Wherein, To My Great Surprise, I actually Agree with James Hansen

James Hansen wrote an editorial supporting a revenue-neutral carbon tax, and while I don't really agree with all of his justifications or economics, I do agree with his ultimate conclusion --that such a tax would be fairer, more efficient, less growth-killing, and ultimately more effective than the Frankenstein mess of parts that makes up the current cap-and-trade bill.

To be fair, I have been on this point for a while, having advocated a carbon tax offset by a payroll tax reduction to make it revenue neutral for some time, including in my most recent film.  I don't think I have to tell my readers that I am not big on taxes nor am I of the belief that any strong action on CO2 emissions is necessary.

However, I am largely indifferent between a sales tax on fuel and an equal sized sales tax on labor (which is effectively what payroll taxes are).  There is no doubt that a reduction in payroll taxes would be a helpful step in this recession, and if folks would sleep better at night with less carbon emissions, I can tolerate trading one for another.

Jonathon Adler has more, including Paul Krugman's negative reaction to the plan  (did this guy really once win the Nobel Price in economics?)

  • Frederick Davies

    "did this guy really once win the Nobel Price in economics?"

    The guys at Cafe Hayek have been wondering the same for a while. I think he got it for some kind of trade research he did, but as for the rest of the field of Economics, Krugman is a menace.

  • Max

    There is also a secondary plane to your argument. A cut in payroll taxes and a tax on carbon-emitting transportation does help the poor, who don't use cars.
    I also think it is then more of a luxury tax than a tax on the needs to live. So, it is also a sensible shift in tax. Though it be better if we could complete do without it...

  • Craig

    Charles Krauthammer has been a big proponent of a gas tax for payroll tax swap. Makes sense to me.

  • http://mrodor.blogspot.com/ Micah

    First link is broken. Both of them point to your video.

  • Ben Gardiner
  • Michael

    I've never seen how tax trade would work unless they're dollar for dollar and all carbon taxes go to fund SS and Medicare. And this is at the government level. The employee isn't going to like it. His SS and Medicare taxes may go down, but employers aren't going to give employees a bigger pay check since they need to offset higher energy costs (service and taxes, green energy more expensive, carbon energy higher taxes).

    Employers know that as they move to non carbon energy, the government isn't going to due with less money, their going to keep coming back and hitting employers with higher rates. Employers are going to hedge against this and in the end, the employee is going to have the same pay check but much bigger expenses at home.

    It's just replacing the current ponzi scheme with a much more convoluted ponzi scheme subject to easier government abuse.

  • O Bloody Hell

    > There is no doubt that a reduction in payroll taxes would be a helpful step in this recession, and if folks would sleep better at night with less carbon emissions, I can tolerate trading one for another.

    Dude, what makes you think you'll get to keep them?

    What will happen is a bait-and-switch -- you'll give them the new tax for reductions in the old tax, then they'll just jack the old tax back up over time. Give them five to ten years, and the tax you got lowered will be back to its current levels, and the new tax will still be in effect.

    NEVER EVER GIVE THE GOVERNMENT NEW TAXES.

    The purported justification, whatever it is, is a lie.

    They'll misuse the money time and again, and call you a selfish pr*** for actually wanting to keep your money rather than be a "volunteer slave".

  • http://QandO.net Bryan Pick

    Michael -

    "I’ve never seen how tax trade would work unless they’re dollar for dollar and all carbon taxes go to fund SS and Medicare."

    The payroll tax isn't all going to SosSec and Medicare; much of it has been spent by Congress on the general budget, replaced by IOUs. This tax swap would eliminate the accounting fiction that SocSec and Medicare have separate taxes to fund them.

    "And this is at the government level. The employee isn’t going to like it. His SS and Medicare taxes may go down, but employers aren’t going to give employees a bigger pay check since they need to offset higher energy costs (service and taxes, green energy more expensive, carbon energy higher taxes)."

    A payroll tax cut would make it easier to pay employees more and to give them more hours. It would increase the attractiveness of paying compensation in the form of salary instead of in benefits.

    Meanwhile, remember that the carbon tax falls on employees as well as employers. Employees and prospective hires will demand higher pay to compensate for their increased energy costs, and firms will still be competing on salary. As intended by the tax swap, firms will have an incentive to cut their carbon-based energy use to remain competitive on salary.

    "Employers know that as they move to non carbon energy, the government isn’t going to due [sic] with less money, their [sic] going to keep coming back and hitting employers with higher rates."

