If You Won’t Pay Higher Taxes for Your Kids, Would You Pay Them for the Polar Bears?
May 16th, 2008 . by economistmomAmerican Enterprise Institute’s (and McCain economic advisor) Kevin Hassett likes polar bears. He likes them so much that he brought them up yesterday at a tax conference, during his panel on advising the presidential candidates. (This morning we’ll hear from an entire panel discussing “can tax policy save the penguins.” I think they should have said “polar bears,” which are cuter…. ) You see, Kevin, a low-tax kind of guy, favors the idea of a carbon tax.
And by the way, so does Greg Mankiw, a former Chairman of the Council of Economic Advisers under this Bush Administration. And so does Glenn Hubbard, another former CEA Chairman under this Bush Administration, known as the “architect” of the Bush tax cuts.
And I have proposed this idea as well, but that’s not a shocker–I’m a tax-loving Democrat, after all.
The point is, like the fact that economists univerally (across the political and ideological spectra) seem to hate the idea of a gas tax holiday, we universally seem to love the idea of environmentally-motivated taxes. Yes, a tax increase that even tax-cutting economists support.
Why? Sustainability. Some economists support the carbon tax purely on the grounds that it would help combat global warming and promote environmental sustainability. As a mom and an economist, I love the carbon tax idea because it promotes fiscal as well as environmental sustainability. It’s a revenue increase–yes, a tax increase!–but an efficient one, with the potential for at least some of that revenue to go toward deficit reduction.
I’d like to think we parents can do better in terms of leaving behind a sound economy and a decent environment for our kids.
Diane,
Some of those that you cite above only seem to like a carbon tax if it is paired with reductions in income and corporate taxes. I’ve mentioned that the second part seems a little extravagant with big budget deficits but that idea doesn’t seem to get much support among economists.
My first “comment” back! John: I’d like to think most of those guys would be willing to consider using at least part of it for deficit reduction, but even if not, a revenue-neutral tax swap would still serve as “relative deficit reduction”, compared with what they might propose were they not in favor of this carbon tax. Such “relative deficit reduction” through revenue-neutral tax reform would be a lot better than the deficit-increasing (revenue-losing) tax cuts we’ve been dealing with for the past 7 years. This is pretty much my view of why pay-as-you-go (”paygo”) budget rules (on tax cuts as well as spending increases) are useful. So I’ll be talking more about “relative deficit reduction” next week when the conference agreement on the budget resolution comes up.
I’m not trying to be a jerk, but I just want to mention that I have a Ph.D. in economics and I am very much against a carbon tax. (I don’t hate the gas tax holiday except for how gimmicky it is.) I also know at least 30 other economists who would oppose it. Don’t get me wrong, they would rather a carbon tax than cap-and-trade, but they would prefer neither to either. So I guess I’m just asking that in the future you say “almost all economists” or even “all economists who have a lick of sense.”
Also if you don’t mind, could you either here in a future blog post spell out exactly what you mean by blaming deficits on tax cuts? E.g. under both Reagan and Bush, tax revenues (eventually) rose. So are you saying that they would have risen faster if not for the tax rate cuts? I bring it up because I think the average person, reading your commentary, would come away thinking that federal revenues were lower today than when Bush took office, when in fact they are up almost 19% from 2000 to 2006 (.pdf). (I ignored the 2007 number because it is listed as an estimate.)
Whoops sorry, after posting the above comment I saw your earlier post about the CBO study etc. I see now the sense in which you are saying tax cuts are responsible for deficits.
Daine,
Right now it seems fairly unlikely that a significant portion of any carbon permit value we create will be used to reduce the budget deficit. Nevertheless, I’m curious about the distributional implications of using this revenue to pay down our national debt. In your paper, you say, “Even if one interprets the benefits of deficit reduction as distributed broadly across the current population, i.e., as a fixed dollar amount of benefit to each American, this benefit will be progressive relative to income (a higher percentage of a lower income).”
But why would one interpret the benefits this way? Wouldn’t the benefit be proportional to each person’s share of future taxation? And given that wealthier Americans have higher average tax rates and pay taxes on a much larger ammount of income, it seems to me that reducing future tax burdens would be really regressive.
Public finance isn’t really my strong suit, so I’d appreciate it if you could tell my why this isn’t the right way to view this problem.
Rich, there are debates on this—what is the burden of budget deficits across the income distribution? (It’s easy to figure out the intergenerational burden, not so easy to speculate on the inTRAgenerational burden among rich vs. poor.) Obviously it depends on what we think the form of the future burden will take–higher taxes or reduced government services, or some combination of both. The more it’s higher taxes, the more it depends on how we think taxes would be raised. If taxes would be raised proportionate to the current (progressive) federal tax distribution, then you’re right, that would be a more progressive change, so reducing the deficit and avoiding such future tax increases would be a regressive change. In my paper I was making the assumption that the future tax increases and/or benefit decreases associated with deficits would be distributed fairly evenly across the population, which would mean that relative to income, avoiding deficits would be a progressive change.