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Posts Tagged ‘Energy Tax’

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.

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I’ve been writing about proposed carbon taxes since 2012.

My message is simple and straightforward. It’s possible to design a carbon tax that is theoretically appealing. Simply use all the revenue to get rid of some other tax that causes greater economic harm, such as the corporate income tax.

Which is basically the same argument that leads some folks to like the value-added tax.

But my argument against the carbon tax (like my argument against the VAT) is that we shouldn’t give politicians a new source of revenue without some sort of up-front, non-reversible repeal of an existing tax.

And since that’s not possible, the only good carbon tax is a dead carbon tax. However, it’s not very easy to kill this tax.

Columbia University’s Center on Global Energy Policy, working with several other organizations, just released four studies to boost the carbon tax.

Study #1.

Study #2.

Study #3.

Study #4.

And below you’ll see the most relevant table, which comes from study #4. It shows – in theory – what politicians might do with the additional money.

To add my two cents, I augmented the chart by numbering the options (in red) and then providing a short critique (in green).

In large part, I’m pointing out that “theory” may not resemble reality. For instance, how likely is it that politicians would impose this huge tax hike and allow all the funds to be used for deficit reduction (Option #3) instead of using a big chunk of the cash to buy votes?

Unfortunately, it’s not just academics and think tank people who are interested in this new tax.

The Wall Street Journal reports that a Republican congressman is pushing this levy.

A Florida Republican is set to propose a carbon-tax bill in Congress… The plan from Rep. Carlos Curbelo, who represents a Miami-area district…, would replace the federal gasoline tax with a tax on businesses including refineries, power plants and steel mills based on how much oil, coal and other fossil fuels they buy. The carbon tax would likely add three to 11 cents to the average pump price for a gallon of gasoline… he also views it as an infrastructure bill—it is crafted to raise additional revenue for bridges, roads and other projects—and as something he can sell as tax reform because it eliminates the gasoline tax. …Mr. Curbelo’s proposal would price carbon at $24 a metric ton and increase that every year by 2% plus the rate of inflation. It replaces the gasoline tax, which Mr. Cubelo frames as a version of tax overhaul. If enacted, his plan would raise an additional $57 billion to $106 billion a year.

Since Congressman Curbelo largely wants the new tax to fund bigger government, he’s proposing a version of Option #5.

Alex Brill of the American Enterprise Institute wants a different type of carbon tax.

One worthy candidate for the next tax reform effort is a cut in the most distortionary taxes in exchange for a tax on carbon emissions, combined with permanent carbon deregulation of the energy sector. …here are the three key components of a deregulatory carbon tax reform… Roll back burdensome carbon-related regulations. …The motivation is not disregard for the environment or climate, but distrust in the regulatory state as an efficient instrument. …A transparent carbon tax would…raise the price of certain consumer goods, including electricity and gasoline. That is a reality… It is, in fact, the policy’s intent. …a carbon tax would generate revenue that could be used to offset the cost of eliminating other taxes that impose greater harm on the economy. …Turning carbon tax revenues into universal welfare payments, as some have suggested, would not promote long-run economic growth.

The good news is that Alex wants Option #4 and is opposed to Option #2.

But that still doesn’t make it a good idea since Congress would never get rid of the corporate income tax.

Writing for the Washington Examiner, Michael Marlow also wants advocates of smaller government to support a carbon tax.

…conservatives should embrace the political opportunity it presents to reduce the harmful distortions imposed by other taxes and shrink the regulatory morass of federal agencies such as the Environmental Protection Agency. conservatives can achieve these goals with a well-crafted revenue-neutral carbon tax. …Because it would trade “good” policy (a carbon tax) for “bad” policy (regulations and taxes with high excess burdens), it would make government more efficient. And packaging together the benefits from deregulation and tax reform would compensate the public for any adverse economic impact… Ensuring that a carbon tax would not simply finance more government spending requires a strict commitment by conservatives that any legislation establishing a tax on carbon emissions must also include, first, an equal tax cut, preferably targeting existing taxes that impose the highest excess burdens on the economy, and second, a significant rollback of carbon regulations. On these points, conservatives should not negotiate.

