The Case for Taxes

Lurking in this New York Times article about "solar thermal" power is a good reason to prefer straightforward carbon taxes to more complicated subsidy schemes as a way of generating cleaner power:

In the solar thermal variant, heat from the sun is used to preheat the water that the exhaust gases will boil into steam. Proponents say that such a system could get about one-sixth more work out of the natural gas by operating at 70 percent efficiency. Most current plants operate with efficiencies in the range of 50 to 60 percent.

The World Bank is considering financial help for projects in Egypt and Morocco that would create such a hybrid. In the United States, such systems are not practical because they would lose the tax benefits that the federal government gives solar projects.

And there's the rub. Part of the genius of a carbon tax is that it creates incentives for more green friendly power at the margin, so that something like this which produces meaningful carbon reductions is rewarded precisely in proportion to the extent to which it does, in fact, reduce emissions. Right now, our subsidy scheme doesn't reward companies at all for adopting this sort of technology. But changing the scheme to make these plants eligible for the solar subsidies would be bad, too, since a mixed plant isn't nearly as clean as a true solar one.

Comments

You might have added that carbon taxes are not only more straightforward than complicated subsidies; they also eliminate the danger of counter-productive subsidies such as those to ethanol or subsidies proposed for coal to liquid which result in more rather than less carbon dioxide emissions. For more on carbon taxes, see www.carbontax.org.

Posted by Dan | July 16, 2007 3:26 PM

My job is to take advantage of stupid, and not so stupid, rules in the tax law. There are absurd benefits to co-generation energy. They help pay my salary. So, obviously, the more complicated the stupid rules for solar energy are the better.

However, for the 99.99% of the world who don't get paid based on stupid laws, I can PROMISE you that we would be far better off with a simple carbon tax or oil tax that is easy to understand and easy to collect.

Of course, one of the big downsides to a simple carbon tax is that my standard of living would go down.

Posted by neil wilson | July 16, 2007 3:27 PM

Why is it that Democrats prefer flat taxes that punish the poor and middle class when their aims coincide with the aims of the party's rich elites and even use the rhetoric and logic of Republicans - a carbon tax would be simple, straightforward - but oppose flat taxes that punish the poor and middle class when their aims coincide with the aims of the Republican Party's rich elites?

Posted by Linus | July 16, 2007 4:04 PM

Linus: The answer to your question is really simple.

Democrats, or sensible people (which includes some Republicans and excludes many Democrats), want a tax system that raises money efficiently and fairly.

A carbon tax would be an efficient and fair way to tax things that contribute to global warming.

A flat tax would NOT be an efficient nor fair way to tax income.

Why?

You can define 'carbon'. You can't define 'taxable income'.

Seriously, it is not possible to define 'taxable income' in under one million words.

I bet you think property tax is pretty simple. Look at the case law concerning property tax. I do some dealings with sales tax and you can't believe how every state takes millions of words to define what is and is not taxable.

We can define 'taxable income' fairly easily for 90% of this country. It is the other 10% that makes the definition so difficult.

I don't think you have ever met anyone who has had trouble calculating their taxes AFTER determining what their 'taxable income' was.

The trouble is determining 'taxable income'. Does anyone disagree?

Posted by neil wilson | July 16, 2007 4:12 PM

I have a really bad feeling about the environmental policy we are going to see over the next few decades. We are going to subsidize all manner of alternative energy lunacy. Its going to be driven by lobbyists and corporate interests and stupid popularity. It'll cost us billions in misplaced subsidies and possible trillions in environmental damage. And all when we could have just had a carbon tax. Its a scary thought.

Posted by mpowell | July 16, 2007 4:18 PM

Neil,

The only thing I have to add is that it only takes lawyers that many words. But, yes, you make an excellent point that I agree with 100%.

Posted by mpowell | July 16, 2007 4:29 PM

Great to see people getting behind the carbon tax idea. It really is the best solution. The tax (in theory) would reflect the environmental costs of burning carbon based fuels, giving consumers an incentive to burn less and/or turn to non-caron based energy. And yes, unlike a welter of rules and regulations, the politicians and lawyers can't manipulate it for their own selfish ends.

Posted by kafka | July 16, 2007 4:47 PM

"A flat tax would NOT be an efficient nor fair way to tax income."

This doesn't answer my question.

