By Institute for Energy Research ——Bio and Archives--November 12, 2014
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Although the initial theoretical analyses tended to reject the double dividend, a second wave of models offered more scope for the double dividend by acknowledging additional potential channels for beneficial efficiency impacts from green taxes. One such channel is an improvement in the relative taxation of capital and labor. If, prior to introducing the environmental tax, capital is highly overtaxed (in efficiency terms) relative to labor, and if the revenue-neutral green tax reform shifts the burden of the overall tax system from capital to labor (a phenomenon that can be enhanced by using the green tax revenues exclusively to reduce capital income taxes), then the reform can improve (in efficiency terms) the relative taxation of these factors. If this beneficial impact is strong enough, it can overcome the inherent efficiency handicap that (narrow) environmental taxes have relative to income taxes as a source of revenue. Similarly, if the initial tax system is highly distorted in terms of consumer goods, and the green tax reform improves the system in that dimension, then the double dividend can occur after all. The presence or absence of the double dividend thus depends on the nature of the prior tax system and on how environmental tax revenues are recycled. Empirical conditions are important. This does not mean that the double dividend is as likely to occur as not, however. The narrow base of green taxes constitutes an inherent efficiency handicap…Although results vary, the bulk of existing research tends to indicate that even when revenues are recycled in ways conducive to a double dividend, the beneficial efficiency impact is not large enough to overcome the inherent handicap, and the double dividend does not arise. [Bold added.] Those conservatives who have been led to believe that a carbon tax swap deal will “help the economy” so long as it’s tied with other tax cuts need to study the above excerpt carefully. Because a carbon tax starts out with such a handicap in terms of conventional economic efficiency, the only way even in theory it can make the tax code in total more efficient is if the bulk of the revenue is used to cut taxes on capitalists, so that the workers (through higher energy prices and conventional taxes) end up shouldering the burden of the new carbon tax. Does any conservative reader actually think this is a politically feasible policy? Try to imagine President Obama saying the following in a national address: “We’d like to provide some tax relief to workers and the elderly dependent on Social Security, who are seeing gasoline, electricity, and natural gas prices zoom upward from this new carbon tax, but I’m sorry, we just can’t do it. No tax relief for you. The thing is, those folks getting dividend and interest income need a tax break more than you do, because my Administration is committed to minimizing what my friend Larry Summers calls the ‘deadweight loss’ of the tax code.”Conclusion
As I’ve documented on these pages, the progressive Left is licking its chops in anticipation of spending new carbon tax revenues on their pet “green” projects. So we’re already in Fantasy Land when conservatives assure us that a U.S. federal carbon tax will be used exclusively to cut pre-existing taxes. Yet the case against a carbon tax swap deal is even stronger. Even if new carbon tax revenues were used dollar-for-dollar to provide tax relief, the only way to possibly help the economy would be to target the tax breaks at capitalists, allowing consumers and workers to suffer the brunt of higher prices with an inadequate tax break compensation. Do conservatives think there is any chance of such a policy being passed, let alone remain in force once average Americans realize they’re getting screwed? [1] Lawrence H. Goulder. 2013. “Climate Change Policy’s Interactions with the Tax System.” Energy Economics 40: S3-S11. Available here:
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