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Pitch

Use a carbon tax for pro-growth tax reform, protecting the poor, deficit reduction, and reducing less efficient policies.


Description

Summary

My carbon tax proposal:

  • $16 / ton CO2 starting immediately.
  • Apply it to all fossil carbon and other identifiable GHG point sources.
  • Ramp tax rate up by 4% over inflation each year
  • Suspend Clean Air Act GHG rulemaking for at least 8 years, or deem emitters compliant with GHG rules if they or their fuel suppliers pay the tax.
  • Eliminate $6 billion per year in tax incentives and direct spending for clean energy deployment, electric cars, and biofuels
  • Convert energy efficiency regulations to information provision
  • Repeal renewable fuel standard
  • Use 15% of revenue exclusively for poorest households (150% of poverty and below)
  • Cut corporate income tax rates from 35% to 28%
  • Establish carefully circumscribed border carbon adjustments confined to the most EITE firms and difference in carbon ambition.
  • Use any other revenue for deficit reduction.
  • No offsets.
  • No earmarking other than for the poor.
  • No reductions in research spending.

 

Features:

  • Reduces corporate income tax bills by $800 billion over a decade
  • Holds poorest households harmless.
  • Reduces the deficit by $200 billion over 10 years and another $600 billion after that.
  • Reduces emissions by 9.3 billion tons over 20 years, or about $148 billion in climate benefits at $16/ton.
  • Modest impact on energy prices in short to medium term.
  • Reduces regulation, lower spending, lower corporate taxes.

 

Five Pro-Competitive Features:

  1. Tax rate starts modestly and ramps up gradually, allowing firms to adjust to new relative prices without prematurely scrapping long lived capital.
  2. Replaces far less efficient EPA regulation.
  3. Reduces corporate tax rate, making the entire economy more competitive internationally.
  4. Establishes a border adjustment on energy intensive trade exposed goods, pegged to the carbon price.
  5. Leverages US action diplomatically to seek analogous action among major economies.

 


Category of the action

Mitigation - Helping U.S. enact carbon price legislation


What actions do you propose?

The full proposal is available at the Brookings Institution website:

http://www.brookings.edu/~/media/research/files/papers/2013/02/thp%20budget%20papers/thp_15waysfedbudget_prop11.pdf

Elaboration on the use of revenues:

This proposal reduces the statutory corporate income tax rate from 35% to 28%, reserves 15% of the revenue to protect the poor, and applies the remainder of the revenue to deficit reduction. The discussion below elaborates on the design and logic of the proposed use of the revenue.

The political and economic tradeoffs of revenue neutrality

Because the annual carbon tax revenue grows through the next few decades, the effect of this proposal is to provide immediate stimulus from the corporate tax reductions and to back load most of the deficit reduction into the out years, past the 10 year budget window.

Politically, revenue neutrality has understandable appeal. Revenue neutrality would mean that instead of reducing the federal budget deficit, the entirety of net carbon tax revenues would be applied to lowering other taxes or providing direct rebates to households, including the poor. This appeals to conservatives who reasonably fear that a large new revenue source will eventually lead to further spending and who wish to fulfill a "no new taxes" pledge.

Economically, however, a strong long term case can be made to reduce the buildup of federal debt so as to avert future increases in taxes, lower the share of interest payments in the federal budget, help keep interest rates low, lower the exposure of US federal debt to downgrades by ratings agencies, and lower the dependence of the US on foreign lenders. In this context, deficit reduction may be thought of as a kind of revenue neutrality in that it reduces the need for higher revenues later.

CBO's latest long term budget forecasts that by 2039, the US debt-to-GDP ratio will be higher than at any time since the end of World War II. As CBO notes, this level of debt would have several deleterious consequences, including crowding out private investment and decreasing the ability of the U.S. to respond to unexpected challenges such as financial crises and sharp economic downturns.

Thus a tradeoff arises between the theoretically optimal economic use of the revenue and the political economy case for revenue neutrality in the short run. This proposal provides a "dashboard" of parameters that legislators can adjust to strike a politically feasible balance in the context of a larger deal. The intent here is to give solid fiscal policy guidance on where to start the dials. 

On protecting poor households

The 15% of revenues earmarked to benefit poor households can be delivered largely through existing tax policies and social safety net programs.  The composition of the benefits would be subject to the legislators' preferences, but here I offer an illustrative set of options.

I would start with an expansion of the Earned Income Tax Credit (EITC) to provide larger benefits and extend coverage to childless workers, who are currently ineligible. To benefit those with little earned income (such as seniors and students), some revenue could be targeted to making Pell grants more flexible (for example to cover summer studies) and to boost Supplemental Security Income payments. Another option would be to directly supplement electronic benefits transfer programs, such as food stamps, but with the possible added flexibility that recipients could spend the new benefits on energy.

The revenue could also allow early retirement benefits for coal miners and coal-fired power plant workers and provide generous educational benefits to them and their children.

Further background on the design of a carbon tax in broader fiscal reform can be found here:

http://www.brookings.edu/~/media/research/files/papers/2014/05/22%20carbon%20tax%20broader%20us%20fiscal%20regulation%20morris/05222014_carbon_tax_broader_us_fiscal_reform_morrisa_mathura.pdf


Who will take these actions?

This policy requires new authority by Congress.  

The US Treasury would take primary responsibility for administering the excise tax, where feasible piggy-backing off of existing upstream fuel taxes.

The Congressional Research Service estimates that about 85% of US greenhouse gas emissions could be covered by taxing fewer than 2500 entities.

 

 


Where will these actions be taken?

The tax would apply within US borders, with taxes also applied to imported fuels. Taxes would be rebated to exported fuels, so as not to disadvantage US exporters of globally traded commodities.


How much will emissions be reduced or sequestered vs. business as usual levels?

