Trade Income Tax for Carbon Tax?

I plan to write more about this later, but wanted to bring it to your attention. Art Laffer is proposing a revenue-neutral carbon tax.

The concept of the revenue-neutral carbon tax is for the government to tax our carbon usage and refund the tax to us in the form of an income or payroll tax reduction. The idea is that since this will make carbon relatively more expensive that it will alter our consumption patterns to consume less carbon and thereby less pollution.

There are three problems with this plan as I see it:

  1. Carbon is an input into everything – find a product that isn’t made with petroleum! As soon as the tax is refunded to us with are either going to buy a product that uses carbon as an input, or buy a service from someone who will then use the money they made  providing the service to buy carbon. Carbon is a proxy for standard of living so if you think you can reduce our usage of carbon you’re really saying you can reduce our overall standard of living. There is nothing we want to buy that doesn’t consume carbon so the idea that this tax will somehow alter our preferences is not very believable
  2. The tax will only affect the United States – keep in mind that if tax ourselves to reduce our carbon usage it only serves to lower the price so that other countries can consume more. It is worth noting that even though a barrel of oil currently sells for about $100 a barrel oil companies can still pull it out of the ground for as little as $2 a barrel. The demand is what is driving the high costs, not the actual production cost. As we lower our consumption, and the price drops, you can be sure that other countries will pick up the slack. At the end of the day the same amount of carbon will be burned (globally) so this policy does nothing to address the burning of carbon on a global scale.
  3. It’s regressive – this will impact the poor, who use a higher percentage of their income on carbon, more than the rich. This will likely cause all sorts of additional market distortions and tax complexity as the bureaucrat social engineers attempt to rectify the situation.

Because of these reasons I don’t believe this policy is useful for reducing global consumption of carbon (won’t help with man caused global warming, if it exists). It might work well for localities looking to reduce their carbon usage to help with air pollution or other externalities. If those localities so desire they could give it a try. I do not support this as a nation-wide policy for the United States as it would unfairly tax those citizens living in less populous areas.

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