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jAZ
07-05-2006, 11:52 PM
http://finance.yahoo.com/columnist/article/economist/6895

The Big Idea: An Energy Tax
by Charles Wheelan, Ph.D.
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Printable ViewEmail this PageWednesday, July 5, 2006
I had lunch not long ago with a fund-raiser for a prospective presidential candidate. He admitted that his candidate is still looking for a "big idea."

I won't say who the candidate is, or even what party he or she belongs to, but I will offer a "big idea" for whoever wants to take it. Since this proposal isn't inherently liberal or conservative (arguably it's both), it would work for a Republican or a Democrat, provided he or she has the backbone for it.

So here's the idea: Create a carbon tax -- basically a tax on energy calculated based on its carbon content -- and use the new revenue to provide offsetting cuts in the income tax, the payroll tax (the tax on wages used to fund Social Security), or both.

The whole package should be revenue neutral, meaning that it will not increase or decrease the total amount of revenue the government collects. The money will simply come from different sources.

High Price, Low Demand

Yes, I'm arguing that we should increase your taxes and cut your taxes at the same time. To understand why that makes sense, you must appreciate an often-overlooked feature of taxation: Taxing something does not merely raise revenue; it also changes behavior.

If we tax red sports cars more than blue sports cars, some car buyers are going to switch from red to blue. In real life, even taxes on addictive products like cigarettes have been shown to cut smoking.

A tax raises the price of something, and the most basic idea in economics is that when price goes up, demand goes down. And that is exactly the point of my "big idea."

A carbon tax raises the price of using carbon-based energy, everything from coal to gasoline. As a society, we're better off if we curtail our use of fossil fuels. We can start to make progress on global warming; we will improve air quality; we will be less dependent on places like Saudi Arabia and Venezuela; and we could even improve traffic congestion, the bane of just about every metropolitan area in the U.S., by making it more expensive to commute long distances alone by car.

More Than Just Talk

We can talk about our "addiction to oil," as President Bush did in his last State of the Union address, or we can actually do something that will change behavior in a major way. Think about the incentives created by a broad-based carbon tax:

We'll use less carbon-based energy. Have you seen the sales figures for SUVs lately? People kvetched about SUVs for a decade, but they only stopped buying the really big ones when gas got to be $3 a gallon.

We'll invest more in conservation and alternative sources of energy. Ours is the most entrepreneurial nation in the history of human civilization. How about using that talent to find some new, cleaner sources of energy? When the old kinds of energy become more expensive, the new kinds of energy look a lot more profitable. That helps to focus the great minds of corporate America.
Meanwhile, cutting the income tax and/or the payroll tax increases the returns from working. A tax cut on income is the same as a pay increase, which makes work more attractive - meaning more hours, a second job, a spouse going back to work, agreeing to write a column for Yahoo! Finance, and so on.

The Payoff

Obviously, gas prices are already painfully high and nobody wants to pay more. But before you hit "Send" on a vitriolic email response to this column, remember that you're also getting the tax cut on the income side. On average, one cancels out the other.

Will that be true for everyone? No, but that's the point. The tax burden will go up for those who use more than the average amount of carbon-based energy and down for those who use less.

In the grand scheme of global injustice (e.g., being born in a malarial village in rural Africa), that just does not strike me as terribly unfair. If you contribute more than your fair share to global warming, traffic congestion, air pollution, and propping up a repressive regime in Saudi Arabia, then you should pay more.

And if you bicycle to work from your modest, solar-powered home, then society should cut you some slack. (As a matter of disclosure, I do bicycle to work, though I have never owned a solar- or wind-powered home.)

Caveats to Consider

Before the presidential candidates rush to embrace my plan, I would offer a couple of caveats.

First, the plan should take into account the fact that higher energy prices hit low-income households hardest. The poor are likely to spend a higher proportion of their income on gas and utilities and may have fewer options for minimizing those expenses. A family living from paycheck to paycheck cannot run out and buy a Prius or a house closer to work. Thus, the offsetting tax cuts on income should be designed explicitly to address the regressive impact of higher energy prices.

Second, things become a little tricky when government depends on revenue from activities that we're trying to discourage. The good news about a carbon tax is that people will use less energy. The bad news -- or at least the complication -- is that when people use less energy, the government gets less money. That's not an intractable problem, but it is something that has to be considered when designing the plan.