Like Alex Brill, Michael Marlow is proposing to do the wrong thing in the best way.

But Option #4 would only be acceptable if the corporate tax is being totally abolished. And that’s not what he’s proposing.

Which is why many sensible voices are explaining that there’s no acceptable argument for a carbon tax.

The Wall Street Journal, for instance, opined on this issue last year.

…never changing is the call from some Republicans to neutralize the issue by handing more economic power to the federal government through a tax on carbon. …George Shultz and James Baker…have joined a group of GOP worthies for a carbon tax… They propose a gradually increasing tax that would be redistributed to Americans as a “dividend.” This tax on fossil fuels would replace the Obama Administration’s Clean Power Plan and a crush of other punitive regulations. …A carbon tax would be better than bankrupting industries by regulation and more efficient than a “cap-and-trade” emissions credit scheme. Such a tax might be worth considering if traded for radically lower taxes on capital or income.

The WSJ shares my concern that Option #4 eventually would turn into Option #2 or Option #5.

…in the real world the Shultz-Baker tax is likely to be one more levy on the private economy. Even if a grand tax swap were politically possible, a future Congress might jack up rates or find ways to reinstate regulations. Another problem is the “dividend.” …the purpose of taxes is to fund government services, not shuffle money from one payer to another. No doubt politicians would take a cut to funnel into renewable energy or some other vote-buying program. The rebates would also become a new de facto entitlement… all methods of calculating a price for carbon are susceptible to political manipulation. The Obama Administration spent years fudging “social cost of carbon” estimates to justify its regulatory agenda. The tax rate would also be influenced by international climate models that have overestimated the increase in global temperature for nearly two decades.

A column in National Review is similarly skeptical.

…a small but persistent group of Republicans are trying to persuade conservatives to abandon…principles and embrace a national energy tax. …the Climate Leadership Council, a group led by James Baker and George Shultz…recently met with the Trump administration to encourage the adoption of a $40-per-ton carbon tax. …There is nothing free-market about their massive new tax hike… A carbon tax would punish users of natural gas, oil, and coal, which make up 80 percent of the energy we consume. This means that all American families would face higher electricity bills and gasoline prices. In fact, it’s estimated that the Council’s carbon tax would hike gasoline prices by 36 cents per gallon. …these hikes would have a disproportionate impact on poor and middle-class families, who spend a higher percentage of their income on energy.

The column discusses a specific plan that envisions a new entitlement (Option #2), warning that it eventually would trigger other types of new spending (Option #5).

Shultz and Halstead want to offset the tax by redistributing to the American people the $300 billion in anticipated revenue from the carbon tax. This is not practical in the real world. The idea that Washington politicians would perpetually refund a massive new revenue stream is incredibly naïve… The more likely scenario is that the government would eventually begin to spend the new revenue… Carbon taxes make energy more expensive. They also destroy jobs, particularly in the manufacturing sector.

Benjamin Zycher of AEI also has a skeptical assessment.

The view is widespread among economists that a (Pigouvian) tax on emissions would be more efficient than the regulatory approach because regulations impose a rough, one-size-fits-all framework for reducing emissions, while a tax allows each emitter to find the least expensive method of achieving its emissions goal. …The central problem with the consensus view is straightforward: The emissions goal is not fixed. Instead, it must be chosen. …Once government derives revenues from a system of carbon taxes, with ensuing political competition for those revenues, it is not difficult to predict that under a broad range of conditions the emissions reduction goal will be inefficiently stringent. That is, the tax rate will be too high.

And what about the notion that at least the revenues can be used to reduce other taxes?

Fanciful thinking, Zycher explains.

