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The Carbon Tax as a Tool for Redistribution

2 min readBy: Scott Hodge

A growing number of conservative economists are becoming enamored with carbon taxes as a means of using market forces to address global climate change. One of the leaders of this movement is Harvard economist Greg Mankiw who has started a “Pigou Club” named after economist Arthur Pigou who developed the idea of using taxes to reduce negative externalities resulting from market activities.

While acknowledging the serious impact a carbon taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. could have on the entire economy, these economists argue that the substantial revenues generated by the tax could be used to cut other economically inefficient taxes such as the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. .

Admittedly, there is a certain intellectual elegance in the idea of shifting the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. away from income-based taxes to consumption-based taxes. But there are vast political dangers in getting from here to there.

A more likely political outcome is the carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. plan recently unveiled by Canadian Liberal Party leader Stephane Dion. In today’s Toronto Star, columnist Carol Goar describes how the plan would lead to a massive redistribution of wealth in Canada:

His “green shift” would transfer wealth from rich to poor; from the oil patch to the rest of the country; and from the coffers of big business to the pockets of low-income Canadians.

Roughly $9 billion of the $15.3 billion Dion expects to collect annually in carbon tax revenues would be returned to Canadians earning less than $40,000 a year. He would use both income tax cuts and benefits targeted at children, low wage earners, rural residents and individuals with disabilities.

It would be unthinkable, under the current tax system, to redistribute a sum of this magnitude. The Liberals are gambling that, under a pollution-based tax system, it would be politically feasible to take from the “haves” and give to the “have-nots.”

It is likely that the U.S. will have a similar debate starting next year since both Barack Obama and John McCain favor the regulatory equivalent of a carbon tax – the cap and trade system. Before the nation gets too far down that road, however, each of the candidates should speak honestly about how they would redirect the billions of dollars raised by their cap and trade plans.