When the International Monetary Fund endorsed a giant energy tax on the American economy, I was not happy.
And not just because the tax hike would have been more than $5,000 for an average family of four. I also was agitated by the hypocrisy.
…these bureaucrats get extremely generous tax-free salaries, yet they apparently don’t see any hypocrisy in recommending huge tax increases for the peasantry.
And when the similarly un-taxed bureaucrats at the Paris-based Organization for Economic Cooperation and Development added their support for a big tax hike on energy, I was irked for that reason, and also because they wanted to use much of the money to make government bigger.
…the OECD is basically saying is that an energy tax will be very painful for the poor. But rather than conclude that the tax is therefore undesirable, they instead are urging that the new tax be accompanied by new spending.
Moreover, I also criticized Barack Obama’s former top economist for endorsing a big energy tax.
So does this mean I’m against energy taxation? The answer is yes, but with a big caveat. I want the government to collect tax (hopefully a small amount because we have a small government) in the way that does the least amount of damage to the American economy.
So while my instinct is to oppose any proposed tax, I’m theoretically open to the notion that we can make the tax system less destructive by replacing very bad taxes with taxes that aren’t as bad.
And that’s what some pro-market economists want to do with an energy tax. Here’s some of what Greg Mankiw wrote for the New York Times.
Policy wonks like me have long argued that the best way to curb carbon emissions is to put a price on carbon. The cap-and-trade system President Obama advocates is one way to do that. A more direct and less bureaucratic way is to tax carbon. When polled, economists overwhelmingly support the idea. …It encourages people to buy more fuel-efficient cars, form car pools with their neighbors, use more public transportation, live closer to work and turn down their thermostats. A regulatory system that tried to achieve all this would be heavy-handed and less effective.
In other words, Mankiw argues that not only could the revenue be used to finance equal-sized tax cuts, but the carbon tax would end any need for destructive regulations.
Which creates a win-win scenario, he argues, citing British Columbia as an example.
Bob Inglis, the former Republican congressman from South Carolina, heads the Energy and Enterprise Initiative at George Mason University A recent winner of the John F. Kennedy Profile in Courage Award, which is given to public officials, he has been pushing for climate change solutions that are consistent with free enterprise and limited government. Environmentalists in the United States would do well to look north at the successes achieved in a Canadian province. In 2008, British Columbia introduced a revenue-neutral carbon tax similar to that being proposed for Washington. The results of the policy have been what advocates promised. The use of fossil fuels in British Columbia has fallen compared with the rest of Canada. But economic growth has not suffered.
Professor Mankiw makes some reasonable points, but now let’s get the other side.
Three of my colleagues at the Cato Institute have just produced a working paper on carbon taxation. They directly address the claims of pro-market advocates of energy taxation.
Within conservative and libertarian circles, a small but vocal group of academics, analysts, and political officials are claiming that a revenue‐neutral carbon tax swap could even deliver a “double dividend”—meaning that the conventional economy would be spurred in addition to any climate benefits. The present study details several serious problems with these claims.
Much of the debate revolves around scientific issues such as the potential long-run harm of carbon emissions.
In the policy debate over carbon taxes, a key concept is the “social cost of carbon,” which is defined as the (present value of) future damages caused by emitting an additional ton of carbon dioxide. …the computer simulations used to generate SCC estimates are largely arbitrary, with plausible adjustments in parameters—such as the discount rate—causing the estimate to shift by at least an order of magnitude. Indeed, MIT economist Robert Pindyck considers the whole process so fraught with unwarranted precision that he has called such computer simulations “close to useless” for guiding policy.
Models about climate change also play a big role.
Additionally, we show some rather stark evidence that the family of models used by the U.N.’s Intergovernmental Panel on Climate Change (IPCC) are experiencing a profound failure that greatly reduces their forecast utility.
As well as the use of cost-benefit analysis.
…the U.N.’s own report shows that aggressive emission cutbacks—even if achieved through an “efficient” carbon tax—would probably cause more harm than good.
I’m not overly competent to discuss the issues listed above.
But the debate also revolves around what happens with the revenue generated by a carbon tax. For instance, is it used to lower other taxes? Or does it get diverted to fund bigger government?
The Cato authors argue that carbon taxes can be just as damaging – and maybe even more damaging – than existing taxes on labor and capital. And they also fear that revenues from a carbon tax would be used to increase the burden of government spending.
