Austerity is dead — the victim of its 2010-2012 failure in the Eurozone. At last week’s G-8 summit at Camp David, leaders called for growth, not austerity. Even German Chancellor Angela Merkel, the iron lady of austerity, conceded that the crisis in Greece would require stimulus. A week earlier, IMF Director Christine Lagarde called for growth-oriented policies. And on May 6, the French elected socialist Francois Hollande, rejecting the austerity policies of his predecessor, Nicolas Sarkozy.
French Voters Gave Austerity the Boot on May 6
So what will austerity’s demise do to the case for a U.S. carbon tax, given that new taxes, or tax hikes in any form, are one of the two pillars of austerity? (The other, of course, is governmental spending cuts.) The answer to that question depends on the alternatives and the uses of the carbon tax revenues, but the key points are these: first, a carbon tax is almost certain to be better for economic growth than draconian spending cuts or higher taxes on incomes or wages; second, if its revenues are used to reduce other taxes or are spent in ways that spur employment, the net effect of a carbon tax can be stimulative.
Ironically, while there is now, finally, broad consensus that austerity in Europe has stunted its economic growth, the fragile U.S. recovery faces a ticking time bomb of automatic austerity, set to go off on January 1. Unless Congress acts, the deficit ceiling legislation enacted in 2011 will “sequester” $1.2 trillion of automatic across-the-board cuts on military and domestic spending. At exactly the same time, the Bush tax cuts are set to expire, which will raise the effective federal tax rate from about 16% of GDP to the Clinton-era 20% level. Last but not least, the payroll tax holiday is set to expire on Jan. 1 as well.
The alternatives to letting those time bombs explode are (i) repeal the “sequester” and extend the Bush tax cuts and the payroll tax holiday (leading to even larger deficits), or (ii) increase revenue by broadening the tax base. In 2010, two bipartisan deficit commissions, “Simpson-Bowles” (officially the National Commission on Fiscal Responsibility and Reform) and Rivlin-Domenici, recommended sweeping tax and entitlement reform. Rivlin-Domenici went further, urging broadening of the tax base by imposing a European style Value Added Tax. A VAT, of course, is a regressive sales tax (levied on virtually all consumer purchases) that can suck up revenue like almost nothing else. But it is so broadly based that it offers little environmental benefit. Other revenue options include worthy but politically-loaded proposals like repealing or limiting the home mortgage deduction.
Where does this leave a carbon tax? In our view, a tax on carbon emissions that starts low or even at zero, with a built-in ramp up over time (as recommended by former Fed Vice-Chair Alan Blinder), is an attractive alternative to pretty much everything on the standard menu — a VAT, higher income taxes or draconian spending cuts. A gradually-rising carbon tax would also yield gradually increasing revenues, helping to close the deficit while working better (at lower cost and more broadly) than any other policy to reduce global warming pollution. One particularly stimulative way to use carbon tax revenue would be to fund and expand the payroll tax holiday, a stimulus measure enacted in 2010 that increased employee paychecks by up to $2,000, but which is set to expire at the end of this year.
Economic analysts of virtually every stripe agree that unparalleled uncertainty about the strength of the recovery is helping to hold back investment and growth. Beyond the general lack of confidence, the energy sector faces additional regulatory and price uncertainty. A clear, upward price trajectory on carbon pollution would give entrepreneurs and investors in efficiency and renewables something to bank on. Without that predictable price signal, renewables will continue to face the prospect of “feast or famine” depending on Congressionally-enacted subsidies or the even more volatile price instability of cap-and-trade systems. And if a carbon tax helps avert an automatic “sequester” triggering draconian cuts in social programs, the result will be enormously better for low and moderate-income households that depend on the safety net.
The fact is that none of the options for avoiding a “fiscal cliff” on Jan. 1, 2013 are pretty. In that context, the dependably-growing revenue stream along with the vast climate benefits of a predictably-rising carbon tax make it a potential winner.
