A carbon tax is not a tax increase? How?


The Carbon Tax Center:

A carbon tax should be revenue-neutral. Revenue-neutral means that little if any of the tax revenues raised by taxing carbon emissions would be retained by government. The vast majority of the revenues would be returned to the public, with, perhaps, a very small amount utilized to mitigate the otherwise negative impacts of carbon taxes on low-income energy users.

Two primary return approaches are being discussed. One would rebate the revenues directly through regular (e.g., monthly) equal “dividends” to all U.S. residents. In effect, every resident would receive equal, identical slices of the total revenue pie. Just such a program has operated in Alaska for three decades, providing residents with annual dividends from the state’s North Slope oil revenues.

In the other method, each dollar of carbon tax revenue would trigger a dollar’s worth of reduction in existing taxes such as the federal payroll tax or state sales taxes. As carbon-tax revenues are phased in (with the tax rates rising gradually but steadily, to allow a smooth transition), existing taxes will be phased out and, in some cases, eliminated. This “tax-shift” approach, while less direct than the dividend method, would also ensure that the carbon tax is revenue-neutral and could offer other benefits. For example, reducing payroll taxes could stimulate employment.

Each individual’s receipt of dividends or tax-shifts would be independent of the taxes he or she pays. That is, no person’s benefits would be tied to his or her energy consumption and carbon tax “bill.” This separation of benefits from payments preserves the incentives created by a carbon tax to reduce use of fossil fuels and emit less CO2 into the atmosphere. Of course, it would be extraordinarily cumbersome to calculate an individual’s full carbon tax bill since to some extent the carbon tax would be passed through as part of the costs of various goods and services.

Revenue-neutrality not only protects the poor (see next section), it’s also politically savvy since it blunts the “No New Taxes” demand that has held sway in American politics for over a generation. Returning the carbon tax revenues to the public would also make it easier to raise the tax level over time, a point made nicely by McGill University professor Christopher Ragan in a 2008 Montreal Gazette op-ed.

A Carbon Tax May be a Progressive (not Regressive) Tax:

A carbon tax, like any flat tax, is regressive — by itself. However, the regressivity of a carbon tax can be minimized, and perhaps eliminated altogether, by keeping the tax revenue-neutral in a way that protects the less affluent.

The operative fact is that wealthier households use more energy. They generally drive and fly more, have bigger (and sometimes multiple) houses, and buy more stuff that requires energy to manufacture and use. As a result, most carbon tax revenues will come from families of above-average means, along with corporations and government.

That is why the two “return” approaches discussed above — carbon dividends or tax-shifting — can turn the carbon tax into a progressive tax. Because income and energy consumption are strongly correlated, most poor households will get more back in carbon dividends than they will pay in the carbon tax. The overall effect of a carbon tax-shift could be equitable and perhaps even “progressive” (benefiting lower-earning households).

Visit the Carbon Tax Center’s website for more information and news updates.

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