…carbon taxes cause more economic damage than generic taxes on labor or capital, so that in general even a revenue‐ neutral carbon tax swap will probably reduce conventional GDP growth. (The driver of this result is that carbon taxes fall on narrower segments of the economy, and thus to raise a given amount of revenue require a higher tax rate.) Furthermore, in the real world at least some of the new carbon tax receipts would probably be devoted to higher spending (on “green investments”) and lump‐sum transfers to poorer citizens to help offset the impact of higher energy prices. Thus in practice the economic drag of a new carbon tax could be far worse than the idealized revenue‐ neutral simulations depict.
I have mixed feelings about the above passages.
On a per-dollar-raised basis, my gut instinct is that a carbon tax does less damage than revenue sources such as the corporate income tax. So you theoretically would get more growth with a revenue-neutral swap.
But my colleagues are probably right that a carbon tax is more damaging than other taxes, such as the payroll tax (which, after all, is a comparatively less-destructive flat tax on labor income).
Indeed, this is what we see in some of the evidence they cite in their study. You only get better economic performance if carbon tax revenue is used to lower the tax burden on capital.
In any event, the most persuasive argument against the carbon tax is that a big chunk of the new revenue would probably be used to make government even bigger. And this is why I argued back in June that supporters of limited government should reject the siren song of carbon taxation.
Last but not least, I should point out that the evidence from British Columbia is not very persuasive according to the authors of the Cato study.
…in British Columbia—touted as the world’s finest example of a carbon tax—the experience has been underwhelming. After an initial (but temporary) drop, the B.C. carbon tax has not yielded significant reductions in gasoline purchases, and it has arguably reduced the B.C. economy’s performance relative to the rest of Canada.
Now we’re back in an area where I’m unable to provide helpful commentary. Other than a one-time analysis of fiscal policy in Alberta, I’ve never delved into the economic performance and competitiveness of Canadian provinces, so I’ll resist the temptation to make any sweeping statements.
Returning to the big issue, my bottom line is that a carbon tax might be a worthwhile endeavor if Professor Mankiw somehow became economic czar and was allowed to impose policies that never could be altered.
In that scenario, I have confidence that we would get a pro-growth revenue-neutral swap. Which means the negative impact of a carbon tax would be more than offset by the pro-growth effect of eliminating or permanently reducing other taxes.
Unfortunately, we don’t have this scenario in the real world. Instead, I fear that well-meaning proponents of a carbon tax are unwittingly delivering a new source of revenue to a political class in Washington that wants to finance bigger government.
P.S. This is the same reason why I’m so strongly opposed to the value-added tax even though it theoretically doesn’t do as much damage – per dollar collected – as our onerous income tax. Simply stated, I don’t trust politicians to behave honorably if they get a new source of revenue.
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From my ONE TOUCH POP C3
International Liberty escribió:
> Dan Mitchell posted: “When the International Monetary Fund endorsed a giant energy tax on the American economy, I was not happy. And not just because the tax hike would have been more than $5,000 for an average family of four. I also was agitated by the hypocrisy. …these”
a carbon tax is just another ploy to create a new government revenue stream… publicity surrounding “global warming” is largely propaganda designed to convince an unsuspecting public of the gravity of climate change… provide lackluster geeks their fifteen minutes of fame… and give government more revenue to party with… global warming is making al gore fat……………………. or did he get portly after he invented the internet?
I forget……
Your last statement says it all. A new source of revenue. Even worse in my mind is the bureaucracy that will be established to administer this new tax fund and fight any possible means to disband it in the future.
In order to estimate damages occurring one century into the future (which would then have to be priced at present value etc.) one has to know two things: The anticipated impact of the climate change that will be doing the “damage” AND the anticipated state, capabilities, adaptability and lifestyle of the humanity receiving the “damages”.
Uncertain and as fraught with special interests and biases as it is, the first part, the state of the climate, is by far the easier part of the equation to figure out. The state of humanity, in a hundred years is impossible to predict!
To understand the enormous delusion of this undertake, imagine pundits in 1915 trying to make plans to address our needs, capabilities and lifestyles in 2015. Everything they might have come up with would be bogus. Now project that into the future and realize that the pace of human change is not only continuing, but accelerating, as evidenced by a four percent world growth trendline. No other era has seen such growth and this acceleration seems irreversible. Therefore, in the next one hundred years we are likely to see changes that are proportionately much greater than the changes we saw in the past one hundred years. While trendlines clearly show that, most people fail to realize it because it is indeed so incomprehensible. “What else COULD be invented?” “haven’t we more or less reached the limit?”. It’s a perpetual delusion and thinking of any contemporary. And it’s always wrong!
