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Michael Meeropol: Carbon Tax With The Revenue Rebated As A Dividend Is an Oustanding Policy Idea

Back in 1993, the original proposal from the Clinton Administration on how to close the budget deficits that they had inherited upon taking office included a revenue raiser called a BTU tax --- a tax on the amount of energy (measured in British Thermal Units) contained within all fuels sold.

(For details see “The BTU Tax Experience:  What Happened and Why it Happened” Pace Environmental Law Review Vol. 12, No. 1 (Fall, 1994) http://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=1528&context=pelr)

As I wrote in my book Surrender, How the Clinton Administration Completed the Reagan Revolution (U. Michigan Press, 1998, pbk. 2000), such a tax should have been strongly supported by economists and politicians who subscribed to the Reagan era analysis of supply side economics.  Supply side economics was, of course, the theoretical underpinning of what came to be known as the Economic Recovery Tax Act of 1981 – the centerpiece of what I have called Reaganomics. So called supply siders argued that the WORST tax was a progressive income tax because it damaged incentives to work save and invest. 

The way the argument went, if tax rates rose as income rose then the more successful you were the larger percentage of your gain in income would be taxed away.  This would, by this argument reduce the incentive to, say, take a job with a $20,000 raise if you only got to keep $10,000 of it.  (And similar arguments explained the discouragement to save and invest because the rate of return would be lowered by ever increasing percentages).   The most extreme supply siders argued that because of the positive incentive effects of lowering income tax rates, the increased economic activity would be so great as there would be no revenue lost.   This argument continues to be used today by those who argue that income tax cuts (such as the ones enacted by the Kansas Republicans) will pay for themselves because they will lead to increased economic activity.

The best tax, according to this approach, was one that created no incentives to change behavior.  Such a tax (called a “head tax” because it is a fixed amount that every individual must pay – it is not levied on any activity, just on the person) was actually introduced by the government of Prime Minister Thatcher in Britain.  It was called a Community Charge and it replaced the way local governments in Britain were financed.  Since even very low income people had to pay it, it ran into strong political reaction. In fact, a large political demonstration in London turned violent.  The public reaction actually led to Thatcher being replaced as leader of the Conservative Pary in 1990.    For details, including arguments for and against that specific tax, see “Margaret Thatcher and the Lump-Sum Head or Poll Tax” Economic Perspectives (December 5, 2008)        http://econperspectives.blogspot.com/2008/12/margaret-thatcher-and-lump-sum-head-or.html

A “second best” tax would be one that had no disincentives to increase income.  Usually this involves taxing consumption rather than income.  That way, using increases in income to increase savings would not result in a tax increase.   A BTU tax which only taxed the production of certain energy producing technologies would not rise as incomes rose --- only if consumption of high carbon footprint fuels were to rise.

A version of this tax passed the House of Representatives but was killed in the Senate.  A small increase in the gasoline tax was the only crumb thrown to the environmentalists as part of the 1993 deficit reduction bill passed by Congress.

Imagine how much closer we would be to a significant reduction in carbon pollution if that tax had been enacted over 20 years ago.

Today, with climate change promising horrendous consequences for our grandchildren the urgency is much more serious.  And there is a new proposal --  a carbon tax that will be immediately rebated to all citizens.

(For details see “Legislative Proposal:  Carbon Fee and Dividends http://citizensclimatelobby.org/wp-content/uploads/2014/04/Carbon-Fee-and-Dividend-April-2014.pdf.    For a number of links devoted to this issue see Citizens Climate Lobby “Revenue-Neutral Carbon Tax”  http://citizensclimatelobby.org/carbon-tax/)

(Something similar is in existence in Alaska only there the tax is on oil company revenue which is then distributed as dividends to all Alaskans.)   

As with the original BTU proposal, this tax should not be opposed by those who believe that rising income tax rates damage incentives.  In fact the impact on incentives will be POSITIVE. Consumers and businesses will have strong incentives to change their behavior in ways that will reduce greenhouse gas emissions.  ON top of that, combining that tax with the dividend payout will subsidize those individuals who will pay increased energy prices and be a significant net income increase for many lower income people whose energy consumption is below average.   A $15 per ton tax on carbon emissions was predicted to produce a 15 cent a gallon increase in gasoline prices.  Given the wide fluctuations in prices over the past ten years (gasoline prices peaked at over $4 a gallon in the summer of 2008), most people will have little trouble adjusting to a permanent 15 cent a gallon increase.   The subsequent increases as the carbon tax rises by $10 per year will be even easier to deal with as alternative sources of energy become more competitive.  Who knows, such a law might finally bring the electric car to the majority of motorists.

So if this is such a great idea – how come it isn’t already racing through Congress to become law as quickly as possible?  I assume most listeners know the answer --- the oil and coal and natural gas companies would stand to lose a lot of money if such a tax were enacted.  The average citizen would be compensated with the dividend, but the cost increases caused by the tax would move consumers of energy away from fossil fuels towards renewables – ultimately consigning the oil, coal and gas industries to the fate of the horse and buggy industry after the automobile caught on.

This will be good for the economy and for the population – and indeed for the very survival of human civilization – but it will not be good for the CEOs and shareholders of fossil fuel companies.   So they will continue to use their power to resist even as reasonable a proposal as this one --- even if it means killing countless millions in the future as global warming takes its toll on the planet and its people.

I apologize for the tone but as William Lloyd Garrison said defending his “immoderation” in attacking slavery, “Tell a man whose house is on fire to raise a “moderate” alarm!”   As the playwright Tony Kushner has exhorted members of his audience, “the planet is burning!”  The carbon tax and dividend rebate is a great idea.  It deserves our whole-hearted support.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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