February 14, 2013
TPC: Carbon Taxes and Corporate Tax Reform
This paper examines the pros and cons of using a carbon tax to help finance corporate tax reform. Revenues from a plausible carbon tax would be large relative to corporate tax revenues and could thus help finance lower corporate tax rates, extension of business tax preferences, or other corporate tax reforms. Done well, such a tax swap could reduce the environmental risks of carbon emissions and improve the efficiency of America’s corporate tax system. But a carbon-for-corporate tax swap poses a significant distributional challenge. A carbon tax would fall disproportionately on low-income families, while a reduction in corporate taxes would disproportionately benefit those with high incomes. Policymakers can offset some of those impacts through other policy measures, such as paying lump-sum tax rebates. But doing so would reduce the swap’s efficiency benefits. Policymakers may also want to use some carbon revenues for deficit reduction. One option would be to aim for revenue neutrality over an initial period, after which a widening spread between growing carbon revenues and relatively stable corporate tax cuts would reduce the deficit.
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It seems natural that because carbon taxes are basically consumption taxes, the tax burden would fall most heavily on the poorest. But how would carbon taxes be imposed on imports? Would we attempt to measure the carbon use in production based on US industry practices or foreign practice? The paper highlights distributional issues but doesn't address international competition on the production side. Policies such as high consumption taxes on transportation fuel and value-added-taxes work because they tax consumption in a way that can not be avoided by international competition -- and need not be imposed on exports to avoid a loss of competitiveness. A carbon-based tax looks like a poor replacement for either policy. Production of goods with high carbon content will likely move offshore to locales with weaker environmental standards than the US or carbon content duties on foreign goods will become the next lobbying/public-choice battleground.
Posted by: Andy G | Feb 14, 2013 2:54:40 PM
The complexity of the carbon tax code would make the IRC look like a kid's book in comparison.
Posted by: Woody | Feb 14, 2013 11:34:08 PM