Tax Carbon Consumption

Recently Paul Krugman argued that the only realistic solution to our long-term fiscal problem is some combination of death panels and sales taxes. Specifically, on the revenue side “we’ll need more revenue — several percent of GDP — which might most plausibly come from a value-added tax.”

I really think the VAT is a decent idea whose time is passed and is now obsolete. VAT recommends itself as an economically efficient revenue raiser, with the downside being that it’s regressive. The result is that from a 2010 point of view it’s completely dominated by the idea of a carbon tax. A carbon tax is also an efficient, but regressive, form of consumption tax. But by specifically taxing consumption of carbon dioxide emissions it also manages to contribute to solving a massive ecological problem. The political obstacles to a carbon tax are formidable, but so are the obstacles to a VAT. Under the circumstances it would be tragic for a political coalition to muster the power necessary to implement a hefty regressive consumption tax that isn’t specifically targeted at greenhouse gas pollution.

It’s time for tax and fiscal wonks to change their tune, stop talking VAT, and start talking carbon tax. Gain some allies in the climate hawk community.