Those are details. To my mind, the big idea is compelling: If we've got to raise revenue somehow, we might as well do it in a way that creates socially desirable incentives. How does someone legally avoid the income tax? By working less. How does the same person legally avoid a carbon tax? By using less energy. Which do you think is better for society?

I'm eager to see which presidential candidate jumps on the idea first.

Simplex3
07-05-2006, 11:59 PM
To understand why that makes sense, you must appreciate an often-overlooked feature of taxation: Taxing something does not merely raise revenue; it also changes behavior.
At least this asshat is man enough to admit he's social engineering through taxation. Sadly, most people won't be offended by it, but at least he admits it.

jAZ
07-06-2006, 12:00 AM
At least this asshat is man enough to admit he's social engineering through taxation. Sadly, most people won't be offended by it, but at least he admits it.
As opposed to social engineering by capitalism?

Simplex3
07-06-2006, 12:03 AM
As opposed to social engineering by capitalism?
You mean the market finding it's own way? The market, that thing which is controlled by the mass but doesn't enforce itself on the individual?

I will never understand people's love of the govt. over themselves. Different strokes, I guess.

jAZ
07-06-2006, 12:12 AM
You mean the market finding it's own way? The market, that thing which is controlled by the mass but doesn't enforce itself on the individual?

I will never understand people's love of the govt. over themselves. Different strokes, I guess.
I'm a big fan of balance. Markets are not infallible. Unrestrained markets are as bad as unrestrained goverment.

patteeu
07-06-2006, 01:15 AM
I definitely wouldn't support a new type of taxation unless one of the old types of taxation were completely eliminated. I'd trade the income tax away for this carbon tax, but it wouldn't be my first choice.

I like the fact that this is a consumption tax instead of an income tax, but we'd be better off, IMO, with a broad based consumption tax based on value rather than carbon because those taxes can be stripped from exports and applied to imports.

headsnap
07-06-2006, 08:00 AM
I lika a good char on my steaks, how much extra will that be?









a breathing tax? don't exhale!!!

Cochise
07-06-2006, 08:23 AM
The whole package should be revenue neutral, meaning that it will not increase or decrease the total amount of revenue the government collects.


I totally disagree. Reducing the amount of money the government collects should be a top priority.

htismaqe
07-06-2006, 09:09 AM
I totally disagree. Reducing the amount of money the government collects should be a top priority.

Reducing the amount of money the government SPENDS should be the top priority. ;)

Baby Lee
07-06-2006, 09:15 AM
Great idea, have the 'flyover country' subsidize the big cities.

FringeNC
07-06-2006, 09:48 AM
I'd be all for it, especially if it only applied to oil. I'm much more concerned the hundreds of billions going to the Wahhabists than I am about carbon dioxide levels, but overall a tax on carbon is preferable to a tax on income.

It'll never happen because the class-warfare crowd won't be able to bear cutting income taxes on the evil wealthy people.

Anyone know typically what the carbon content of the fossil fuels are relative to one another?

Also, is the left going to go along with the construction of tons of new nuclear power plants?

jspchief
07-06-2006, 10:06 AM
Great idea, have the 'flyover country' subsidize the big cities.Exactly.

Cochise
07-06-2006, 10:09 AM
Reducing the amount of money the government SPENDS should be the top priority. ;)

err - well, you know what I mean. :doh!:

ck_IN
07-06-2006, 03:16 PM
<i>As opposed to social engineering by capitalism?</i>

What the heck are you talking about? Capitalism by definition doesn't social engineer. The people, aka the society, decide through their purchases what goes and what stays. Nothing is forced because you have the choice to buy it or not.

As for this 'big idea' isn't this about the same as that dippy BTU tax Algore had sometime back? It was dumb then and it's dumb now. although the people living in the northeast will be fine because they ride subways. In the midwest where public transport is almost non existant we'll get raped.

htismaqe
07-06-2006, 03:41 PM
What the heck are you talking about? Capitalism by definition doesn't social engineer. The people, aka the society, decide through their purchases what goes and what stays. Nothing is forced because you have the choice to buy it or not.

As for this 'big idea' isn't this about the same as that dippy BTU tax Algore had sometime back? It was dumb then and it's dumb now. although the people living in the northeast will be fine because they ride subways. In the midwest where public transport is almost non existant we'll get raped.

