I have a series of columns where I explore tactical disagreements with folks who generally favor free markets and less government.
- In Part I, I defended the flat tax, which had been criticized by Reihan Salam
- In Part II, I explained why I thought a comprehensive fiscal package from the American Enterprise Institute was too timid.
- In Part III, I disagreed with Jerry Taylor’s argument for a carbon tax.
- In Part IV, I highlighted reasons why conservatives should reject a federal program for paid parental leave.
Today, we’re going to revisit the carbon tax because Josiah Neeley and William Murray of the R Street Institute have a column in the Hill that claims that levy would not finance bigger government.
…There have been numerous tax rate changes in the past 70 years, with the marginal income tax rate falling from a high of over 90 percent in the 1950s to as low as 28 percent in the late 1980s. Yet during this entire time period, federal tax revenue has stayed in a fairly narrow band when measured as a percentage of gross domestic product, never rising above 20 percent or falling much below 15 percent between 1950 and 2018. This phenomenon, which keeps federal revenues within a relatively narrow band, is known as Hauser’s law…the belief that any kind of new taxation introduces even greater government spending is based on very little actual evidence. Instead, Hauser’s law provides evidence that certain kinds of tax swaps, such as exchanging an income tax for a carbon tax, may actually increase the rate of economic growth without increasing the tax share of the overall economy.
They also claim that higher taxes don’t lead to more spending.
…demand for government spending drives tax policy, not the other way around. This conclusion has important implications for the carbon tax debate. …The relative imperviousness of the gross domestic product tax percent equilibrium since the late 1940s suggests that spending pressures drive taxes and not the other way around.
I have two responses to this analysis.
First, I very much want Hauser’s Law to be true. It would be very comforting if politicians in Washington could never seize more than 20 percent of the private sector’s output.
Sadly, that’s simply not the case. Just look at Europe, where central governments routinely extract far more than 40 percent of economic output.
All that’s required is taxes that target lower- and middle-income taxpayers. That’s happened in Europe because of harsh value-added taxes, punitive payroll taxes, onerous energy taxes, and income taxes that impose very high rates on ordinary people.
Needless to say, a carbon tax would be a step in that direction.
Second, the authors offer zero evidence that “government spending drives tax policy, not the other way around.”
By contrast, there is some persuasive data for the “starve the beast” hypothesis, which is based on the notion that higher taxes will encourage more spending.
In other words, Milton Friedman was right when he warned that “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”
Though I actually don’t think this causality debate is very important. The bottom line is that higher taxes are a bad idea if they trigger higher spending, and higher taxes also are a bad idea if they merely enable higher spending.
The column in the Hill is a spin-off from a recent study published by the R Street Institute.
Let’s look at that publication to further explore this issue. It starts with the basic hypothesis that a revenue-neutral carbon tax would be desirable.
…a carbon tax…provides a source of revenue that can be put to beneficial purposes, such as funding cuts to other existing taxes. By using the revenue from a carbon tax to replace existing ones, such a revenue neutral “tax swap” would greatly reduce or eliminate the economic costs of the tax. Indeed, in some cases, even if benefits from reduced emissions are not considered, a tax swap could be a net positive for the economy. …many critics of a carbon tax are skeptical as to whether a revenue-neutral carbon tax could be enacted. Some critics go further, arguing that even if a carbon tax started out as revenue neutral, it would not remain so. …While there are no guarantees, the existing evidence suggests that a revenue-neutral carbon tax would not lead to larger government over the long term and could even shrink it.
I don’t object to the notion that a carbon tax would be theoretically desirable if it replaced a tax that did more damage per dollar collected, such as the corporate income tax.
My concern has always been such a swap is highly unlikely. Indeed, many proponents of the carbon tax are very explicit about wanting to use the revenues to create a new entitlement. That would be the worst outcome, assuming we want more growth.
And, as noted above, I don’t think Hauser’s Law would save us from higher overall taxes and a larger burden of government spending.
Interestingly, the study basically acknowledges the same thing.
…given that Hauser’s Law is not an iron law of economics, it would be imprudent to put too much weight on it when considering the effects of a tax swap.
There are a couple of other parts of the study that deserve attention, including the assertion that politicians would have a hard time using the carbon tax as a money machine.
…a carbon tax has natural limitations that preclude it from being used to generate ever-increasing amounts of tax revenue. This is because higher carbon-tax rates induce a more rapid fall in greenhouse gas emissions. This, in turn, limits the overall revenue collected from the tax. In fact, unlike revenue from income, sales or property taxes, which tends to increase over time even at a constant tax rate, revenue from a carbon tax is likely to remain stable or fall gradually as emissions decline.
Since I’m a fan of the Laffer Curve, I think this argument is very reasonable in theory.
In effect, the R Street Institute is making the same argument – excessive tax rates can reduce revenue – that Alexander Hamilton used when endorsing tariffs.