Why should we predict that the interests benefiting from the reduction in the corporation income tax would prove to be the marginal members of whatever congressional coalition imposes the carbon tax? That certainly is possible, but other outcomes seem far more likely. Some industries and geographic regions will bear disproportionate burdens attendant upon the carbon tax, and their votes will be necessary to enact it, particularly in the US Senate. …The list of potential supplicants is long indeed, each comprising some combination of constituencies to protect and campaign contributions and votes to offer.

For all intents and purposes, he’s explaining that “public choice” will turn a bad idea into a really bad reality.

Paul Blair of Americans for Tax Reform summarizes another new proposal for a carbon tax, which is largely a version of Option #2.

Just last month, seven-figure swamp lobbyists Trent Lott and John Breaux rolled out their support for a “simple and elegant” tax on carbon dioxide emissions. Realizing the insufficient appetite for a new “tax,” the former senators disingenuously relabeled it as a “fee.” Their $40 per ton carbon tax would immediately result in a 36 cent per gallon increase in the gas tax. Proponents of the tax admit that the price of home heating would increase by 22 percent and coal would increase by an average of 264 percent. The revenue generated from this tax would constitute the largest tax increase in U.S. history. To offset some of these astronomical increases in energy costs, the plan would create a new national federally managed welfare program, paying the average family of four $2,000 a year…a program of that scale would greatly exceed the size of Obamacare, giving Uncle Sam the responsibility of managing another $1.7 trillion over a decade.

His conclusion is not subtle.

It’s a plan designed to harm American manufacturers, raise prices for every single American consumer, and prop up uncompetitive expensive sources of energy like solar and wind. It places trust in the federal government to manage yet another massive welfare program, while giving the Left a significant opportunity to extract more and more money from taxpayers. Killing a carbon tax dead in its tracks isn’t only good policy, it’s a basic IQ test for modern day conservatives.

Since Republicans have failed many IQ tests in recent years (see here, here, and here), this doesn’t leave me overflowing with optimism.

Last but not least, Ryan Ellis opines on Cong. Curbelo’s carbon tax.

Rep. Carlos Curbelo, R-Fla., will introduce a costly carbon tax bill on manufacturers… Curbelo’s own press release indicate that his carbon tax is structured to be a net tax increase. While it will eliminate the $0.184 per gallon federal tax on gasoline, the carbon tax will raise taxes higher (on net?) to the tune of $57 billion to $106 billion per year. Over a decade that’s a trillion dollar tax increase… Structurally, the Curbelo carbon tax is typical tax-and-spend liberalism. With the extra resources from the net tax increase, the plan proposes throwing money at so-called “infrastructure projects,” which comes right out of the 2009 Obama stimulus playbook.

As you can see, Ryan is not a fan of what Curbelo is proposing, which is a version of Option #5.

And Ryan also doesn’t want to enrich and empower the swamp.

While the bill by statute includes coal, petroleum, and natural gas, the EPA administrator is also given free rein to expand this carbon taxable list of industries at will. Imagine what an Obama administration would have done with that kind of power. …the Curbelo carbon tax also creates a United Nations NGO-style “National Climate Commission.” If that doesn’t sound scary enough, it also empowers this commission with an unlimited authorization to procure the services of “experts and consultants.” This section of the bill might as well be called the “DC swamp deep state full employment act.” How many of these taxpayer-funded “consultants” would an Obama-like administration use to enforce left-wing policies on the rest of us?

This is a long column, so let me conclude by noting that my opposition to a new tax has nothing to do with partisan politics. I’ve criticized Republicans for backing a carbon tax and I’ve also skewered Democrats for supporting that levy.

Heck, I’ve even gone after self-styled libertarians who advocate for this new tax. Especially when they pull a bait and switch, claiming initially that the revenue from a carbon tax could be used to lower other taxes, but then later admitting that they’re willing to acquiesce to a huge net tax increase.

