Steve Verdon, the Carbon tax envisioned by the World Resources Council is
revenue neutral. Check their web site out....
The document is called "The Right Climate for Carbon Taxes: Creating
Economic Incentives to Protect the Atmosphere", by Roger Dower, and Mary
Beth Zimmerman, World Resources Institute, Aug. 1992.
This is a seminal paper. The introduction points to three salient features:
1. "some of the revenues from a carbon tax can also be used to
compensate groups adversely affected by the tax."
2. "a portion of the revenues generated by a carbon tax can be returned
to the economy by lowering other taxes, providing net gains for the US economy."
3. "Carbon taxes offer a practical and administratively manageable
means of encouraging a "least cost" approach to achieving any given level of
reduction in carbon dioxide emissions. Compared to regulatory alternatives
they could save significant economic resources."
To make the tax effective then it is recommended that the tax be pegged to
the carbon content of the fuel. This would be effective in supporting fuels
like natural gas, and effective in suppressing demand for new coal fired
electricity plants. Coal has more than 2 times the carbon content that
natural gas has.
"Industries that emit C02 can use less coal and more natural gas, invest in
energy efficiency programs, change their mix of products, or do all three."
The tax could be used to encourage good practices such as investment in
capital and labour, and discourage bad practices like transfers and releases
of pollutants.
"Carbon tax revenues can be used to shift the economic burden of our current
tax to encourage "goods", such as investments in capital and labor, and to
discourage "bads", such as air pollution, thereby promoting longer-term
economic growth and a healthier economy."
The effect of a taxation policy which discourages investment in capital and
labour is considered a "dead weight loss" because of the "distortionary"
impact of taxes which impact on labour income. Reduce the taxes on labour
income, and increase the taxes on the most polluting fuels like coal and
oil, will improve the investment and capital flows into new technologies.
This is what Sweden has done recently. They have implemented a carbon tax
and reduced labour taxes. This ensures that the competitiveness of the
economy is maintained and this supports a reduction in costs incurred by
energy demanding industries which imports 100 % of their fossil fuels. Some
industries simply begin to produce their own power like IBM and the Body
Shop International.....from wind, etc.
Because of the distortionary tax policy which taxes labour, but not carbon,
there is "for every dollar raised in tax revenue, more than a dollar's worth
of private production...lost."
The estimated loss of economic efficiency from alterntive forms of taxation
presented here is from "The Excess of Burden of Taxation in the US" by
Jorgenson and Kun-Young, HIER discussion paper No. 1528, Harvard University,
Cambridge MA, November 1990.
Jorgenson and Kun-Young estimate that for every additional dollar raised
through capital income taxes, "the economy loses 92 percent in lost economic
productivity....When the revenues generated by a pollution tax are used to
reduce the marginal tax rate on capital, labour and other resources, the
deadweight loss from these taxes is also reduced."
The idea here is very cogent because if the worst return on an additional
tax dollar raised are from taxes on capital, labor and other resources in
terms of economic efficiency, then the shifting of taxation from capital and
labour onto natural resources would improve efficiency. Currently the
marginal tax rate on labour is in the order of 30 %, whereas on some natural
resources the tax is zero. For instance their are no taxes on jet fuel, nor
on coal. If the corporate income tax rate was reduced by 35 billion US
dollars, and the estimated increase in economic efficiency would be in the
order of 23 and 32 billion US dollars, resulting in a positive return if a
revenue nuetral taxation policy was implemented to discourage carbon
emissions. Now if the estimated loss in economic efficiency was calculated
for a carbon tax of equal revenue, and that revenue was balanced by a
reduction on corporate capital and labour, the benefit would be tremendous
because there would be an incentive to reduce the inputs of carbon emitted
from energy. Simply put, no one would care if less coal was used, because
the whole economy would be better off....
"If for example, $35 billion in carbon revenue taxes were used to reduce
corporate income taxes by the same amount, the economy would be better off
by between $23 and $32 billion." This is because of the economic efficiency
of having people employed rather than on welfare and social assistance
burning up tax dollars, and because industries would retain far more
earnings - rather than attempt to hide profits in risky and unprofitable
ventures. The incentive to find alternative and renewable energy would be
one way industry would cut costs without impacting negatively the labour,
and capital markets. This kind of taxation would stimulate economic growth
in comparison to high corporate taxes and labour taxes.
john foster
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