    As with other taxes, revenues may drop as firms become more efficient at not using what is most taxed. Almost every conceivable tax creates a disincentive to use the thing taxed. Taxes on labor encourage firms to outsource, mechanize, and squeeze more productivity out of each labor-hour. Consumption-based taxes encourage people to consume less. The government cuts and raises taxes for political reasons, and one of their incentives is to not tax a thing so much that they decrease the total revenue collected (see Laffer curve).

    "Employers are going to hedge against this and in the end, the employee is going to have the same pay check but much bigger expenses at home."

    The more likely result is that the payroll tax cut will be split between employees (including new hires) and employers.

    In the end, the employer uses marginally less carbon-based energy and marginally more labor, and the employee uses marginally less carbon-based energy and gets paid marginally more.
    -=-=-=-=-=-=-=-=-=-=-
    O Bloody Hell -

    It wouldn't be too hard to write legislation so that it's hard for Congress to do that. If you completely end the payroll tax (or even just the part paid by the employee or just the part paid by the employer), then re-instituting the payroll tax will make a lot of noise -- as much as creating a new tax like Cap-and-Trade.

    In the meantime, we get a more efficient, relatively broad consumption-based tax that allows people to change their behavior to compensate for it. Pretty much everyone needs to be paid; not everyone needs to use as much fuel as they do now.

  • Michael

    Bryan,

    Since Coyote proposes this to be revenue neutral, I would think a massive new bureaucracy would need to be created to micro manage the tax to keep it neutral.

    The other issue is balanced taxation of the people. Coyote would do well under a carbon tax. He's got nuclear energy, is closes to food producers and need little gas for heating. I'm in Cincinnati. Coal provides energy, long distances from food producers and a fair amount of gas is need for heating.

    Plus, even if Phoenix and Cincinnati were to go solar, Phoenix is about 33 degrees N while Cincinnati is about 39 degrees N. That six degrees of separation would give Phoenix quite a cost advantage.

    If a carbon tax was implemented, people in the northern half of the country would be heading south or screaming bloody murder at their politicians to repeal it.

    I don't see it ending well.

  • O Bloody Hell

    > If you completely end the payroll tax (or even just the part paid by the employee or just the part paid by the employer), then re-instituting the payroll tax will make a lot of noise — as much as creating a new tax like Cap-and-Trade.

    To some extent but there is always the issue of a Serious Financial Crisis -- and if you don't know there are several more looming on the horizon you're Not Paying Attention.

    After all, that's how they got TARP passed, pretty much, innit? "The sky is falling the sky is falling! We must DO something!"

    The only way to be sure there will be no payroll taxes is to repeal the income tax amendment. I'm all for that notion. Replace it (UPON REPEAL -- NOT ONE MOMENT BEFORE) with the so-called Fair Tax (most FT proposals do NOT absolutely tie it to the repeal of the income tax amendment, and if they don't they are deadly abortions waiting to be dropped onto the head of the citizenry).

  • Link

    AGW is a crock. Why do we need a carbon tax at all?

    Issues like energy independence, pollution, pressures from global population growth need to be adressed straight up and honestly, not by proxy.

  • http://QandO.net Bryan Pick

    Michael -

    Since Coyote proposes this to be revenue neutral, I would think a massive new bureaucracy would need to be created to micro manage the tax to keep it neutral.

    I don't see the need for a massive bureaucracy. You put a handful of economists in a room and get them to give a best-guess dynamic scoring of how much an increase or decrease in those taxes will affect sales of carbon-based fuels, and if you're wrong, you adjust the rate again based on the lessons you've learned.

    It seems at least as easy as asking every business in the country to pay tax on every single paycheck.

    The other issue is balanced taxation of the people. Coyote would do well under a carbon tax. He’s got nuclear energy, is closes to food producers and need little gas for heating. I’m in Cincinnati. Coal provides energy, long distances from food producers and a fair amount of gas is need for heating.

    "Coyote" lives in a desert suburb, IIRC; if I'm right about that, he has to use fuel to drive around and everyone (from homes to supermarkets to office buildings) has to deal with wild swings in temperature on a daily basis--hot days and cold nights. Most of his food is probably not grown locally.
    As for me, I've lived in suburbs most of my life (mainly around LA, where we have to drive everywhere), though I've also lived in cities.

    It's true, some locales and some lifestyles use more energy (and emit more carbon) than others. Energy-intensive industry, transportation, cold and hot climates... these things have associated energy costs that are uneven. Obviously, some people aren't paying the payroll tax right now (students, the unemployed, some retirees), and they'd be upset with having to pay a tax on their consumption. That's something you'll see with any consumption-based tax, even the very broad-based ones.

    That's a political difficulty. But improving employment and take-home pay is a big political boon. Doing something that makes the corruption-ridden cap-and-trade system redundant is good, and a broad-based consumption tax has a lot to recommend it.

