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Thursday, September 24, 2009




Lets talk again about carbon taxes

The cap and trade uncertain future in America and its unimpressive achievements in Europe seem to be driving a renewed interest in its most obvious alternative - a carbon tax. These days even Exxon Mobil is stating its support for carbon taxes. Never mind the US car manufacturers who were begging for such a tax for years. Putting coal, ecology and global warming aside, a standalone carbon tax on oil makes sense from more than one perspective and yet America seems to be no closer to achieving it than before.

There may be several reasons behind this absurd situation, but without any doubt one, and maybe the most important of them all, is a widespread belief that carbon tax is going to hurt American taxpayers. But is there really going to be so much pain to hurt? Lets take another look at a revenue neutral gas tax which was probably discussed in the media more than any other carbon tax. The idea is that what we take in gas taxes, we cut elsewhere or we pay back in social benefits. Lets say that we are going to swap payroll taxes, income taxes, VAT... You name it, we can swap any of it for a carbon tax. Say we swap 50c immediately and then we swap 10c every next year over the course of a decade. So what's going to happen?

For a start, there is a simple law of microeconomics that postulates that regardless if a tax is imposed on the consumer or the producer, the price usually falls somewhere in between with a loss getting split between the two. Those who believe that the demand for oil is too inelastic for the carbon tax to be subject to this law, should check what happened in Oregon where gas taxes precipitated such a dramatic fall in tax revenues that the state had to consider replacing them with a mileage tax. This is very relevant for the US which is twice as much a global swing consumer as Saudi Arabia is a global swing producer. The US alone accounts for 25% of the global oil consumption. So a gas tax of $1 does not translate into the current price of gas plus $1. Say, the price will rise by 80c. Given that the taxpayer is fully refunded through the swap, the taxpayer wins 20c on every gallon. In this case the producer takes a loss of 20c and, given that so much of the US oil is imported, much of this loss inflicted on foreign producers. If this carbon tax comes in the form of a tariff on imported oil, it's a loss taken exclusively by foreign producers (read Arabs/Persians/Russians/Chavez).

Next, a carbon tax swap means that we are swapping regular taxes, say payroll taxes, with a "please avoid me" tax. If the taxes are swapped dollar for dollar, it's enough that a taxpayer then finds a job close to home and he is already winning. If the taxpayer switches to a hybrid or electric car, he is sabotaging the whole system. That's why any swap of regular taxes for carbon taxes amounts to sheer cutting taxes. A revenue neutral carbon tax swap won't stay revenue neutral even for a year. It's going to be the most dramatic cutting of taxes ever dared by the US government. That's why contrary to the reasoning of the "we don't raise taxes in recession" school of thought, carbon tax swap is perfect for recessions. This is because it's not about raising taxes but about restructuring them in a way that makes sense. Essentially carbon tax swap is a "do it yourself" stimulus package under which taxpayers are cutting their taxes themselves on the way reducing America's dependence on oil, defeating America's enemies abroad and creating thousands of green jobs at home. It's way better than the senseless throwing money around we've seen until now with its bridges leading to nowhere and whole sectors becoming dependent on government's handouts.

Finally, if a certain taxpayer prefers to pay carbon tax, he is not losing a penny as long as a tax swap is done dollar for dollar. But if in other corners of the economy people and business do their share of avoiding carbon taxes, they are bringing the price down for all taxpayers. You don't want to change? No problem. Let others change and benefit from their work.

Basically we are talking here about a massive wealth transfer from the US government and oil producers to the US taxpayers. In fact, with a bit of imagination a carbon tax swap can be improved to make it even more beneficial for an average person. For example, rich tend to account for a larger share of carbon fuels consumption. The swap can be designed in such a way that it does not refund the upper 10 percent, but instead redistributes their taxes between the rest. So a carbon tax swap can also include wealth redistribution. In this case the taxpayers are more than compensated for the carbon tax right from the beginning.

It's the misguided and confusing marketing campaign launched by some enthusiasts of carbon taxes that is very much responsible for leaving the public unaware of the many virtues of carbon tax. There was no point really for calling on the public to start sweating blood for the good of the nation. This is absurd. Carbon taxes are so good for taxpayers that they don't need any special apologetics, let alone of such a lame kind. If anything revenue neutral carbon tax swap needs guarantees from the political class against replay of the Oregon scenario. Such guarantees are the only thing that was missing here all the time. The politicians should make it clear that they are perfectly aware of the fact that for all practical purposes a revenue neutral carbon tax amounts to a massive and sustained tax cut, that a carbon tax swap can be implemented only as a gradually unfolding stimulus package. The political class should promise to resist temptations to smuggle in extra taxes to compensate the state for collapse in tax revenues a carbon tax swap is bound to produce.

As a matter of fact, politicians have more than enough reasons to resist such temptations due to the tremendous costs until now never properly reflected in the price of oil including oil's geopolitical externalities, the instability of the oil market and its manipulations by OPEC, the tremendous amount of local and state taxes wasted on supporting overgrown infrastructure and suburban sprawl created by the politics of cheap gas. In fact, oil's externalities and long terms costs of the carbon fuel consumption are probably the only thing that supporters of carbon tax swap have managed to communicate to the public correctly. Where they failed is convincing the public that what's good for the nation is not automatically bad for the public and they failed in this precisely because they have missed this point themselves. The beauty of revenue neutral carbon tax is that it's good for America as a nation, but it's even better for American taxpayers.

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