Which confirms all my fears that a carbon tax would wind up being a gusher of money that would trigger an orgy of new spending in Washington.

P.S. I hope nobody will be surprised to learn that both the International Monetary Fund and the Organization for Economic Cooperation and Development support higher energy taxes for the United States.

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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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Explaining why statists are wrong about policy is a necessary part of what I do, but it sometimes can get a bit predictable. So I’ve decided to periodically pick fights with people who generally are on the right side.

By the way, I’m definitely not talking about Republicans, who oftentimes are among the most worst people in Washington.

I’m talking about friendly fights with other policy wonks.

My first friendly fight featured my complaints about an anti-flat tax column by Reihan Salam of National Review, mostly because I think he got some economic analysis wrong even though I largely agreed with his political analysis.

My second friendly fight featured my grousing about the fiscal plan put forth by the American Enterprise Institute, which openly proposed that the tax burden should increase to enable a larger burden of government spending.

Time for a third fight. My former Cato colleague Jerry Taylor is now head of the Niskanen Center. He wrote a paper in March making “The Conservative Case for a Carbon Tax.” Here’s some of what he wrote.

…conservatives should say “yes” to a revenue-neutral carbon tax …so long as the tax displaces EPA regulation of greenhouse gas emissions and eliminates a host of tax preferences provided to green energy producers. If federal and state governments are going to act to reduce greenhouse gas emissions, better that they do so at the least economic cost possible. A carbon tax…promises to do that by leaving the decision about where, when, and how to reduce greenhouse gas emissions to market actors (via price signals) rather than to regulators (via administrative orders). A carbon tax would also produce revenue that can be used to provide offsetting tax cuts. …Suggestions have been made to use those revenues to offset cuts in the corporate income tax, the capital gain s tax, personal income taxes, payroll taxes, and sales taxes. If the carbon tax is less economically harmful than the tax it displaces, a revenue neutral carbon tax is worth embracing even if we leave aside the environmental benefits. …Morris calculates that her carbon tax would bring in about $88 billion in the first year,rising to $200 billion a year after 20 years

Everything Jerry wrote is theoretically reasonable, particularly since he is proposing a carbon tax as a replacement for counterproductive regulation and he also says the tax revenue can be used to lower other tax burdens.

But theoretically reasonable is not the same as practical policy or good policy. What if politicians pull a bait and switch, imposing a carbon tax but then not following through on the deal?

Jerry addresses these concerns.

Many conservatives resist carbon taxes because they believe that increases in federal revenues will increase the size of government. But virtually every proposed carbon tax put on the political table includes offsetting tax cuts to ensure revenue neutrality. Revenue neutral carbon taxes will not increase the size of the federal treasury. …The true definition of government’s size is not how many dollars the treasury extracts from the economy. It is best measured by how many resources are reallocated as a consequence of government. To the extent that carbon taxes are more efficient than command-and-control regulation at achieving the aims of greenhouse gas emission constraint, a carbon tax would serve to decrease the size of government relative to the status quo.

Those are fair points, and I particularly agree that fiscal policy is an incomplete measure of the burden of government.

So Jerry is right that a particular regulation might be more damaging that a particular tax.

Jerry continues to address concerns on the right about a carbon tax.

Many conservatives have argued that no matter how compelling the case for a carbon tax might be, it will be rendered intolerable by the time it emerges from the legislature. Politics, not economics, will dictate the tax rate. Exceptions and favors for politically popular industries will litter the code. And despite promises to the contrary, the inefficient regulations will never die. Economist Tom Tietenberg of Colby College examined the literature pertaining to the 15 major pollution tax and fee programs instituted worldwide and found that while concerns about the translating economic theory into political practice are not baseless, they are overstated.

I find Jerry to be less persuasive on this front. I’m not sure foreign evidence tells us much, in part because almost all other nations have parliamentary forms of government where the party in power, by definition, exercises both executive and legislative control in a system of strong party discipline.