Why do you hate people so much? jAZ just wants to make the world a better place, you big meanie.

Hydrae
07-06-2006, 04:29 PM
Removing income tax = GOOD
Tax based on something most consider a "necessity" = BAD

He even talks at the end of the article about how this would hit the poor but then basically blows it off as something to worry about later. When you have a hole this big, you need to fill it before trying to get others on board.

Bottom line for me, I will entertain anything that removes the income tax. However for me that is the objective, not social engineering through taxation. A reduction in income tax is not enough IMO, it needs to go in one fell swoop. Otherwise, in 10 years we will be paying as much in income tax as we do know AND paying an additional tax that was meant to replace a part of it.

ck_IN
07-07-2006, 01:59 PM
You know if these idjuts really want to reform the tax code I've got the perfect idea: a national sales tax.

We could almost do away with the IRS. Youd just need people to handle the electronic transfers. You could slash guvment payout by slashing the IRS payroll. People would quit spending $ on tax software, tax perparers, and accountants. Tax shelters would disappear, at least for fed tax purposes. Payroll withholding would end. And the amount you spend in taxes would be completely under your control.

Hydrae
07-07-2006, 02:36 PM
You know if these idjuts really want to reform the tax code I've got the perfect idea: a national sales tax.

We could almost do away with the IRS. Youd just need people to handle the electronic transfers. You could slash guvment payout by slashing the IRS payroll. People would quit spending $ on tax software, tax perparers, and accountants. Tax shelters would disappear, at least for fed tax purposes. Payroll withholding would end. And the amount you spend in taxes would be completely under your control.

And we can get tax money from all those illegals and drug dealers and any other black market people who still have to buy things to support themselves.

Logical
07-07-2006, 03:14 PM
Seems if the goal is to lower output of carbon emissions then it cannot possibly be advantageous to be revenue neutral. There would be no advantage to lowering consumption/output if the all the consumer does is break even.

Mr. Laz
07-07-2006, 03:18 PM
You mean the market finding it's own way?
the market finding it's own way is financial social engineering

and the government still has a hand in it by the way taxes etc are setup.


i imagine you just don't like the enviromental aspect of it.



too much "stinkin libby tree huggers are controlling stuff" for your tastes.


but when the oil companies raise prices and effect the entire market ........ tis all good. :rolleyes:

Mr. Laz
07-07-2006, 03:21 PM
Seems if the goal is to lower output of carbon emissions then it cannot possibly be advantageous to be revenue neutral. There would be no advantage to lowering consumption/output if the all the consumer does is break even.
sure it could ...


just because the total market is revenue neutral, doesn't mean that each part of the market is.


the idea is to be totally revenue neutral but encourage certain positive areas of the market while diminishing other sectors.

ck_IN
07-07-2006, 03:21 PM
<i>And we can get tax money from all those illegals and drug dealers and any other black market people who still have to buy things to support themselves.</i>

As opposed to the illegals and drug dealers and black market people that don't file a 1040 form every April now?

ck_IN
07-07-2006, 03:23 PM
<i>the idea is to be totally revenue neutral but encourage certain positive areas of the market while diminishing other sectors.</i>

Why is it the governments business to decide what area of the market is positive or negative?

The market would work a hell of a lot better of government stayed out of it.

Mr. Laz
07-07-2006, 03:26 PM
The market would work a hell of a lot better of government stayed out of it.

that isn't true when is comes to areas of the market where "profit" isn't the only ultimate goal.

ck_IN
07-07-2006, 03:29 PM
and what would that 'ultimate goal' be?

Mr. Laz
07-07-2006, 03:32 PM
and what would that 'ultimate goal' be?

getting the country off of it's dependency on oil


the market won't do that on it's own until the oil problem gets so bad that the profits drives it elsewhere.


that's politically and environmentally too long to wait for that to happen imo.

ck_IN
07-07-2006, 03:37 PM
And the market, without guvment meddling, is starting to do just that. The sale of hybrids is way up as is the sale of small fuel effecient cars. More people are carpooling. Flexfuel autos are running out the door. There's a town in NW Indiana that is off the power grid. They're creating their own power by using biomass. Private investment in wind turbine farms is up.

The market, not guvment is driving this. Just like the price of oil in the first place was driven in large part by the market, aka consumer demand.

The market works best when government intrudes least. The market and through it the consumer will decide their own ultimate goal thank you.

