Avoiding the Fiscal Cliff: Why not a Greenhouse-Gas Tax?

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

Mark Kleiman is a professor of public policy at the New York University Marron Institute.