Wednesday, 10 August 2011

A Suggestion for the Deficit Supercommittee: Carbon Taxes

Introduce a carbon tax, but offset it with income tax decreases. Wouldn't that be something for Republicans to take back to their supposedly over-taxed constituents? Lower income taxes?

The six Republicans that will be on the "Deficit Supercommittee," the Joint Select Committee on Deficit Reduction, have been named -- three by House Speaker John Boehner (Reps. Fred Upton, Jeb Hensarling, and Dave Camp) and three by Senate Minority Leader Mitch McConnell (Sens. Rob Kyl, Rob Portman, and Patrick Toomey). They will join the three Democrats that have been named so far (Sens. John Kerry, Max Baucus, and co-chair Patty Murray). The committee is charged with presenting recommendations for cutting at least $1.5 trillion over ten years. If the committee cannot agree, or if Congress fails to adopt its recommendations, in their entirety (no amendments allowed), then a series of automatic "trigger cuts" will take place, imposing deep cuts to military spending (to supposedly incentivize Republican cooperation) and to nonmilitary programs, including Medicare (to supposedly incentivize Democratic cooperation). Many hands have already been wrung about how hopeless the task, and how the committee members named thus far do not inspire confidence. Politico has pointed out that all six have signed Grover Norquist's anti-tax pledge. New revenues would appear to be out of the question.

I can't solve the problem (I think it is a problem) of getting Republicans to agree to new revenues. I wish there were a way to persuade Republicans to abandon ethanol subsidies, subsidies for oil exploration, and the Bush tax cuts for the rich. But I don't see that happening. What I do see as a possibility is that revenues might be introduced in a new way -- carbon taxes -- that might be viewed as less offensive. The seeds of a possible compromise might involve a new carbon tax, coupled with further income tax reductions. The latter is certain to be a condition of accepting a carbon tax; if there are any Republicans that would accept a straight carbon tax, they are laying low for now. I am convinced that there are Republicans that accept the need for new revenues; they are just too shy to come out of the closet right now. If Tom Coburn can acknowledge the need for increased revenues from reducing what he calls "special giveaways," then there are many more out there who also feel the need to increase revenues. At any rate, I am accepting without agreeing that new revenues would have be offset by more tax cuts. In principal a revenue-neutral carbon tax -- one that recycles the proceeds so that no new net revenue is taken in -- should not be an affront to even Norquist, who at least in 2006 reportedly supported the idea of increasing gasoline tax in exchange for reducing other taxes. That should make the six Republicans feel a little freer of the bonds of their pledge to Norquist.

A carbon tax coupled with income tax cuts can nevertheless be surprisingly tricky to set up. Treasury won't know until tax returns are in and all carbon tax proceeds are processed, exactly how much of each was collected. In other words, there is no way to guarantee that carbon tax proceeds will be completely offset by income tax breaks. In fact, since there is no way of knowing the baseline counterfactual -- how much income tax proceeds would have been collected without tax breaks -- it is impossible to know if there will be a one-for-one offset.

But so what? What if the American public, the Supercommittee, and at least a majority of both chambers can accept a little uncertainty about revenues? That is going to be the case anyway, as income tax revenues are hard to predict ex ante in any case. The Supercommittee just has to agree, and get a majority of the House and Senate to agree, that in reasonable scenarios, the proceeds from a carbon tax would be about the same as the reduction in proceeds from a further tax cut. It could and should take into account that carbon tax proceeds would likely decline over time, as people and firms and the entire economy adjust to higher prices. Initially, carbon tax proceeds should be more than income tax reductions. Over a ten-year period, it would be reasonable to expect carbon tax proceeds to be greater than income tax reductions over the first five years, and the reverse to be true over the last five years.

One thing I don't know is whether Republicans could stand the United States not being an international pariah for inaction on climate change.

1 comment:

  1. Dear Mr Hsu,

    Thanks for a terrific post. I've just posted a link in our news column on the Carbon Tax Center site.

    You and your readers might be interested in:

    Brookings Panel Points To “Grand Bargain” – Carbon Tax to Reduce GHG Pollution and Deficit


    Best regards,

    - jh