Will Conservatives Fall for the Carbon Tax Seduction?

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Fri, Jan 23 - 9:00 am EDT | 3 years ago by
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    Free Radical - Carbon Tax

    The view from the Left is that Republicans and the center-right are all beholden to Grover Norquist, the American’s for Tax Reform head who allegedly wants to eliminate all taxes and drown government in a bathtub. Yet many on the Right are talking now about instituting a carbon tax. If Republicans all hate taxes, then what gives?

    The answer is twofold. First, no political party or ideology is uniform. Many Republicans do indeed oppose tax increases and want to lower the current tax burden. Others claim to want that, but then behave differently once elected. Others still just really like government so long as they control the levers, and clearly desire to tax and spend.

    But there’s more to the story. The push for a carbon tax is primarily coming not from politicians, but from outside conservatives and center-right policy groups. They argue for a carbon tax not to increase revenue or give politicians more money to spend, but to benefit the economy.

    The points they raise have merit, but in focusing too much on the economics they’ve missed the forest for the trees. Center-right groups and individuals have been seduced into supporting a policy that would, in the long run, result in a higher tax burden on Americans and more government – the exact opposite of what they typically claim to desire.

    To understand where they go wrong, we must first consider the case for a carbon tax. Obviously, supporters start from the assumption that carbon is bad and that we want less of it; if they thought otherwise we wouldn’t be having this discussion. In economic parlance, they identify carbon production as a negative externality, meaning it places costs on those not involved in the economic transaction from which it was produced. In this case the costs are primarily said to come from carbon’s alleged contribution to so-called climate change.

    There are different possible ways to deal with negative externalities. Government might choose to regulate activities that result in negative externalities, such as by requiring adoption of expensive technologies to mitigate their impact and thus forcing producers to bear at least some of the cost for solving the problems they create. The tort system can also provide redress through lawsuits by compensating those negatively impacted.

    The most market-friendly solution, however, is the Pigovian tax. Simply put, by taxing activities responsible for negative externalities, market participants are forced to price in its full costs, thereby reducing supply and correcting a market inefficiency.

    When you tax something, you get less of it. But not only does a Pigovian tax reduce the negative externality in question, it also places the cost of doing so primarily on relevant producers. It’s also simple to administer and doesn’t introduce as many of its own negative side effects as regulation, though it’s not always easy to determine the actual cost of an externalitity and by extension the optimum Pigovian rate.

    After carbon taxes are collected, conservative supporters argue they can be used to reduce other, more destructive taxes. As mentioned, when you tax something, you get less of it. This means that taxes on things that are good – like work, savings or investment – are particularly harmful to the economy. Replacing taxes on good things with taxes on bad things thus makes a lot of economic sense. Unfortunately, it’s just not that simple.

    Many conservative carbon tax supporters, especially the economists, are very smart people who have studied the issue closely. But their problem is one of scope, not rigor. What they miss is the politics.

    In an ideal world legislators would establish what activities are essential, determine their costs, then raise the funds necessary to carry out those functions. In such a world, substituting one tax for another is easy because there is a set limit on what is to be raised, and whatever one tax brings in means less must be raised elsewhere.

    But we don’t live in an ideal world.

    The exact opposite system is one where politicians first seek to raise as much revenue as they possibly can. Only then do they figure out how to spend it, along with whatever more they can get away with through debt. This system is prone to waste, as any revenue raised over that which is necessary is spent on programs that are frivolous or that have costs outweighing benefits. In this system it is very hard to substitute one tax for another, as there is no set revenue target. New revenue is always treated as a bonus, not a replacement.

    Our system falls somewhere in between the two extremes. Politicians don’t entirely maximize revenue, but they do mostly try to spend whatever they are able to get and then some.

    Because of this, many of the argued benefits of a carbon tax would fail to materialize. Rather than use the revenue to offset destructive taxes like income or payroll taxes, the money will inevitably be spent on new vote-buying schemes. Even if a political coalition exists today to both raise carbon taxes and to use it to reduce other taxes, there’s nothing to stop a future Speaker Pelosi or her Democratic successor from simply raising the income tax rate right back up.

    It wouldn’t be similarly easy to reduce the carbon tax to zero, however, as established taxes very rarely ever go away.1 Likewise, short of repealing the 16th Amendment, there’s simply no way that supporters can promise a carbon tax will actually offset other taxes.

    So assuming a carbon tax is established and that it either immediately or at some point in the future exists in addition to, rather than instead of, current taxes, what will be its true impact?

    New revenue streams mean fewer dollars in the productive sector of the economy. And while that new stream may be less destructive than others, so long as it exists on top of existing taxes as it inevitably will, the government will grow and the economy will shrink.2

    It’s certainly arguable that the benefits of correcting a market inefficiency outweigh the costs of growing government and all which that entails. I’m skeptical of the proposition, but it depends heavily on how much faith one puts in climate models with extremely poor track records for predicting actual outcomes. And of course for the left, growing government isn’t seen as a cost at all; it’s a benefit.

    They see falling oil prices as an opportunity to finally slap a tax on carbon at a time when a public used to higher gas prices won’t object quite as strenuously. But conservative supporters need to realize that they are also open about wishing to use the revenue to grow government.

    Left-wing support for a carbon tax is a given. It does everything they want – it punishes fossil fuels and those who use them, combats their climate change boogeyman, and grows government all at the same time. But if a carbon tax is to become reality, it will be because conservatives have been seduced by appeals to market efficiency and ephemeral tax benefits that will ultimately be found incompatible with political reality.

    __________

    1 In 1898 Congress enacted a telephone tax as an emergency war measure. It expired in 1902, was brought back in 1914, extended until 1916, briefly expired again, was brought back stronger in 1917, grew in 1919, expired again in 1924, returned in 1932, and was subsequently reauthorized 29 times, including indefinitely in 1947. In 2006 it was finally put to rest. For now.

    2 The Rahn Curve postulates there is a growth maximizing level of government, above which new spending becomes counter-productive. Intuitively we can think of government first spending on essential functions like defense, infrastructure and the rule of law. Each new program is of decreasing importance, eventually reaching the point of providing less value than would have been created had the tax dollars remained in the private sphere. Research puts the growth maximizing rate of spending at 20-25% of GDP, whereas combined US government spending is ~40% of GDP.

    Brian Garst is a political scientist, commentator, and advocate for free markets and individual liberty. He also blogs at BrianGarst.com and you can find him on Twitter @BrianGarst.

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      • Kasimir Urbanski

        I think climate change is pretty obviously real; but a carbon tax is an idiotic way (or I should say non-way) to deal with it. At its best, its part of that anti-innovation ‘back to the cave’ thinking; and at its worst it is just government corruption no more likely to stop fossil fuel emissions than the beer tax is to stop alcohol production.

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