Our separation-of-powers system, by contrast, necessarily requires consensus among Senators, Representatives, and the White House, further complicated by the necessity of moving legislation through committees. All of this results in the kinds of compromises and horse trading that can take clean theoretical concepts and turn them into Byzantine reality.

Heck, just consider the internal revenue code, which has become a nightmare of complexity.

But that’s not my main concern with Jerry’s proposed carbon tax.

My real objection is that I have zero trust that Washington won’t use the new tax as a tool for expanding the size and cost of government.

This isn’t just idle speculation or misplaced paranoia. The crowd in Washington is salivating for a new source of revenue. The Wall Street Journal opines on this development, citing the soon-to-be leader of Senate Democrats.

Chuck Schumer is…already planning for 2017…predicting that the political class might join hands and pass a carbon tax. “…many of our Republican friends will say we’ve been starving the government for revenues,” Mr. Schumer told an environmental event on Capitol Hill according to the Politico website, “but many of them will not be for raising [income tax] rates.” So Republicans and Democrats will both be hunting for revenues and “you might get a compromise” over a new carbon tax, he added.

The editors at the WSJ are not sold on this idea, to put it mildly.

It’s amusing that Sen. Schumer thinks a federal government that spends nearly $4 trillion and 21% of national output a year is “starving” for anything. …Our view of a carbon tax is that it might be acceptable as part of a tax reform that eliminated—entirely—some current revenue source such as the payroll or corporate income tax. But we don’t expect to live long enough to see that day. A slippery compromise would trade a new carbon tax for a reduction in some tax rates, but the politicians would soon return to raising those rates again. The U.S. would be left with the current tax burden plus the new carbon tax—and a permanently larger government.

The folks at the WSJ hit the nail on the head. More spending is the most realistic outcome if politicians get a new tax, whether it’s an energy tax, a value-added tax, a wealth tax, or a financial transactions tax.

And Jerry actually confirms my fears. Just yesterday, he posted some comments on the Wall Street Journal’s editorial, and what he wrote perfectly captures why advocates of smaller government are so resistant to a carbon tax.

He went from advocating a revenue-neutral (and regulation-eliminating) carbon tax in March to now saying it’s okay to have a net increase in the tax burden!

…there is a very strong, conservative case for doing exactly what Sen. Schumer proposed this week (if the revenues are used to reduce the deficit, as Sen. Schumer implied, rather than to fund more spending).

And keep in mind that Sen. Schumer doubtlessly intends to spend every penny (and more) that is generated by this new tax, so the real-world outcome would be even worse.

By the way, Jerry then ventures into the world of fiscal policy, asserting that there’s no hope of fiscal restraint and that Republicans should simply figure out ways to increase the tax burden.

This may be unpopular with Republicans at the moment, but sooner or later, bills must be paid. And there’s no chance whatsoever that those bills are going to be paid by savings gained from budget cuts alone. If a carbon tax is not going to provide the necessary revenues, then what do Republicans propose as a source of revenue in its stead?

Wow, there’s a lot wrong in those three sentences.

But I’ll just focus on a few points.

But you don’t have to believe me. Just read what leftists have said they want to do with the money from a new energy tax.

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The Organization for Economic Cooperation and Development is a Paris-based international bureaucracy with the self-proclaimed mission to “promote policies that will improve the economic and social well-being of people around the world.”

But if there was a truth-in-advertizing requirement, the OECD would instead say that its mission is to “promote policies that will increase the size, scope and power of government.”

Here are just a few examples of statist policies that are directly contrary to the interests of the American people.

The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes in the United States.

The bureaucrats are advocating higher business tax burdens, which would aggravate America’s competitive disadvantage.

The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.

It supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.

It even concocts dishonest poverty numbers to advocate more redistribution in the United States.

And, most recently, the OECD published a report suggesting numerous schemes to increase national tax burdens.

