R Street study: Swap the corporate income tax for a fee on carbon
The Congressional Budget Office projects corporate income tax receipts will be about $300 billion in 2016 and $3.76 trillion over the next decade. While abolishing the tax would leave a large hole in the federal budget, the report from R Street’s Catrina Rorke, Andrew Moylan and Daniel Semelsberger argues that more than half that total would be recouped through “feedback effects” that would follow the tax’s elimination.
Assuming that corporate income tax repeal would be coupled with ending the tax code’s existing preferences for capital gains and dividends, the combination of ending those preferences, higher wages for workers, more money paid out by companies to investors and more corporate profits repatriated from offshore would combine for $167.2 billion, or 55.7 percent of 2016 corporate income tax revenues, that would flow back to the Treasury through other taxes, the study finds.
To make up the remaining gap of about $1.66 trillion over the next decade, the authors propose a carbon fee of $25 per ton, rising annually at 5 percent above the rate of inflation. The fee would be tied to eliminating redundant environmental regulations and subsidies, such as the Obama administration’s Clean Power Plan, the investment and production tax credits for renewable energy, the Department of Energy Appliance and Equipment Standards Program and state renewable fuel standards.
“Axing federal policies designed to restrict carbon dioxide emissions from the energy sector as a whole would eliminate billions of dollars in compliance costs for industry and shrink the federal government’s rulemaking and enforcement capabilities,” the authors write.
Finally, the fee would be adjustable at the border—that is, imposed on imports and removed from exports—to allow energy-intensive domestic industries to continue to trade in foreign markets that have wildly different carbon policies.
“It is a feature, not a bug, of a carbon tax that it eventually would take in no revenue. A carbon price is a policy specifically designed to put itself out of business,” the authors write. “By setting the benchmark that lower taxes are wise policy and that specific policy outcomes can be achieved while simultaneously shrinking the government’s footprint, this proposal could serve as a model for policies that reduce the size of government broadly.”