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November 20, 2012 8:59 AM Avoiding the Fiscal Cliff: Why not a Greenhouse-Gas Tax?

By Mark Kleiman

1. The Federal government needs some revenue in medium and long term but we still need fiscal stimulus in the short term.
2. The planet needs a decrease in greenhouse-gas (GHG) emissions.
3. The right way to control GHG emissions is to tax them.
4. The ideal GHG tax would phase in slowly to allow the economy to adjust.
5. A phased-in tax is also easier politically, because the pain is mostly in the future: i.e., after the next election, whenever that is.

6. But when the time comes for the tax to start or increase, the political pressure to avoid that could become intolerable: cf. the Alternative Minimum Tax and the “Doc Fix” under Medicare.

7. If economic decision-makers don’t believe – or at least aren’t sure – that the tax will kick in and rise as promised, the benefit of the phase-in is lost.

8. Therefore, you want a phased-in GHG tax that is politically bullet-proof.

9. While a GHG tax has attractive efficiency features, distributionlly it’s more or less a value-added tax: it hits poorer people harder because they spend a larger fraction of their incomes.

10. Social Security and (especially) Medicare are a big part of the long-term budget problem.

11. They are also political sacred cows.

12. The Social Security tax is regressive: it’s on labor income only, and capped.

Therefore, I propose a steep but slowly phased-in GHG tax dedicated to the Social Security and Medicare trust funds, tied to the elimination of payroll tax on the first $X of annual income. The formula relating X to the GHG revenue stream would depend on how much additional revenue the feds need in the long term.

But the key point is the political one. If reducing the GHG tax as it’s about to hit means either raising payroll taxes or raiding the trust funds, Congress won’t want to do it. That would make the phase-in credible.

I know this isn’t on the table in the current negotiations. What I don’t know is why.

[Cross-posted at The Reality-based Community]

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Mark Kleiman is a professor of public policy at the University of California Los Angeles.

Comments

  • Peter C on November 21, 2012 10:50 AM:

    Dang it, Mark, would you please stop talking about the 'fiscal cliff' as if it were a REAL economic problem requiring a REAL economic solution. It is NOT. It is a REAL political problem with economic consequences requiring a political solution.

    Because of a flawed compromise last year, we are poised to impose painful and unnecessary fiscal austerity. If we do, it will be a stupid consequence of our dysfunctional political environment. The easiest solution to the 'fiscal cliff' is to decide NOT to impose painful and unnecessary fiscal austerity. PERIOD!

    Your interesting proposals are a possible solution to our long-term budget defecit issues, but that's a different problem. And when you propose them as a solution to the 'fiscal cliff' idiocy, you give legitimacy to it which it doesn't deserve. That only serves to empower the idiots.

  • Pete N on November 21, 2012 1:48 PM:

    Ideally, the carbon tax is a self-extinguishing tax and not a good candidate for a long-term revenue stream.

  • Jim Bogden on November 25, 2012 8:36 AM:

    We old geezers remember the 1980 election, when independent candidate John Anderson proposed a 50-cent tax on gasoline to be applied to shoring up Social Security. Imagine if we had implemented such a policy 32 years ago! It was a good idea then and a good idea now.

  • Gladys McCarthy on November 26, 2012 5:14 AM:

    Is there a possible way to avoid Fiscal Cliff ? Well, I think since taxes are constant there's no way we can avoid it. But hopefully they can make ways not to totally increase taxes. See Ed Butowsky, as he examines on what fiscal cliff means to investors.