Describe to me a scenario in which a tax on energy would not be the better part of a carbon tax. Now describe to me a scenario in which a tax on gasoline is not a sales tax which is in this country (and most others) a flat tax. And while you're at it describe to me how this increase in gas taxes would not adversely impact the working poor, working class, and even middle class people who live in cities without viable public transit options, can't telecommute, or live in suburbs or rural areas; this is much of the country.

It isn't as if I'm the only person on the planet having these thoughts.

Posted by Linus | July 16, 2007 5:00 PM

Linus,

the technical term is "Pigovian taxes", which means taxes that increase disincentives for undesired activities. Tobacco taxes are the chief example at the moment. Lottery is perhaps less clear, but the cut that the state taxes from the betting pool before it is distributed in winnings amounts to a sales tax on gambling.

Clearly, smokers and lottery players, among whom low income groups are overrepresented, are adversely affected, but as we wish them to smoke and gamble less, that's a feature. (At least I think so, I would also ban ads of gambling, and in the case of states, there is no free speach issue there.)

In case of gasoline, Pigovian tax must provide some pain, otherwise it will not lead to a change in behavior. The alternatives are from the realm of command economy, like planning what kind of vehicles can be sold (CAFE standard), rationing gasoline or some such. Tax, while painful, leaves choice in the hands of the public. The Economists likes carbon tax because of its clarity of principles and presumed economic efficiency -- give homo economicus right incentives and watch what they do.

Now, the poor, and the lower middle class can be helped using the money collected from the not-so-poor drivers, and there are plenty of ways to consider. First, cities without viable transit option could acquire viable transit options. The poor already carpool a lot, carpooling can be supported better. Exchange of vehicles from gas guzzlers to super-efficient can be subsidized.
Etc. etc.

Actually, the working poor are adversely affected by the lack of viable transit option and very poor efficiency and mediocre reliability of used cars with the resale value they can afford. Giving them opportunities to use public transit and to have subsidized purchases of brand new very efficient cars could be a substantial improvement.

Posted by piotr | July 16, 2007 5:53 PM

Kafka: "And yes, unlike a welter of rules and regulations, the politicians and lawyers can't manipulate it [carbon tax] for their own selfish ends."

As George Constanza would say, "you are sooo naive". If certain kinds of polutions, of cars, or income, etc. may be deemed, by law, not to constitute polution, or cars, or income, same may happen to carbon.

Adults are deemed children in some situations (when we want to forbid something), children are deemed adults in other (when we want to punish them). Our laws constantly defy normal usage of English words. I would amend the Constitution, "English is the official language of the union and laws redefining the established meaning of words are null and void."

Posted by piotr | July 16, 2007 6:00 PM

Piotr,

I won't pretend to speak for Kafka, but I don't think anyone is under the delusion that politicians won't try to play funny games with a carbon tax. But a carbon is much more fool-proof (or should I say lobbyist-proof?) than a command approach to green energy: subsidize this technology! improve the fuel efficiency of these cars!

Posted by mpowell | July 16, 2007 6:07 PM

And by the way, emissions trading schemes are probably the worst thing we could come up with. The opportunity for obfuscation is tremendous. The carbon taxes are regressive line is misguided, in my opinion. Any restrictions or taxes on energy consumption will be regressive. If you mandate higher fuel standards in cars, they'll cost more than they would have otherwise. Its just a feature we'll have to live with. Its not as if it prevents us for advocating more progressive policies elsewhere.

Posted by mpowell | July 16, 2007 6:10 PM

"In case of gasoline, Pigovian tax must provide some pain, otherwise it will not lead to a change in behavior."

You can call it whatever you want my friend but it's still a flat tax and flat taxes are regressive. I'm surprised you didn't mention that rich people use more energy per capita than the poor; this is of course true. It is also true that the rich eat more Chateubriand and drink more Cristal than working people; they fly on private jets more too. The point here is that it's easier for the rich to cut their consumption of energy and harder for the poor; it would even be a strain on some middle class people. I don't know if you've ever been poor, but most poor people don't drive around all day for no apparent reason. This is especially true today with the high cost of gas, and gas taxes.

It's one thing to smoke less; smoking is unncessary. For most people in this country driving is not. Nor is eating. Higher gas taxes mean higher food costs, higher clothing costs, higher housing costs, higher rents.

Let them have carpools I guess.

Posted by Linus | July 16, 2007 6:21 PM

Yes, a carbon tax (or energy tax) is regressive.
Of course, so is the federal wage tax and state sales taxes.