And here’s the insult on top of injury. You’re paying for this nonsense. American taxpayers finance the biggest share of the OECD’s budget.

And I’m sure you’ll be happy to know that the OECD is now pushing for a massive energy tax.

Here are some relevant passages from an article in the OECD Observer.

…it’s prime time to introduce a tax on carbon… “Every government will need to explain how their policy settings are consistent with a pathway to eliminate emissions from fossil fuel combustion in the second half of the century,” says OECD Secretary-General Angel Gurría. This means looking at all policy measures to assess if they are effective in reducing CO2 emissions and in line with governments’ climate change objectives. An OECD report, Climate and Carbon: Aligning Prices and Policies outlines specific actions.

By the way, you can access the Climate and Carbon report by clicking here. But since I assume few if any people will want to read a turgid 57-page paper, let’s stick with excerpts from the short article in the OECD Observer.

All you really need to know is that the OECD (like the IMF) wants governments to boost energy prices, both explicitly and implicitly.

Explicit carbon pricing mechanisms, such as carbon taxes… other policies affect a country’s CO2 emissions and can effectively place an implicit price on carbon. …It’s time for governments to ramp up the development of alternative energies and to nail a price onto every tonne of CO2 emitted.

The article also includes other recommendations that are very worrisome. It suggests other fiscal changes that would boost taxes on the energy sector.

Needless to say, this means higher costs on energy consumers.

…carbon pricing should also include a review of the country’s fiscal policy to ensure that budgetary transfers and tax expenditures do not, directly or indirectly, encourage the production and use of fossil fuels.

By the way, when the OECD talks about “budgetary transfers” and “tax expenditures,” that’s basically bureaucrat-speak for back-door tax hikes such as changes to depreciation rules in order to force companies to overstate their income.

And since we’re deciphering bureaucrat-speak, check out this passage from the article.

…compensatory or other measures to mitigate the regressive impacts of reforms without losing the incentive to reduce emissions.

What 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.

Maybe this means higher welfare payments to offset increased energy prices. Maybe it means some sort of energy stamp program.

The details aren’t important at this point, particularly since the OECD isn’t making a specific proposal.

But what is important is that the OECD is using our tax dollars to advocate bigger government. So maybe the moral of the story is that we should stop subsidizing the OECD.

P.S. On a related topic, and in the interest of fairness, I have to give the OECD credit for being willing to publish an article on tax competition by my Australian friend, Professor Sinclair Davidson.

Sinclair points out that the OECD’s anti-tax competition campaign is based on the premise that bad things happen if labor and capital have some ability to migrate from high-tax nations to low-tax jurisdictions.

Yet the OECD has never been able to put forth any evidence for this assertion.

High income economies have tended to follow irresponsible fiscal policies over an extended period of time. …governments have been trying to access new sources of revenue. …The OECD has been campaigning on “harmful tax practices” since the late 1990s. …The report itself was a somewhat wordy affair that actually failed to define what ‘harmful tax practices’ constitute.Most damning of all, however, is that the OECD was unable to produce any actual evidence of these dire consequences, arguing instead: “A regime can be harmful even where it is difficult to quantify the adverse economic impact it poses”. The dog had eaten their homework.

What’s really going on, as Sinclair explains, is that politicians want a tax cartel to enable bigger government.

It turns out that governments and politicians, like business, don’t always appreciate having to work at improving themselves and offering a more attractive mix of services and taxation in order to attract business. …It is perfectly understandable why governments would want to establish a tax cartel. …countries, rather than respond to such competition by competing themselves, have chosen instead to engage in fiscal imperialism – bullying and cajoling sovereign nations to change their domestic policies.

Again, kudos to the OECD for allowing a contrary viewpoint.

I guess the bureaucrats are more relaxed now than they were back in 2001, when the OECD threatened to cancel an entire conference simply because I was present, or in 2008, when the OECD threatened to have me thrown in jail for giving advice to low-tax jurisdictions at another conference.

