), then delves into moral hazard to make good on the bonds. Yes, there certainly are a *lot* of caveats and contingent claims in all this…

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