Taxing carbon rather than labor

Maybe you don’t believe that carbon dioxide contributes to global warming and you don’t think that even the possibility that it does would be worth worrying about. Maybe the fact that pregnant women and small children have to avoid eating fish because it’s full of mercury from coal doesn’t bother you. Maybe the summer days on orange air quality alert status are fine by you. Even so, if you have to discourage one of them, would you rather discourage productive labor or the burning of coal and oil?Forget about Obama’s foolish proposal to implement tradeable carbon credits. Obama talked a good game, but he didn’t do much of anything for the environment until after Hillary had lost the election. His carbon-trading proposal had a lot more to do with enriching Wall Street parasites than with addressing global warming. Here we are talking about a straight tax on carbon, imposed on the fuel, with a carbon-equivalent border tax on imported products.

The proceeds would go to reducing the employee side of FICA taxes, structured as an exemption for the first $X of FICA wages, so that the benefit would be skewed towards lower-wage working people. Part of the revenue would be paid out as a bump in social security and other federal retirement payments and in state revenue sharing for welfare payments in proportion to the effect of the carbon tax on goods purchased by retirees and by those unable to work due to disability, but that may largely happen automatically through inflation adjustments in benefit levels.

A carbon tax should be phased in over at least three years to allow businesses and consumers to adapt. That would give everyone time to invest in lower-carbon alternatives before the full burden of the tax starts to bite, and would allow time to react to any unanticipated problems in administering the tax.

The carbon-equivalent tax on imported products would require agreeing on a proper tax amount for a large number of products, but that could be made manageable. The tax would not be based on the actual carbon profile of the particular imports. Instead, it would be based on a generic profile of products computed as though they were produced using coal-generated electricity. Domestic manufacturers of a given product (if there are any) would be asked to provide the data for a given product; they would have incentive to help to ensure that the competing product was subject to an appropriate tax.

There are at least two ways to structure the border tax, one of which is better than the other as a policy matter but would require more international negotiation. The less desirable version would only impose a border tax on products from countries that do not impose an adequate carbon tax of their own. Such carbon-equivalent taxes have been discussed in the past and appear to be generally viewed as a fair trade practice. However, that version would have issues. For example, if South Korea imposed its own carbon tax on televisions, a product that nobody manufactures in the United States, their carbon tax would tend to increase the price of televisions sold to U.S. consumers without the revenue being available to reduce U.S. FICA taxes. In the other direction, a carbon tax imposed on U.S. exporters could hurt the competitiveness of our manufacturers.

Ideally, then, we would instead impose the carbon-equivalent tax on all imports and provide a carbon-equivalent rebate for exports. We would agree with our trading partners for them to do the same. Each country would then be able to compensate its own consumers for the pricing effects of the tax, and would be able to set its own tax rate. So long as the carbon-equivalent tax was set at a level that roughly corresponds to the domestic burden of the carbon tax our trading partners would not have a legitimate right to complain.

Where taxes on labor discourage hiring and accelerate the day when we will be replaced by our new robot masters, a carbon tax would boost economic activity by stimulating the green economy. Solar and wind power, insulation, new conservation technologies and the like are all more job intensive than coal mining or petroleum production. New technologies would give America an opportunity to benefit from what remains of our advantage in innovation. This would all make employees more valuable rather than less, improving worker market power and helping to rebalance our economy while promoting growth.

Further, it would improve U.S. national security. The government loves to talk about how rampant coal mining and fracking improve American energy independence, but in practice both Democrats and Republicans are still sucking up to the Saudis, the guys who sponsor the crazy-violent Wahhabi version of Islam that gave us 9-11 and who have encouraged us to attack normal, peaceful Muslims. A true green economy would put that sort of foolishness behind us. We won’t get a green economy through regulation. We have to encourage everyone to WANT to use less fossil fuels. A suitable carbon tax would do that.

By the way, the OECD (hardly a radical body) agrees that green taxes are a superior way to raise revenue.