P.P.S. For additional information on why American taxpayers shouldn’t be subsidizing a left-wing bureaucracy in France, here’s my video on the OECD.

Now you can understand why eliminating handouts for the OECD should be a gimme for congressional Republicans.

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Because of the need to control the size and scope of government, it’s critically important to reject all tax hikes. Simply stated, once politicians think there’s a possibility of more revenue coming to DC, any commitment to spending restraint and entitlement reform will quickly evaporate.

It’s especially important not to let politicians get new sources of revenue. That’s why, for instance, the value-added tax would be a terrible idea. Politicians might promise to use the revenue to lower or eliminate other taxes, but the European evidence shows that the long-run impact is to finance a much larger burden of government spending.

And you also get more red ink, for what it’s worth.

It also would be a bad idea to give politicians a big, new energy tax. They’ve been salivating for something like this ever since Bill Clinton unsuccessfully proposed a BTU tax back in 1993.

But like other bad ideas (i.e., Keynesian economics), the notion of a national energy tax refuses to die.

President Obama’s former Chief Economist (as well as a Treasury Secretary for Bill Clinton) wants an energy tax imposed on America. Here is some of what Larry Summers wrote for the Washington Post.

With the recent steep fall in oil prices and associated declines in other energy prices…there should be no doubt that, given the current zero tax rate on carbon, increased taxation would be desirable. …While the recent decline in energy prices is a good thing in that it has, on balance, raised the incomes of Americans, it has also exacerbated the problem of energy overuse. The benefit of imposing carbon taxes is therefore enhanced.

In other words, he wants government to benefit from falling energy prices, not consumers.

And he also wants tax harmonization as part of an ideological crusade on global warming.

A U.S. carbon tax would contribute to efforts to combat climate change in other ways. It would be a hugely important symbolic step ahead of the global climate summit in Paris late this year. It would shift the debate toward harmonized measures to raise the price of carbon use.

You also won’t be surprised to learn that Summers wants a big tax.

What size levy is appropriate? Here there is more danger of doing too little than too much. Once the principle of taxation is accepted, its level can be adjusted. A tax of $25 a ton would raise more than $100 billion each year and seems a reasonable starting point.

A $100 billion tax is a “reasonable starting point”?!? I’m afraid to ask him for his definition of a “reasonable concluding point.” Probably with government consuming all the nation’s output.

But you have to give Summers credit for honesty. Most politicians would pretend that a new tax would be used for deficit reduction. But Summers is honest enough to say the money would be used to finance a new spending spree by Washington.

How should the proceeds be used? …An additional $50 billion a year in infrastructure spending would be a significant contribution to closing America’s investment gap in that area. The same sum devoted to pro-work tax credits could finance a huge increase in the earned-income tax credit, a meaningful reduction in the payroll tax or some combination of the two.

Gee, what wonderful ideas. More pork-barrel spending out of Washington and more income redistribution laundered through the tax code with the EITC.

I talked with Neil Cavuto about the merits (and lack thereof) of this proposed energy tax.

To elaborate on the interview, the left understands very well that their spending agenda requires more revenue. That’s why Obama is relentless in urging more revenue. It’s why the leftists at the Paris-based OECD endlessly urge higher taxes in America (even to the point of arguing that tax-financed redistribution is somehow good for growth). And it’s why the DC establishment is so enamored with “bipartisan” tax-hiking budget deals, which inevitably lead to bigger government and more debt.

Honoring the no-tax-hike pledge isn’t a sufficient condition to rein in big government, but it sure is a necessary condition.

Amazingly, top Democrats even admit that their top political goal is to seduce Republicans into supporting higher taxes, yet some GOPers seem willing to walk into this trap.

No wonder Republicans are sometimes known as the Stupid Party (as cleverly illustrated by Michael Ramirez).