In addition to the positive budgetary impacts of a carbon tax, there are significant environmental benefits. Modeling results predict the policy would reduce taxed emissions relative to baseline by about 12 percent after twenty years and by a third by mid-century, producing a cumulative reduction of 9.2 billion metric tons of CO2 in its first two decades.

If the present value of those emissions reductions is, say, at least $16/ton, the first twenty years of the tax would produce at least $148 billion in climate benefits. Further benefits could arise from increased GHG abatement by other countries in response to U.S. climate action and diplomacy.  


What are other key benefits?

In addition to the climate benefits, health benefits would arise from reductions in conventional air pollutants such as sulphur dioxide, particulate matter, nitrous oxides, and mercury.

By taking on a policy with clear economic outcomes, the US tax builds US strength in international climate negotiations. The tax would make it much more likely we could influence other countries to adopt analogous stringency, either as part of a multi-lateral agreement or independently.

Politically, this proposal offers several dimensions across which legislators could negotiate to balance efficiency and equity goals. For example, the corporate tax rate could be lowered more (or tax rate reductions expanded to LLC's and S corporations), with less deficit reduction. Alternatively, tax reductions could also apply to personal income or payroll taxes. The tradeoff is that those taxes are less distortionary than capital income taxes, so the overall package would be less pro-growth.

 

 


What are the proposal’s costs?

Our recent study here (http://www.brookings.edu/~/media/research/files/papers/2014/06/03%20economic%20consequences%20delay%20us%20climate%20policy/03_economic_consequences_delay_us_climate_policy.pdf) and our other recent research to be published next year in the National Tax Journal show that using carbon tax revenue to reduce capital income tax rates can improve GDP, wages, employment, and investment.

 

 

 


Time line

The tax would begin immediately, and rise gradually through 2040 at least. Congress could update the tax trajectory as new information about costs and benefits becomes available, but the primary goal would be to provide price signals that are as predictable as possible.


Related proposals

We propose an international dialog on carbon pricing here: http://www.brookings.edu/research/papers/2013/02/08-climate-diplomacy-carbon-pricing-morris-mckibbin-wilcoxen.  This is not a direct negotiation towards binding measures. Rather, we envision a consultation that encourages transparent carbon pricing as a way to build mutual confidence that climate commitments are additional to business as usual efforts and helps participants move towards a system that minimizes the trade distortions that can arise from differential climate policies.

The US carbon tax would feature directly in these proposed talks.


References

Selected References:

Congressional Research Service. 2012b. “Carbon Tax: Deficit Reduction and Other Considerations,” (R42731; September 17, 2012), by Jonathan L. Ramseur, Jane A. Leggett, and Molly F. Sherlock,

Dinan, Terry, and Diane Lim Rogers. 2002. “Distributional Effects of Carbon Allowance Trading: How Government Decisions Determine Winners and Losers.” National Tax Journal 55(2): 199–221.

Fischer, Carolyn, and Alan K. Fox. 2009/2011. “Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates.” Resources for the Future Discussion Paper, RFF DP 09-02-REV. Originally published February 2009, revised March 2011.http://www.rff.org/rff/documents/rff-dp-09-02-rev.pdf

Gayer, Ted, and W. Kip Viscusi. 2012. “Overriding Consumer Preferences with Energy Regulations.” Working paper.http://mercatus.org/sites/default/files/Overriding-Consumer-Preferences-with-Energy-Regulations-Final.pdfAlso forthcoming in Journal of Regulatory Economics.

Joint Committee on Taxation (JCT). 2012. “Estimates of Federal Tax Expenditures for Fiscal Years 2011–2015, JCS-1-12.” January 17.

———. 2013. “Estimated Revenue Effects of the Revenue Provisions Contained in an Amendment in the Nature of a Substitute to H.R. 8, The ‘American Taxpayer Relief Act Of 2012,’ As Passed by the Senate on January 1, 2013.” JCX-1-13. January 3. https://www.jct.gov/publications.html?func=startdown&id=4497

Marron, Donald, and Eric Toder. Forthcoming. “Carbon Taxes and Corporate Tax Reform.”

Mathur, Aparna, and Adele C. Morris. 2012. “Distributional Effects of a Carbon Tax in Broader U.S. Fiscal Reform.” December 14. The Brookings Institution, Washington, DC. http://www.brookings.edu/research/papers/2012/12/14-carbon-tax-fiscal-reform-morris

McKibbin, W., A. Morris, and P. Wilcoxen. 2012. “The Potential Role of a Carbon Tax in U.S. Fiscal Reform.” July 24. The Brookings Institution, Washington, DC. http://www.brookings.edu/research/papers/2012/07/carbon-tax-mckibbin-morris-wilcoxen

Metcalf, Gilbert, and David Weisbach. “The Design of a Carbon Tax,” Harvard Environmental Law Review, Vol 33, Issue 2 (2009), pp. 499-556.

Morris, Adele, Pietro Nivola and Charles Schultze. 2012. “Clean Energy: Revisiting the Challenges of Industrial Policy.” Energy Economics 34 (Suppl. 1, November).

Rausch, Sebastian, and John Reilly. 2012. “Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?” MIT Joint Program on the Science and Policy of Global Change, Report No. 228, August. Massachusetts Institute of Technology, Cambridge, MA.

Statistica. 2013. “Corporate Income Tax Revenues and Forecast 2000–2022.”http://www.statista.com/statistics/217509/revenues-from-corporate-income-tax-and-forecast-in-the-us

U.S. Environmental Protection Agency. 2009. “EPA Analysis of the American Clean Energy and Security Act of 2009: H.R. 2454 in the 111th Congress. June 23. http://www.epa.gov/climatechange/Downloads/EPAactivities/HR2454_Analysis.pdf