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High Taxes vs Tax Reform

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"High Taxes vs Tax Reform"

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Tom Friedman writes:

That is why I believe the second biggest decision Barack Obama has to make — the first is deciding the size of the stimulus — is whether to increase the federal gasoline tax or impose an economy-wide carbon tax. Best I can tell, the Obama team has no intention of doing either at this time. I understand why. Raising taxes in a recession is a no-no. But I’ve wracked my brain trying to think of ways to retool America around clean-power technologies without a price signal — i.e., a tax — and there are no effective ones. (Toughening energy-effiency regulations alone won’t do it.) Without a higher gas tax or carbon tax, Obama will lack the leverage to drive critical pieces of his foreign and domestic agendas.

As I was saying yesterday I think it would be a little bit strange to expend a lot of political capital on taxing gasoline rather going for a comprehensive carbon tax. A reasonable carbon tax would have all the benefits Friedman claims for a gas tax but would also put a serious dent in global warming. A narrow target on gasoline would do no such thing. But I completely agree with Friedman that there’s ultimately no substitute to a price signal.

In terms of raising taxes during a recession, yes, that would be a bad idea. But by the same token if you have a revenue neutral but efficiency-enhancing tax reform, it’s always a good time to do that. And there’s no reason that a carbon tax, or a public auction of carbon emissions permits, would need to be a net tax increase. The revenue could offset some other taxes. And I see no reason to think that, e.g., reducing payroll taxes and making up the revenue with carbon taxes would be bad for the economy. One kind of tax gives firms an incentive to economize on their use of labor, and another gives firms an incentive to economize on their use of natural resources. Natural resources depletion, and the pollution it causes, is a bad thing. But the labor market equivalent of resource depletion is full employment, and that’s a good thing.

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