Logical
07-07-2006, 03:51 PM
sure it could ...


just because the total market is revenue neutral, doesn't mean that each part of the market is.


the idea is to be totally revenue neutral but encourage certain positive areas of the market while diminishing other sectors.
Changes in tax rates would have to be far too fluid to ever get passed by Congress in a timely enough fashion for that to happen. You are not being very realistic.

Hydrae
07-07-2006, 04:07 PM
<i>And we can get tax money from all those illegals and drug dealers and any other black market people who still have to buy things to support themselves.</i>

As opposed to the illegals and drug dealers and black market people that don't file a 1040 form every April now?

Exactly. We get no revenue from them now but with a National Sales Tax they will pay a share.

Mr. Laz
07-07-2006, 05:42 PM
Changes in tax rates would have to be far too fluid to ever get passed by Congress in a timely enough fashion for that to happen. You are not being very realistic.
proactive energy sector gets a big tax boost


older gets tax hit



i would think that the only fluid part would need to be what new energy item catagory get classified as proactive each year.

i wouldn't think that would be too difficult

Logical
07-07-2006, 05:59 PM
proactive energy sector gets a big tax boost


older gets tax hit



i would think that the only fluid part would need to be what new energy item catagory get classified as proactive each year.

i wouldn't think that would be too difficultThis does not sound like a plan that will directly impact the consumer and without that you are not going to incentivize capital spending by the individual to replace air conditioners, heaters, cars, etc. Without that the impact is going to be significantly reduced. The consumer gets no choice at how their energy is produced unless they start producing it themselves.

Rain Man
07-07-2006, 06:30 PM
As a carbon-based life form, the concept of a carbon tax scares me.

Mr. Laz
07-07-2006, 06:38 PM
This does not sound like a plan that will directly impact the consumer and without that you are not going to incentivize capital spending by the individual to replace air conditioners, heaters, cars, etc. Without that the impact is going to be significantly reduced. The consumer gets no choice at how their energy is produced unless they start producing it themselves.

i would think it would get to the consumer through the price of the items and business it effects.

ie proactive energy sector gets items at a lower price etc.


it's already happening a little bit ... i just think it should be expanded to make the price impact more apparent.

WoodDraw
07-07-2006, 11:26 PM
Greg Mankiw - an economist who I tend to agree with on most things - is a big fan of this kind of tax. It taxes a negative (pollution) instead of a positive (income). It takes a negative externality, fixes it, and then lets the market work things out. He also favors a gas tax, which would work in a similar way. He tends to talk a lot about it on his blog if anyone is interested. Just run a search for "Pigou" on the site below.

http://gregmankiw.blogspot.com/

Moooo
07-07-2006, 11:36 PM
This is a horrible idea...

It will be most felt in the lower class. This has the same effect of decreasing income tax and increasing sales tax overall...

Moooo

jAZ
07-07-2006, 11:59 PM
Greg Mankiw - an economist who I tend to agree with on most things - is a big fan of this kind of tax. It taxes a negative (pollution) instead of a positive (income). It takes a negative externality, fixes it, and then lets the market work things out. He also favors a gas tax, which would work in a similar way. He tends to talk a lot about it on his blog if anyone is interested. Just run a search for "Pigou" on the site below.

http://gregmankiw.blogspot.com/
It fixes a market failure where the true costs (pollution, health, etc) of a product (carbon fuels) aren't reflected properly in the current product prices.

I've proposed the same thing by tying funding for the Iraq War to increases in taxes on imported oil. The costs of the war are paid through income taxes. We are effectively subsidising the cost of importing oil from the ME and keeping the market price arificially low by taking care of protecting shipping lanes, and fighting wars to stablize supplies.

patteeu
07-08-2006, 11:15 AM
the market finding it's own way is financial social engineering

When most people talk about social engineering, they are talking about a conscious attempt to change behavior. The market isn't consious so even if it causes changes in behavior, it's not really involved in what I'd call social engineering.

and the government still has a hand in it by the way taxes etc are setup.

This is true, but govenment impacts can be minimized if social engineering is not a goal and if an effort is made to maintain neutrality. If there are two products that are taxed at different rates, then people are being implicitly encouraged to buy more of the lightly taxed product and less of the heavily taxed product. If the tax rate is equal on both products, the tax-based influence disappears and people make the same choices they would make in a tax free world.