But where is the point where carbon taxes become excessive? I don’t know the answer, but I’m very worried that there would be ample leeway to collect a lot of tax revenue before getting close to the revenue-maximizing point (the Congressional Budget Office estimates that a $25-per-ton carbon tax would generate more than $1 trillion in the first ten years).
The bottom line is that I worry that a carbon tax likely would be akin to a value-added tax. Yes, there are negative feedback effects from a VAT, as I noted at the end of yesterday’s column. But that doesn’t change the fact that the revenue-generating capacity of the VAT helps to explain Europe’s bloated welfare states.
I understand how a carbon tax, in theory, might not enable bigger government. But I see no way, in reality, that politicians wouldn’t use this new levy to finance even more spending.
P.S. If you’re not already convinced that a carbon tax will mean bigger government, then all you need to know is that both the International Monetary Fund and the Organization for Economic Cooperation and Development support higher energy taxes for the United States.
[…] P.S. I write about “Fiscal Fights with Friends” when I think someone is well meaning but is pushing bad policy or bad analysis. Previous editions have focused on Medicaid reform, tax increases, parental leave, the value-added tax, fiscal policy, the flat tax, and the carbon tax (twice), […]
[…] other words, Milton Friedman was right when he warned that “History shows that over a long period of time government will spend […]
[…] P.P.S. I write about “Fiscal Fights with Friends” when I think someone is well meaning but is pushing subpar policy. Previous editions have focused on tax increases, parental leave, the value-added tax, fiscal policy, the flat tax, and the carbon tax (twice), […]
[…] Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system […]
[…] Some otherwise sensible people in the U.S. are flirting with making the same mistake with energy policy. Perhaps the failure of such policies in the U.K. will teach them something (but I won’t […]
[…] Some otherwise sensible people in the U.S. are flirting with making the same mistake with energy policy. Perhaps the failure of such policies in the U.K. will teach them something (but I won’t hold […]
[…] new taxes that are capable of generating a lot of revenue (or a medium amount or small amount of […]
[…] Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system […]
[…] Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system […]
[…] moral of the story is that Milton Friedman was right when he warned that, “History shows that over a long period of time government will spend whatever the tax […]
[…] Part V, I warned that “Hauser’s Law” would not protect America from higher taxes and bigger […]
more on the climate change hoax:
“FACT-FREE POLITICS”
“The Left’s climate of misinformation”
by Thomas Sowell
https://www.frontpagemag.com/fpm/273845/fact-free-politics-thomas-sowell
“Thomas Sowell: Global Warming Manufactured by Intellectuals?”
Thomas Sowell in conversation with Peter Robinson:
“Robert ‘Beto’ O’Rourke to Farmers: Give ‘Fair Share’ of Crops for Climate Change”
By MICHELLE MOONS
https://www.breitbart.com/politics/2019/04/08/robert-beto-orourke-to-farmers-give-fair-share-of-crops-for-climate-change/
““If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”
– Joseph Goebbels
“John Kerry Praises Ocasio-Cortez’s ‘Leadership’ with Green New Deal”
By JOSHUA CAPLAN
https://www.breitbart.com/politics/2019/04/09/john-kerry-praises-ocasio-cortezs-leadership-with-green-new-deal/
“Nolte: Scientists Prove Man-Made Global Warming Is a Hoax”
By JOHN NOLTE
https://www.breitbart.com/politics/2019/04/09/nolte-scientists-prove-man-made-global-warming-is-a-hoax/
the amount of misinformation on this subject is stunning… anyone who has taken a credible climatology course and has a rudimentary understanding of climate change… and it’s relationship to geologic time… knows just how full of
–IT– ol’ Al Gore really is…
“Greenpeace Founding Member: ‘The Whole Climate Crisis Is Not Only Fake News, It’s Fake Science’
BY TYLER O’NEIL MARCH 12, 2019”
https://pjmedia.com/video/greenpeace-co-founder-the-whole-climate-crisis-is-not-only-fake-news-its-fake-science/
“New U.S. Climate Report a ‘Scientific Embarrassment’
BY TOM HARRIS AND DR. MADHAV KHANDEKAR
https://pjmedia.com/trending/new-u-s-climate-report-a-scientific-embarrassment/
The idea that a carbon tax will reduce fossil fuel usage the way a cigarette tax reduced smoking is nonsense. Smoking was reduced by education and attitude changes. Now the cigarette tax just weights heavily on the addicted. A carbon tax is also a very dangerous tax. It will make the US more dependant on imports and crush US jobs. Fossil fuels are the fuel of the economy. Put a tax on them and energy-intensive business will close. The US will still buy steel, copper, aluminum, fertilizer, plastics, it just will not be mined, made or fabricated in the US. We may even have to buy cheaper electricity from Mexico as they will not put in place a carbon tax. A carbon tax is a numbskull tax.
AMERICA NOT PROTECTED:
https://clarionproject.org/trumps-pick-for-chief-of-staff-friends-with-fuqra/