Prominent carbon tax skeptic admits it could increase economic growth

carbon tax

A lot of writing opposed to carbon taxes is, frankly, not of high quality. But there are exceptions. Bob Murphy, an economist with the Institute for Energy Research, has written some of the strongest and most sophisticated arguments for carbon-tax skepticism. So it was with interest that I read his latest broadside on the subject in the Canadian Free Press.

In the piece, Murphy focuses his ire on what might be called the nonenvironmental case for carbon taxes. Even if climate change was a hoax invented by the Chinese, a carbon tax still might be a net benefit to the economy if it allowed for cuts to more economically damaging taxes. As Murphy summarizes the case:

[W]hen proponents of a carbon tax pitch it to American conservatives and libertarians, they explain that if we have a revenue-neutral carbon tax where 100% of the proceeds are devoted to cutting taxes on capital, then reputable models show that this could boost even conventional economic growth, in addition to whatever environmental benefits accrue from reduced greenhouse gas emissions. This is called a ‘double dividend’ that arises when policymakers began to ‘tax bads, not goods.’

This sounds reasonable. And R Street has, of course, argued for swapping the corporate income tax for a carbon tax on precisely these grounds. But would it really work?

To show the limitations of the “double dividend” argument, Murphy highlights a chart from a 2013 analysis by Resources from the Future, showing the economic impact of instituting a carbon tax and using the revenue to reduce various other forms of taxation.

carbon tax

As the chart shows, it matters a lot what type of tax you are swapping out for a carbon tax. Using carbon tax revenues to offset reductions in consumption taxes, for example, would be a net negative for the economy. Swapping a carbon tax for cuts to taxes on labor would have a smaller, but still negative effect. And simply returning the money to people in the form of lump sum payments would be worst of all.

But look at the blue line. If carbon tax revenues were used to cut taxes on capital, this would result in a net increase in gross domestic product. Murphy himself acknowledges this, stating that “the RFF model shows that only if carbon tax revenues were devoted entirely to a corporate income tax cut would the economy’s growth rise above the baseline.”

That’s overstating things a bit. For example, just eyeballing the chart, it looks like a plan that used half of the revenue from a carbon tax to cut taxes on capital and the other half to cut taxes on labor would still be a net positive for economic growth, albeit not as much of a positive as if all the money went to cutting capital taxes. I’m not saying that R Street would favor such a split, just noting that you could still end up ahead economically even if not all the money from the carbon tax went to cutting taxes on capital.

And remember, the above analysis assumes no benefits to the economy from limiting climate change. To the extent that one does think there are risks from climate change that taxing carbon emissions could mitigate, it makes the case even stronger.

So why isn’t Murphy on board with swapping carbon taxes for capital taxes? Basically because he doesn’t think it’s politically realistic:

There is no way in the world that a massive new U.S. carbon tax is going to be implemented, in which all of the new revenues are devoted to cutting corporate income taxes… We can see that the ‘fashionable’ proposals that are anywhere close to actual political proposals do not consist entirely of tax cuts on corporations. For example, the recent Whitehouse-Schatz proposal, unveiled at the American Enterprise Institute, is ostensibly revenue neutral. Furthermore, one of its features is a reduction in the corporate income tax rate from 35 to 29 percent. So far, this sounds like it’s a ‘pro-growth’ measure, right?

But hold on. The Whitehouse-Schatz proposal would also use its revenues to fund a reduction in payroll taxes (but it is a flat $550 tax credit, so it lacks ‘supply-side’ incentives and acts as a lump-sum check), and to allocate $10 billion annually in grants to states to assist low-income people who will be hit the hardest by higher energy prices.

Murphy is right that the Whitehouse-Schatz proposal is flawed (we’ve written about why here). But I’m a bit surprised to hear him dismiss ideas on the grounds that they aren’t politically realistic. Murphy is an anarchist (not that there’s anything wrong with that). His preferred solution on climate is to abolish the government and have a system of private sector judges work everything out. Whatever the merits of that idea, I would submit it’s at least as unlikely as swapping a carbon tax for cuts to the corporate income tax.

More generally, lots of political ideas start out being unrealistic, only to become law later. People who advocate for Social Security privatization or drug legalization probably recognize the uphill struggle they face in advancing their views, but that hardly means they should just give up. As Milton Friedman famously said, the basic function of a policy advocate is “to develop alternatives to existing policies, [and] to keep them alive and available until the politically impossible becomes the politically inevitable.” I happen to think the time is a lot closer for revenue-neutral carbon taxes than Murphy probably does. But it’s only going to happen if people make the case.

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