    Personally, what I would have done as the recession became apparent (and probably would still do) is pass a bill that immediately eliminates at least one side of the payroll tax (my preference, if we must eliminate one side, is the employer-paid portion) if not both. Initially, there's no carbon tax, but as the economy improves by certain measures (employment and income, particularly), the carbon tax kicks in -- perhaps only partially at first -- with an ironclad commitment to make up the estimated loss in revenue from the payroll tax cut.

    That way our creditors know that we're committed to paying back what we borrow, so we don't endanger our credit. Also, employers have an opportunity to adjust their behavior before the carbon tax kicks in, as well as an incentive to hire more people, and a relatively predictable tax environment to facilitate investment. And finally, we avoid instituting the carbon tax while many people are jobless yet still consuming.

    It combines an efficient stimulus with fiscal responsibility, and allows us to transition from a production-based tax to a consumption-based tax relatively smoothly.
    It works politically because:
    * people want jobs and higher take-home pay,
    * people who count themselves as environmentally conscious would have several reasons to back it,
    * it plays well on national security, energy security and "energy independence" grounds, and
    * it makes the horribly corrupt Cap-and-Trade redundant.

    It's a good-governance measure.

    Another way to make it work politically, possibly, would be to exempt certain jobless people (seniors especially, possibly students) from all or part of the tax, so that savings collected during a time of production taxes aren't hit quite so hard by a transition to consumption taxes. Logically, that could be sunsetted over time.
    -=-=-=-=-=-=-
    O Bloody Hell -

    "If you completely end the payroll tax (or even just the part paid by the employee or just the part paid by the employer), then re-instituting the payroll tax will make a lot of noise — as much as creating a new tax like Cap-and-Trade."

    To some extent but there is always the issue of a Serious Financial Crisis — and if you don’t know there are several more looming on the horizon you’re Not Paying Attention.

    After all, that’s how they got TARP passed, pretty much, innit? “The sky is falling the sky is falling! We must DO something!”

    Respectfully, that doesn't address my claim. In response to the proposition that one should never give the government a new tax in a tax swap, because they'll just raise the old tax back to old levels, I say that I think it would be about as hard to reintroduce the payroll tax as it would be to newly pass Cap-and-Trade.

    The only way to be sure there will be no payroll taxes is to repeal the income tax amendment. I’m all for that notion. Replace it (UPON REPEAL — NOT ONE MOMENT BEFORE) with the so-called Fair Tax (most FT proposals do NOT absolutely tie it to the repeal of the income tax amendment, and if they don’t they are deadly abortions waiting to be dropped onto the head of the citizenry).

    As much as I like consumption taxes, there's no way to pass one that big. You get sales taxes up that high, and you start getting massive tax evasion. All kinds of goods, especially luxury items, are going to be smuggled, sold under the table or on the black market, or stolen, at extremely high rates.

    You might be able to replace some of the income tax with a sales tax, but not all of it. It's unworkable.
    Now, if we had a much smaller government, relying on much less revenue, we could pull that off. Just don't put the cart before the horse.

  • Michael

    Bryan,

    To quote:

    "Personally, what I would have done as the recession became apparent (and probably would still do) is pass a bill that immediately eliminates at least one side of the payroll tax (my preference, if we must eliminate one side, is the employer-paid portion) if not both."

    Politically, I don't see this ever happening. SS and Medicare has been sold to the American people as an "insurance" program funded by employees and employers. To drop the payroll tax and fund SS and Medicare though a carbon tax would force the politicians to admit that SS and Medicare are welfare programs. That's the 3rd rail of political death.

    “Coyote” lives in a desert suburb, IIRC; if I’m right about that, he has to use fuel to drive around and everyone (from homes to supermarkets to office buildings) has to deal with wild swings in temperature on a daily basis–hot days and cold nights. Most of his food is probably not grown locally."

    There is still disparity. For one, I doubt Warren has the A/C on during the day and the furnace on at night, and he does live closer to ports.

    At the country level, cooling is electric while heating is gas. Anyway you cut it, the south is going to be better off under a carbon tax. Even if you can sell the payroll to carbon tax switch to the people as good for business, it wont be long before the northern states find themselves in the situation of facing a higher burden to fund SS and Medicare. Plus, manufacturing is going to relocate to low carbon areas leading to increased loss of jobs a property value in the northern states.

    While I don't like payroll taxes, they at least have parity. Carbon taxes, once in place are going to cause a significant restructuring of the economy and population.

  • Michael

    Bryan,

    To quote:

    "I don’t see the need for a massive bureaucracy. You put a handful of economists in a room and get them to give a best-guess dynamic scoring of how much an increase or decrease in those taxes will affect sales of carbon-based fuels, and if you’re wrong, you adjust the rate again based on the lessons you’ve learned."

