Al Gore Suggests Carbon Tax Replace Payroll Taxes

September 19, 2006

Former Vice President Al Gore, who has long been concerned with environmental issues, has suggested that the U.S. should impose a tax on carbon emissions in place of the current payroll tax, which is about 15 percent (combined employee/employer) and is used to finance Social Security and Medicare. From MSNBC:

Former Vice President Al Gore has a novel approach for dealing with global warming: tax carbon dioxide emissions instead of employees’ pay.

“Penalizing pollution instead of penalizing employment will work to reduce that pollution,” Gore said Monday in a speech at New York University School of Law.

The carbon tax would replace all payroll taxes, including those for Social Security and unemployment compensation, Gore said. He said the overall level of taxation, would remain the same.

While taxation of carbon emissions may or may not be proper public policy, Gore’s suggestion that we would be penalizing pollution as opposed to penalizing work ignores the question of who would bear the burden of a pollution tax. Most likely, much of a carbon tax would be borne by workers of companies that emit carbon, meaning you would still be “penalizing” some work.

To the extent that a carbon tax is borne by the firm, it would encourage lower carbon emissions. However, to the extent that the tax would fall on workers, the distributional effects of this may not be desirable for progressives like Gore. Much of the polluting is done by companies whose workers are blue-collar, while white collar positions often involve companies with little, if any, carbon emissions.

Also, unless other countries agreed to impose the tax as well, this would put U.S. based firms at a competitive disadvantage compared to other locations. Thereby, you may get less pollution in the U.S., but the pollution would merely move to a separate country without U.S. employees. Tyler Cowen at Marginal Revolution, however, thinks that U.S. leadership could possibly solve this international public goods problem.

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