A grand compromise on carbon taxes

Arthur Pigou was an economist that pioneered the idea of a "Pigovian Tax" in that the government should tax "externalities", also known as negative side effects.  In economic terms the burning of fossil fuels creates costs beyond just the monetary cost of the fuel, namely the environmental cost of pollution and global warming and the military cost of maintaining the balance of power in the Middle East.  The economically efficient way to discourage the use of carbon fuels relative to "cleaner" fuels (from a carbon dioxide perspective) such as renewables and nuclear.  This is a theme that has been encouraged by Thomas Freidman at the New York Times, where he has been relentlessly promoting a high gas tax to make us live in a more environmentally-responsible manner.

Of course, any national-level politician that proposed just jacking up the gas tax would lose in a landslide.  Such a tax would be regressive and hurt lower income people the most.  The other downside to a high carbon tax is that until fossil fuels were replaced with other forms of energy it would discourage certain forms of business activity in the US, particularly manufacturing and transportation.

So the compromise I propose is simple.  I start with the assumption that we want to wean ourselves off petroleum and coal and move toward alternatives and nuclear.  I also assume that the change would need to be gradual so we don’t jam a stick in the spokes of the economy.  I also must give the caveat that I have done none of the math to know what my proposal means in dollars…I just assume it’s done in a way that’s revenue neutral.

Thus, I propose the following: over 15 years phase in a carbon tax while phasing out the payroll tax (a regressive income tax) and the corporate tax.  In other words, instead of using the tax code in a way that taxes labor and discourages corporate investment, use the tax code to encourage energy efficiency and to encourage companies to locate business activity in the United States.

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