The one thing that is sure, is that at 4% growth rate (and that is even assuming that the growth rate does not accelerate any further — as it has already done in the past century) the world GDP (ie. the prosperity) of our descendants will be 50 times more that today. No that is not 50%, its x50 = 5000% (1.04^(100)=50.5.
Scientific and technological advances well outside our current myopic imagination will have to accompany such prosperity advances. As a matter of fact, as always, the prosperity advances WILL come mostly from technological, scientific and entrepreneurial advances. Otherwise how do you get x50 more prosperous? By working x50 more? Or by exploiting the worker x50 more as the left’s narrative would have it? No, technological advance beyond our current imagination is an inextricable component of this nearly inevitable yet unimaginable to us increase in prosperity.
When put in perspective, the assumption that the future much more capable, much longer living and x50times more prosperous and capable humanity in a hundred years, WILL suffer in the next century because of climate change, is so speculative that is a belief that belongs more in the realm of religion.
But, however speculative, what is the downside to being cautious and proactive with climate change and potential consequences, just in case? The downside is decrease in economic activity. A mere 1% decrease in world growth due to behavior modifying enviro taxes would compound to 270% of foregone growth in a hundred years!! At 3% world growth, your country’s descendants will be 19 times wealthier that you are today. At 4% growth my country’s descendants will be 50 times wealthier. My descendants will dominate yours, being 2.7 times wealthier. THAT is what is really at stake.
Behavior modification taxes decrease prosperity away from things people would otherwise like to do. They decrease their incentives, their rewards, for being exceptional and productive.
If I cannot go fishing in my Toyota Tundra because a majority around me discourages such behavior, then I have one less reason to work since I have one less outlet in using the monetary remuneration I’m awarded for my work. The fact that some pundits tell me that this is a less destructive way to raise taxes will have little impact on my desire to work for an essentially decreased compensation.
If the main thing that society has to offer me in exchange for my work is apartment living by the railroad tracks and a smart mini-car that I only drive on the weekends to visit a close by park where I cannot even disturb a pebble then forget it. I don’t need to be exceptional to enjoy that. I can refrain from stressful advanced degrees and long hours working on your next cancer cure, and find a mediocre job in your city beehive, since that is all I have to adapt into enjoying anyway.
Yes, if we wanted more religion, the solution would be to tax atheism and agnosticism. So if we want more environmental religion, we need to tax the unbelievers who are unwilling to cooperate and subscribe to the eco-religion where the new mother earth goddess rules deity supreme.
Finally, if you really want to worry about something, worry about something that will likely evolve, magnify and keep pace with exponential world growth: Human capacity for warfare and self-destruction. It may start with Iranian nukes but clearly that is just the beginning of the nuclear and other WMD proliferation juggernaut. Many more countries are in line to follow the same pathway to armament. No one will acquire and use WMDs in the next one hundred years? That is a long bet to make. Future even more destructive armaments are either already in the making or are somewhere in our future sometime in the next one hundred years. Will protection technology be able to keep up with the rising sophistication of destruction technology? It’s a toss. So far it has not. I’m much more confident that human capabilities will keep up with sea levels rising a few feet (if that happens and if we indeed fail to find a method to lower the sea level again in the next hundred years) than I am that protective technologies will always and reliably outpace destructive technology. So far, destructive technology seems to be moving ahead of protection technology.
So if you want something to worry, worry about that. I’d say there is a 20:1 higher probability that the end of the world sometime in the next one hundred years comes from WMD self-annihilation, rather than climate change. Witness the rising likelihood of an Israeli attack on Iran and you’ll start getting a feeling for how things may turn. How many more such conflicts of increasing potency are in store, throughout the whole world, in the whole next one hundred years? One starts realizing the pathetic religious obsession with climate change – and the holy global war against those who do not want to follow.
This religion is different. The afterlife of the earth in a hundred years is at stake. You shall obey.
Daniel,
It could be made simple for Washington: You can have a carbon tax when you repeal the 16th Amendment.
OK, so I didn’t read it all, but the image shows JOBS winning. So I don’t get it . . .
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