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Is the Conservative-Friendly Carbon Tax a Regressive Flat Tax In Disguise?


by Bill Chameides | January 22nd, 2009
posted by Erica Rowell (Editor)

Permalink | 6 comments

What’s wrong with this picture? Conservatives, such as the members of Wall Street Journal‘s editorial board, are talking up a carbon tax instead of a market-based system to address climate change. These are the folks whose favorite refrain is “no new taxes.” What gives?

The choice between a cap-and-trade system and a carbon tax is not obvious. Taxes appear to be more transparent and simpler but do not guarantee a decrease in emissions over time. Cap and trade is admittedly more complex, and, in the midst of a market meltdown, that complexity is vexing. But what a cap and trade does do, if implemented properly (and that’s a big if), is provide environmental certainty by mandating specific decreases in emissions by certain dates. It also allows markets to find the cheapest alternatives through the trading of emissions allowances. (More details here [pdf].)

Cap and Trade’s Popularity Grew Out of Its Successes

Way back in the Clinton days, much of the discussion focused on taxes such as the BTU tax proposed by Vice President Al Gore, which aimed at taxing the heat content of fuel. But by the end of the 1990s cap and trade had gotten the upper hand. Why? Three reasons come to mind immediately:

  • the success of cap and trade in lowering emissions of acid-rain-inducing sulfur oxide and nitrogen oxide from power plants at costs well-below projections,
  • the nation’s growing belief in the market’s ability to find the most effective and least expensive solutions, and
  • the very real perception that a carbon tax was politically untenable – that the American public would not accept a new tax.

By the time the Lieberman-Warner Climate Security Act of 2008 hit the Senate floor last spring, a solid alliance in favor of cap and trade appeared to be in place — an alliance that spanned the array of politically diverse environmental organizations and corporate America. (See USCAP’s letter [pdf] to Senate.)

Cap and Trade Loses Its Appeal

That was then. These days, the cap-and-trade alliance is in tatters. And what bad timing. For the first time, with a Democratic majority in Congress and Obama in the White House, there’s a real possibility that a climate bill could become law.

But with this new reality and no doubt as a result of the ongoing market debacle, the environmental community is splintering into cap-and-trade and carbon-tax camps. Not surprisingly, the more left-leaning elements of the community tend to favor taxes (see here, here [pdf], and here) while centrists tend to favor markets.

Conservatives Favoring a Tax?

It’s one thing when Ralph Nader comes out in favor of a carbon tax, but conservatives? Here are just two cases in point:

  • Staunch conservatives Bob Inglis (R-SC) and Arthur Laffer, a former member of President Reagan’s Economic Policy Board, argued in the New York Times in favor of a carbon tax, albeit a revenue-neutral one; and
  • The predictably conservative, there’s no-global-warming-so-no-need-to-do-anything editorial board of the Wall Street Journal recently opined that “a (carbon) tax would be the least painful way to get” to a fix. For some reason the WSJ editors believe that a cap-and-trade system using the market to find the least expensive pathways to reducing emissions would lead to “market distortions caused by subsidies and regulation.”

So what’s going on? Have conservatives seen the light? Are they joining hands with liberal environmentalists to save the world from climate change? Probably not.

Carbon-Tax Support As a Backdoor Entry to Other Policy Goals?

Some of my colleagues believe it’s the poisoned pawn ploy – since taxes are not viable politically, kill climate legislation by favoring a carbon tax.

I have a different hunch. First, note that the carbon tax favored by these conservatives is “revenue neutral.” Read their pieces and decide for yourself, but to me their form of revenue neutral means substituting revenues from our current income tax system with those from a single-rate tax tied to the fossil-carbon content of consumer products – essentially a sales tax. But sales taxes are notoriously regressive – they place disproportionate burdens on lower income brackets. So their solution is essentially substituting a carbon tax, which is actually a regressive sales tax, for our progressive income tax system.

Coincidentally, Inglis and Laffer just happen to favor replacing our progressive tax system with a more regressive one (see here and here). Inglis has earned the Citizens for Tax Justice’s highest rating for his opposition “to progressive taxes,” and Laffer is a highly vocal proponent of the flat tax that would replace our progressive tax system with a single tax rate for all Americans.

Now, a revenue-neutral carbon tax could be made progressive – it depends upon how the revenues are returned to the taxpayers – for example, using a tax and dividend approach [pdf]. But I suspect that that is not what the Wall Street Journal and Messrs. Inglis and Laffer have in mind. Before getting too excited about a new liberal-conservative alliance on climate change I’d recommend looking that gift horse in mouth – with just a sleight of hand, that carbon tax could end up achieving public policy goals that have nothing to do with fixing climate change.

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6 Comments

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  1. Matt Gardner
    Feb 2, 2009

    Hi, Thanks for mentioning CTJ’s ranking of members of Congress on their tax votes, but you’ve (sort of) got the ranking backwards. Your post says: “Inglis has earned the Citizens for Tax Justice’s highest rating for his opposition ‘to progressive taxes.'” But we actually gave Inglis an “F” in our Congressional report card for that reason. I’d prefer to call that our “lowest rating,” not our highest. Would hate to give the impression to anyone that we liked Inglis’ policies. The CTJ report card in question is at http://www.ctj.org/pdf/reportcard2006.pdf, by the way. Just a matter of wording, but thought I would mention it. Thanks for citing our report!

    • Bill Chameides
      Feb 2, 2009

      Matt, Thank you for pointing out that little slip-up. Indeed Inglis is a staunch opponent of progressive taxes and a proponent of regressive taxes, as I stated in my blog, and therefore he received the Citizens for Tax Justice’s lowest (not highest) rating.

  2. Barry
    Jan 31, 2009

    only the ‘tax rate’ in our current tax system is ‘progressive.’ No doubt there are numerous examples every tax year where people with a higher ‘income’ pay less percentage-wise as some below due to deductions, write-offs, incomes from tax-friendly vehicles, or legal or shady loop-holes. So, I find it humorous that the reason our current system is better is it is more ‘progressive’, when in reality in many cases it is regressive. A flat tax is neither regressive nor progressive. A flat tax with say a $30,000 standard deduction is mathematically progressive period…

    • Bill Chameides
      Feb 2, 2009

      A straight-up carbon tax charged at the point of sale, like a sales tax, is regressive. Obviously, a C tax does not have to be regressive, as I pointed out in my post, but I wonder if progressive forms of the tax are what conservatives like Inglis really have in mind.

      • Barry
        Feb 2, 2009

        First off I guess I do have a problem with anyone really being ‘conservative’ and suggesting a tax, even a carbon tax. That aside, I have yet to find a good study (although I haven’t searched much) on how it would play out. For example, how high would the carbon tax rate have to be to get real shifts of energy usage from carbon based sources to others. My guess is the ‘carbon tax rate’ would need to be astronomical for that to happen and what we would end up with is similar energy usage, but another tax. Another issue is the enormous infrastructure upgrades needed to make solar and wind viable on a large scale (i.e. new transmission lines). Thanks, Barry

        • Bill Chameides
          Feb 2, 2009

          Barry: I don’t know about astronomical, but many studies indicate for instance that the tax on gasoline would have to be quite high to affect overall usage. But even with cap and trade, some increases in costs, at least in the short term, are inevitable. The price we pay for living off of fossil fuels all these years.

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