Photo: Flickr — Passarello Luna
David F Collins says
The Carbon Tax is an idea whose time came decades ago (back in 1973, with the oil embargo crisis, in my opinion) and whose appropriateness continues to grow. Personally, I most heartily support the «Fee and Dividend» approach, championed by James Hansen and others, praised in this blog and elsewhere. «Fee and Dividend» is a proposal for collecting a tax on carbon materials (particularly fuels) before combustion, then distributing the «take» to the people on a count-the-noses basis. Putting aside this Robin Hood style preference, I support the Carbon Tax because it offers the most potent offensive against the menacing Two Towers that pose a real and present danger to our country and our world. Climate Disruption and Resource Extraction. The Carbon Tax attacks both, simultaneously. So I support the Carbon Tax, regardless of how the take is spent.
As this 2012/05/12 essay points out, austerity is a rotten response to the ongoing economic crisis. The Carbon Tax could help, whether by disbursing the take straight to the people (small-government-style) or by spending it more wisely (big-government-style). It would also amœliorate the release of greenhouse gases into the atmosphere and, simultaneously, the depletion of carbon-based resources, both by reducing more and more the consumption of carbon-based fuels.
The powerful who for their own reasons powerfully support an ever-increasing consumption of carbon-based fuels, strenuously object to the Carbon Tax in any form. One major objection is that it would penalize sectors of domestic industry that consume massive quantities of carbon-based fuels (e.g. cement, steel).
The article you linked — “French to revive Sarkozy’s EU carbon tariff idea” — describes an eminently sensible approach that lays that objection to rest: a carbon fee levied at the border on goods (and services) produced abroad under an inadequate carbon tax or none at all. This would undermine any price advantage of such imports.
So the next objection is that this at-the-border tax would be protectionist. But that dog don’t hunt, neither. The foreign country that would lose sales this way would have a greater grievance: the take of that tax would go into the coffers of the tax-levying country. Thus, the sensible approach for said foreign country would be to levy the tax and put those tax receipts into its own coffers… and the siege of the Twin Towers intensifies as the recession abates.
James Handley says
David,
Thanks for your supportive comments.
You and other carbon tax supporters may want to get your hands on “The Case for a Carbon Tax” by Shi Ling Hsu. Not only does Prof. Hsu make a cogent affirmative case for a carbon tax on environmental, economic and political grounds, but he also forcefully and systematically responds to arguments against a carbon tax, particularly political arguments that seem to have been a stumbling block. After the election, when Congress confronts the “fiscal cliff” and is pressed to look for new (or at least different) revenue sources, we need to be ready to make the case as forcefully and authoritatively as possible that taxing CO2 pollution offers unique benefits not available from any other kind of tax. “The Case for a Carbon Tax” strikes me as an indispensable source of information in that upcoming conversation on tax policy.
ElMadster says
I support a carbon tax but your logic is flawed.
A carbon tax is a form of austerity, actually. It’s simply austerity targeted on the private sector, not the public sector. The carbon tax transfers cash from the private sector to government, leaving the private sector cash balances lowers – less cash to spend is by definition austerity.
Ending austerity, as Krugman advocates for example, is using borrowed money to increase support government spending (stimulus). Krugman would probably agree with imposing a carbon tax but not as an economic stimulus. Again your logic is flawed and I have not heard anyone else advancing it so it seems to be an argument without any legs.
A better way to get to a carbon tax is simply to “buy off” the conservatives who oppose a carbon tax.
That’s what Conservativesforacarbontax.com is all about. What have you got to lose?
James Handley says
As I wrote, “taxes… are one of the two pillars of austerity.” I’m not suggesting that imposition of a carbon pollution tax by itself would be stimulative. But if carbon tax revenue were used to reduce payroll tax burdens, the net effect could be stimulative. As things now stand, the payroll tax “holiday” is set to expire in January, which along with other fiscal austerity measures, could lead to another recession according to CBO.