    A couple of things I found interesting. One, you are basically turning over taxing to unelected people of the executive branch. Since the little bit left of the constitution gives that power to the house, their not going to give it up.

    And second, what becomes of areas deemed historical. Do we exempt them from the carbon tax to protect our history or raze them for energy efficient structures.

    I feel the government is going to keep the historical areas and go for a big bureaucracy to make things "fair".

    In all reality, if the carbon tax were to go though and the states of the great lakes wanted to leave the union and become a "federation of states of the lakes", I'm pretty sure I'd support the move.

  • http://QandO.net Bryan Pick

    Michael:

    “Personally, what I would have done as the recession became apparent (and probably would still do) is pass a bill that immediately eliminates at least one side of the payroll tax (my preference, if we must eliminate one side, is the employer-paid portion) if not both.”

    Politically, I don’t see this ever happening. SS and Medicare has been sold to the American people as an “insurance” program funded by employees and employers. To drop the payroll tax and fund SS and Medicare though a carbon tax would force the politicians to admit that SS and Medicare are welfare programs. That’s the 3rd rail of political death.

    Well, Al Gore proposed it. The Canadian Liberal Party proposed it. I think a lot of Democrats would go along with it. Maybe not all, but enough that you could line up a bunch of Republicans too and get it passed.

    “Coyote” lives in a desert suburb, IIRC; if I’m right about that, he has to use fuel to drive around and everyone (from homes to supermarkets to office buildings) has to deal with wild swings in temperature on a daily basis–hot days and cold nights. Most of his food is probably not grown locally.”

    There is still disparity. For one, I doubt Warren has the A/C on during the day and the furnace on at night, and he does live closer to ports.

    We don't know what Warren does. But local businesses have to run A/C during the day. Cars too.
    And as for living closer to ports: No, he doesn't. Scottsdale is 400 miles from any American port. The whole of New England and the Upper Midwest is all closer to either the Atlantic or the Great Lakes ports, not to mention the navigable rivers.

    At the country level, cooling is electric while heating is gas. Anyway you cut it, the south is going to be better off under a carbon tax. Even if you can sell the payroll to carbon tax switch to the people as good for business, it wont be long before the northern states find themselves in the situation of facing a higher burden to fund SS and Medicare. Plus, manufacturing is going to relocate to low carbon areas leading to increased loss of jobs a property value in the northern states.

    The Southern states rely plenty on gasoline, natural gas and coal. As do the states of the Mountain West and Midwest. California relies on gasoline/oil too; we sure have a hard time getting nuclear here.

    While I don’t like payroll taxes, they at least have parity. Carbon taxes, once in place are going to cause a significant restructuring of the economy and population.

    Payroll taxes don't have parity. They punish labor-intensive business. Getting rid of them would indeed cause a restructuring of the economy, but then, we're already undergoing such a restructuring. We might as well pick now to ensure that the new structure is more efficient than the old one -- that it encourages savings, that it doesn't punish production, and the other benefits of taxing carbon energy that I've already mentioned.

    “I don’t see the need for a massive bureaucracy. You put a handful of economists in a room and get them to give a best-guess dynamic scoring of how much an increase or decrease in those taxes will affect sales of carbon-based fuels, and if you’re wrong, you adjust the rate again based on the lessons you’ve learned.”

    A couple of things I found interesting. One, you are basically turning over taxing to unelected people of the executive branch. Since the little bit left of the constitution gives that power to the house, their [sic] not going to give it up.

    First, the payroll tax is already administered by the executive branch. Second, I'm proposing that the Congress lay down the manner in which the executive branch must make it revenue-neutral. There's no real shift in power between branches here.

    And second, what becomes of areas deemed historical. Do we exempt them from the carbon tax to protect our history or raze them for energy efficient structures.

    I feel the government is going to keep the historical areas and go for a big bureaucracy to make things “fair”.

    I don't know what you're talking about. Please clarify.
    If you're talking about what I think you're talking about, at least the carbon tax leaves a lot less room for such "waivers" and other corruption than cap-and-trade does.

    In all reality, if the carbon tax were to go though and the states of the great lakes wanted to leave the union and become a “federation of states of the lakes”, I’m pretty sure I’d support the move.

    Uh huh. Not the first time hotter heads have threatened to secede and then been stifled by the fact that the supposedly outrageous policies aren't anywhere near the horror stories that were predicted.

    Look: labor costs are a pretty huge problem in the old industrial base in the Great Lakes region, aren't they? And don't the employees want to encourage companies to hire them instead of mechanizing/automating and outsourcing?