Policy Studies Carbon Pricing

Swapping the corporate income tax for a price on carbon

The attached policy study was co-authored by R Street Executive Director Andrew Moylan and Research Assistant Daniel Semelsberger.

The corporate income tax and domestic carbon policy are two areas of concern in dire need of reform. In both cases, protracted political infighting has inhibited progress on legislative solutions. The tax code remains as voluminous and convoluted as ever. The outgoing administration spent eight years expanding its authority to reduce greenhouse gas emissions without ever receiving congressional authorization.

Progress on tax reform has been stymied by clear revenue needs. Though there is growing consensus on the need to reduce the U.S. corporate income tax, the available policy tools to achieve that goal – such as a European-style Value Added Tax or broad-based taxes on consumption —remain politically unpopular. Meanwhile, political fissures and a lack of motivation to find bipartisan agreement continue to block progress on greenhouse gas emissions.

Though it would no doubt be politically adventurous, there is a way to pair these two policy areas to yield an economically optimal tradeoff: an orchestrated swap of existing taxes on stuff we like for new taxes on stuff we don’t. This swap could take any number of forms. Policy analysts and advocacy groups have in the past advanced proposals to use the proceeds from a tax on carbon emissions to reduce taxes on labor, on capital or on some combination thereof.

Despite the political baggage associated with the climate debate, lawmakers could soon discover—as they attempt to slay the corporate tax code’s many sacred cows—that a price on carbon just might be the easiest way to finance substantial tax reform. Moreover, the combination of a price on carbon with deep reductions in corporate tax rates would reduce government interference in the private market and in the energy market, in particular.

Given the salience of those goals, this paper proposes a politically feasible and revenue-neutral plan to use a price on carbon emissions to eliminate the U.S. corporate income tax completely.

Image by Chuong Vu

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