Friday, May 16, 2008

Environment meets energy meets tax policy

Larry Kudlow blogs to comment on McCain's recently announced carbon cap and trade platform (he doesn't like it, nor should you). What caught my eye was hearing that intelligent people (Greg Mankiw and Al Gore to name a few) are suggesting a carbon tax with proceeds to defray federal income and/or payroll taxes in lieu of the cap and trade system.

I LOVE this idea! Here's why:

-tax efficiency: fundamentally, a carbon tax is a consumption tax, while income is, well, income. When you tax something, you get less of it - shouldn't we create incentive to consume less, and remove disincentives to generating more income?

-transparency: directly taxing carbon will give us all a direct and greater understanding of the cost and environmental impact of all economic activities.

-feasibility: a stand-alone carbon tax would never fly - no one wants to vote for a new tax - but substituting taxes could fly. Likewise, there's no chance that either the payroll or income taxes are spontaneously reduced or eliminated on their own.

-economic impact: just a guess on my part, but I think that a payroll or income tax cut will have a net greater positive on the economy than a tax on carbon consumption.

-and finally, this idea works because frankly, cap and trade - already in use in europe - DOESN'T WORK!

1 comment:

Kevin said...

Hey Tim,

Interesting article. Two comments:

1) Just because something doesn't work doesn't mean something else will -- it's not a causal relationship.

2) The reason why tying the tax to income or payroll taxes won't work is that it has been shown that the non-immediacy of the tax never hits home -- people tend to just grumble about the unfairness and such. One example that has worked is when grocery stores charge you for each bag (Ikea and Whole Foods).

I think one of the most important thing the next president can do is encourage americans to reduce their consumption -- purchasing crap (most of which is plastic and requires oil), turn off lights (look at cities at night), increase the house temperature during the summer, decrease it during the winter, and similar.

Maybe Al Gore can make a movie about the Great Depression and how everyone's grand and great-grand parents had to adapt to the shortages.

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