If a carbon tax was coupled with a reduction in wage taxes, an increase in the earned-income tax credit, it would cushion the blow to the poor in the short term, and those who are able to shift to higher mileage cars or other means of decreasing their carbon footprint would come out in the end better off.

Posted by mhpine | July 16, 2007 6:47 PM

Re: Great to see people getting behind the carbon tax idea. It really is the best solution.

Only if it applies to corporations not to individuals. Individuals in many cases in this country simply lack the means to trade up to higher efficiency. For example, if you increased the price of gasoline by a lot many people will be priced right out of the new car market and instead will have to buy old gas-guzzling models (which will be even cheaper because they are gas-guzzlers). Corporations on the other hand have the resources (and the credit) to trade up, and really large corporations can even assist the effort with their R&D departments, something individuals lack. And yes, they will try to pass those costs on, but that is limited, to some extent, by the competitive nature of the market: they can only raise prices so much. Finally, to the extent that prices do go up the blame will accrue to the corporations not to the government. A direct carbon tax on individuals would be a rightwing demagogue's wet dream; an indirect tax is harder to demagogue since most people will just blame greedy companies instead.

Posted by JonF | July 16, 2007 6:58 PM

I don't think anyone is dismissing out of hand Linus's position that a carbon tax would likely effect the poor more than the rich or upper middle class. Calling it a "flat tax" is a rhetorical flourish that is not so helpful, though.

One thing Linus says bears a bit more scrutiny:

It's one thing to smoke less; smoking is unncessary. For most people in this country driving is not.

I think he's missing the big picture here. Driving is necessary today. It takes a certain amount of blindness not to realize that one goal of global warming policy is to make sure that it is not so necessary in the not-so-distant future. Also, the other goal here is to create a society where much more energy is generated without the release of carbon into the atmosphere. As new technologies are improved and new infrastructures are put into place, the pinch on the poor will be lessened. (And not incidentally, as carbon use decreases, the tax will either need to be increased or supplemented with other taxes, but that's a different story.)

Admittedly, the happy-land future of mass transit and solar powered everything is not exactly around the corner. This means that, as just about everyone here has acknowledged, something will have to be done to help those with lower incomes deal with the transition.

And I'd have to agree that the argument for simplicity here is not necessarily all that strong. We need to do what's going to achieve the best result. Not what's simplest. And a carbon tax coupled with all kinds of measures to relieve the impact of said tax is unlikely to be simple. Sorry, folks.

Posted by Rob Mac | July 16, 2007 7:12 PM

People spend a fairly limited percentage of their income on carbon-emitting activity. It's more than peanuts, but less than, say, the tax base for general sales taxes or the income tax.

A carbon tax is regressive and that is unfortunate. However, the magnitude of its regressive impact just isn't that large. And that drawback has to be balanced against the environmental benefits on the other side of the scale.

If the income tax (and other taxes) were made more progressive, then you could come up with a scheme where, in spite of the increase in carbon taxes, the overall tax system could be made more progressive, while keeping the carbon tax's environmental benefits.

Posted by JP | July 16, 2007 7:30 PM

"Driving is necessary today."

I appreciate this point but the fact I think is that geography is destiny; most people will not be using public transit in the suburbs of Boulder twenty years from now.

There is an irony here too: Robert Moses tore up New York on behalf of the car. Villaraigosa is tearing up Los Angeles on behalf of density, "smart growth".

The time in which we live is not just a means to an end; it's all we have. I thought we gave up sacrificing on behalf of half-baked ideas. I thought we gave up sacrificing on behalf of "history". People have to live in these places.

I'm moving to Oregon and riding a dirt bike. If I'm lucky I'll run it on black market gasoliine.

Posted by Linus | July 16, 2007 9:52 PM

Linus:

Yes, a carbon tax, just like any 'flat tax', sales tax, VAT, payroll tax, etc. hurts the poor more than it hurts any one else.

Does hurting the poor make something bad? I don't know.

However, if you follow John Anderson's idea from 1980 and have a big tax on gas, carbon, etc, and reduce another regressive tax then the net tax should not hurt the poor.

Now, obviously, you will have some guy who drives 100 miles a day in an old car to a minimum wage job that will be hurt. Just as you will have some poor guy who works next door and is too poor to own a car will be helped.

Unfortunately, we ain't God and we can't create a perfect system so we try and make the best we can.

A serious gas/carbon tax and a reduction in payroll taxes is a revenue neutral way to help most people and to help the country as a whole.

Do you agree?

Posted by neil wilson | July 16, 2007 10:44 PM