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US considers 'greening' the tax code

Revenue collected by carbon tax could be used to help taxpayers.

PALO ALTO, Calif. — Consider this as you stand in line at the post office tonight: What if
the government cut taxes on things it likes, such as labor and capital investments, and focused on taxing things it doesn’t — like pollution?

That’s been the thinking of several economists, who argue that a “greening” of the tax system offers a chance to shift a portion of revenue collection from methods that distort the economy to a source that corrects one of its major problems: Only rarely is the cost of pollution included in the price of a product.

With several proposals for putting a price on carbon emissions now being floated in Washington, the idea is closer than ever to becoming reality. The bills under consideration would either put a direct tax on carbon, or more likely put a cap on emissions, with the potential to raise revenues through the auctioning of permits. Indeed, the budget proposed by President Barack Obama includes estimates of an average revenue of $80 billion a year from
efforts to curb carbon emissions, money that economists suggest should be somehow returned to the taxpayer.

An important part of the thinking, said Gilbert Metcalf, an economist at Tufts University, is that the cost of cuts in carbon will be more politically palatable if accompanied by corresponding drops in income and payroll taxes.

“We don’t want to mix up environmental policy with a debate on how big the government should be,” Metcalf said.

Perhaps equally significant, from the point of view of economics, is the opportunity to use the extra revenue to reduce the distortionary impact of a tax on work. For every dollar of income taxed, the economy is estimated to suffer another 15 to 30 cents, as people — often working
mothers or teenagers — decide it’s not worth their while to take a job.

“It can really make a difference on whether they enter the market or not, or choose between full-time and part-time work,” said Larry Goulder, an economist at Stanford who has been studying the greening of the tax code since the mid-1980s.