P.S. Here’s an excellent video outlining seven reasons to oppose higher taxes.

P.P.S. The bureaucrats at the International Monetary Fund have proposed a massive energy tax on American consumers (in addition to all the other tax hikes advocated by that international bureaucracy).

P.P.P.S. An energy tax would be a levy on consumption, which is less destructive than higher income tax rates and more double taxation. But just as I wrote about the value-added tax, the issue isn’t whether we replace a horrible tax with a less-horrible tax. The debate is whether we add a less-horrible tax on top of the current horrible system.

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I’ve written many times about the dangers of a value-added tax. I obviously think it’s a bad idea as an add-on tax, but I also think it’s dangerous as a replacement tax.

Not because it’s a horrible tax from a theoretical perspective (like the flat tax and national sales tax, it’s a single-rate system with no double taxation of income that is saved and invested), but instead because I don’t trust politicians.

The VAT in Europe, for instance, almost surely played a role in enabling the huge expansion in the burden of government spending – thus helping to set the stage for the current fiscal crisis.

All these arguments also are equally relevant to the debate about imposing a carbon tax.

As with the VAT, there are features of a carbon tax that make it a less-destructive alternative when compared to other forms of taxation. The problem is that politicians wouldn’t permanently lower or eliminate any other tax, and the new revenues would be used to further expand the size and scope of the federal government.

Andy Quinlan of the Center for Freedom and Prosperity discusses the issue in a column for Forbes. Here are some key excerpts.

With the economy sputtering toward what can at best be described as a meager recovery, it seems like an obviously poor time to consider raising taxes on any form of energy. …Yet that is also precisely what an unholy coalition of big spending liberals and misguided conservative economists is proposing – to raise taxes on carbon and send the economy spiraling toward another recession. Last month, Rep. Jim McDermott (D-WA) introduced the “Managed Carbon Price Act of 2012,” a bill that would require greenhouse gas emissions to be reduced by 80% from 2005 levels over the next 42 years – ultimately leaving the United States with per capita emissions levels lower than that of Haiti today. …At the fifth annual National Clean Energy Summit held in Las Vegas last month, Senate Majority Leader Harry Reid expressed his hope of enacting a carbon tax by next year. Senate Environment and Public Works Chairman Barbara Boxer went as far as to say that she would like to see it included in a year-end budget deal. …The motives of the left in pushing for a tax are easy to understand, they want more “revenue” to spend. A recent paper from the MIT Global Change Institute estimated one carbon tax proposal would generate $1.5 trillion over ten years, and politicians and the media immediately began to salivate at the idea of using such a tax as an excuse to further expand the burden of government spending. …If the political climate was such that cap-and-trade or other big government carbon regulations were on the horizon, proffering a more economically efficient carbon tax as an alternative might not be a bad strategy from a do-the-wrong-thing-in-the-least-destructive-fashion perspective. But that is not the case. …More generally, the very idea of offering a new tax in exchange for lower rates elsewhere is flawed. Even if leftists agree to lower taxes on income to keep a new carbon tax revenue neutral, there’s nothing to stop them from raising rates in the future. On the other hand, given the love politicians have for taxes, eliminating an entire tax would be much harder. A similar logic can be seen in the experience of Europe, where less economically destructive value-added taxes did not replace income taxes, but instead helped usher in the bloated, unsustainable European welfare states which are today circling the drain.

Wow, Reid, Boxer, and McDermott. That’s like the Three Stooges of Statism.

But this isn’t a laughing matter. Politicians would love to get their greedy hands on $1.5 trillion of new tax revenue. And Quinlan points out in the article that some Republicans are sympathetic to the idea.

Keep in mind, by the way, that $1.5 trillion would be the floor, not the ceiling. As we’re seeing in Japan, politicians can’t resist boosting the rate whenever they want to spend more money.

P.S. Read this if you want to see what happens when politicians get a new source of revenue.

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