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Revenue collected by carbon tax could be used to help taxpayers.
For a period of time in the early 1990s, economists thought the benefits from freeing up labor would be enough to more than offset the effects of putting a price on carbon, in effect making a green tax a policy that pays for itself. Now, said Goulder, the consensus is that reducing income taxes will offset about half the cost to the economy of putting a price on carbon.
“It’s not a free lunch,” said Goulder. “But it’s a lunch worth paying for.”
Accompanying a carbon tax with corresponding cuts in income tax also would solve another problem: The disproportionate burden an environmental tax would place on the poor, who after all spend a larger portion of their income on carbon-intensive expenditures, such as gasoline, electricity, food and consumer goods.
Metcalf, in a paper written for the Brookings Institution, advocates returning the revenue in the form of rebates on payroll taxes, which are paid by all working Americans. Taxpayers near the bottom of the scale would see most of their payroll taxes returned to them.
Whether the greening of the tax code will come about will be determined in the coming months as legislators hash out their approach to dealing with climate change. One pitfall is the allocation of pollution permits under a cap and trade plan. If these are given away, rather than auctioned, prices will still go up, but the extra revenue is likely to be captured by energy companies, rather than the government.
Obama, for his part, seems aware of the pitfalls. His proposed budget explicitly channels 80 percent of the hikes in revenue from carbon into a “Making Work Pay” tax cut (the remaining 20 percent are allocated towards clean energy technologies).
Of course, taxing carbon has one long-term side effect that cutting the income tax can’t solve. As the economy becomes cleaner, revenue will drop. But that’s a problem Goulder would like the United States to have. “If we get to the point where’re not getting much revenue from a green tax, it means we’ve solved the issue,” he says.
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