Revenue-Neutral Carbon Tax NOT “Just a Higher Gas Tax”

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Jason Gillman responded to the revenue-neutral carbon tax proposal I’ve described by saying that transportation taxes (gas tax) should only be used by government to pay for transportation infrastructure, not for general government expenses.

 

Under the current regime what he says is correct: State and federal motor fuel taxes and state vehicle registration taxes are levied with the express purpose of providing safe and convenient roads for us to drive on. A portion of this money, maybe 10 percent, is ripped off to provide subsidies to pay for empty buses driven by public transportation union members who work for corrupt urban mass transit systems like Detroit’s. (Cynical? Moi? No, just brutally honest.)

 

But most transportation tax money goes into concrete and asphalt like it’s supposed to, and government transportation departments do a reasonably competent job of providing a decent network of roads. That’s why I don’t get all that exercised by the perennial proposals to raise the gas tax – it’s the closest thing to a pure user fee that any taxpayer “gets to” pay.

 

What I’m recommending with a revenue-neutral carbon tax is something different, though. Motor fuel taxes would no longer be (almost) pure user fees. And the carbon tax would apply in equal measure to consumption of fossil fuels for other purposes too – heating, electricity generation, commerce and industry. The increased revenue wouldn’t be used just for purposes related to those activities, but to finance government operations in general. The tradeoff for the higher energy taxes would be a lower income tax.

 

This would essentially shift a portion of the public’s tax burden from a tax on income to a tax on consumption (of energy); the government would be funded more by energy taxes and less by income taxes.

 

It’s a well established economic principle that consumption taxes are more economically efficient than income taxes. As a society we want to lower the disincentives to wealth-creating activities like working, saving, studying, investing, and entrepreneurial risk taking. We are relatively indifferent to disincentives to consumption, except ones that prevent people from acquiring the necessities of life, especially people on the lower end of the economic scale. Energy is a fundamental necessity of life, so the proposal I describe includes means-tested refundable tax credits (send them checks) or even “prebates” for those who would not gain much from income tax rate cuts because they already don’t pay much (or any) income tax.

 

The goal is for every level of income to be no worse or no better off as a result of the tax shift, in the aggregate. Individuals who use more than an average amount of fossil fuel energy would be worse off, of course, and vice versa. That’s the idea – create incentives for people to use less fossil fuels, and for producers and innovative entrepreneurs to help them to do it by marketing conservation products and/or non-carbon energy sources.

 

Personally I’m not in such a rush to accelerate the inevitable transition that industrial civilization will make over the next 200 years from fossil fuel energy to other sources. But many people are, and to some extent they’ve got their hands on the public policy levers. Given that, I want to make sure that they don’t pursue their goals with policy tools that are stupid and destructive, like the pernicious carbon cap-and-trade scam, or the growing tragedy that is the ethanol boondoggle.

 

As long as it’s revenue neutral, and phased in gradually so that people and the economy can adjust, a carbon tax is not stupid and economically destructive. It certainly changes the economy, but doesn’t wreck it, and the change is accomplished in a way that’s honest, transparent, doesn’t reward rent-seeking particular interests, and doesn’t expand the power of politicians and bureaucrats.

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2 Responses to “Revenue-Neutral Carbon Tax NOT “Just a Higher Gas Tax””

  1. Jason Gillman Says:

    Gotcha. The important thing to grasp here, is that Key-Phrase “Revenue Neutral,” which than makes it OK (as we must take the tax down somewhere else to offset)

    The reality however, in the implementation of such an act is similar to other plans which are GOOD policy, but rarely understood correctly. Though not similar in the timing, (phasing in) the MI Fair tax proposal was such. And there may be others I am not familiar with.

    Enhance the opportunity to control your own taxation by reducing (or increasing) your consumption, with the “revenue neutral” component as a base reduction in other costs by government. That is IF the regression of other costs/taxes can be assured.

    I would recommend encouraging such taxes with a HEAVY emphasis on the reduction in those other areas first, and guarantees that those costs would not be reinstated.. ever.

  2. jmchugh4u Says:

    Gotcha back.

    As I see it, the carbon tax increase and income tax rate decrease would be contained in the same legislation – they “hold hands and jump together,” kicking in simultaneously at each step.

    As for not reinstating higher income tax rates later, when I talk with liberals about this they are suspicious that it’s some right wing conspiracy to “shrink the government enough to drown it in a bathtub.” Specifically, they say, “Ah-HA! What happens when you’ve squeezed the fossil fuels out of the energy mix and there’s nothing left to tax? Where’s the revenue come from to run the government?”

    My response is that this is not a trick, but a sincere alternative offered to prevent them from doing something stupid and destructive like carbon cap-and-trade. Therefore, just as the income tax comes down while the carbon tax revenue is going up, let it work in reverse when the carbon tax revenue starts going down because the consumption of fossil fuels is phasing out. IOW, I’m not trying to pull a fast one on the statists here. We limited government folks will work on the “drown it in a bathtub” project elsewhere, but in this proposal it’s the, pardon the expression, straight-talk express.

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