Carbon Tax vs. Cap and Trade

Well, I finally did it. I finally had a look at the Waxman-Markey cap and trade bill. One word: aaaaaaaaaaaaaaaaaaaaaaaaaaaaaahhhhhhhhhhhhhhhhhhhhh‼‼! Or, to be more precise, don’t try to follow that link with Internet Explorer 8 or below. Your browser will struggle. The bill is a quarter million words long! It’s like a Robert Jordon novel, only more tedious. Every legislator who voted for this monstrosity ought to be strapped into a Clockwork Orange chair and forced to read it in one sitting.

And I actually want to stop global warming; I am not a climate change denier.

But after looking at this bill, a few extra feet of seawater doesn’t look so bad. This bill combines the micromanaging mindset of the worst Democrats with a big-business giveaway worthy of the worst Republicans.

Many opponents of this bill refer to it as “cap and tax.” This is way too charitable. This bill will jack up the cost of energy and give the money to…today’s biggest contributors to global warming! Imagine if we gave crime permits to the Mafia and other gangs, and allowed them to sell permits if they choose to reduce their own criminal activity. This is the logic of cap and trade.

Don’t get me wrong. I don’t believe we should punish past carbon emissions. That would be ex post facto punishment, which is not only unconstitutional, it’s just plain wrong. But if science has indeed determined that burning fossil fuels harms the environment, then doing so should be penalized. Longtime polluters should be penalized at the same rate as any new business which needs to burn some carbon to operate.

Besides, the government needs the money. We could use a carbon tax just to avoid going bankrupt.

The actual cap and trade portions of the bill are just that: portions. The bill has a few hundred pages of subsidies, incentives, etc. for a whole host of energy saving and alternative energy technologies. The bill reads like a Stalin era five year plan, only in something resembling English. Econ 101 folks: if carbon fuel prices go up sufficiently, conservation, alternative energy and mass transportation will all pay. With a carbon tax we could reduce the number of energy programs and subsidies.

We should have some government research into advance nuclear energy, such as liquid fluoride thorium breeder reactors, in case solar doesn’t cut it. Nuclear energy research should have the government involved because of safety concerns. The Energy Star program might be worth keeping as well. Government as an independent evaluator of hidden consumer produce features might be beneficial.

I say “might” because with regulatory capture, the government may well be worse than a private sector auditor. When government gets too complicated for the citizens to track, regulatory capture is a given. Cap and trade is a huge rat’s nest of possible areas for regulatory capture. If you are a corporatist, opt for cap and trade. If you believe in democracy, tell your friendly neighborhood legislator you want a carbon tax instead.

Are the Rich Over Taxed?

The Obama Administration annoys me. It legislates horrendously complicated healthcare legislation. It applies Keynesian pseudoscience to attempt to restart the economy, driving up our deficit ever higher.

Conservative talk show hosts annoy me even more. They pontificate over how bad Obama is about the deficit even though most of the deficit was inherited from the Bush Administration. Moreover, back when Clinton achieved a budget surplus (cash basis, not actuarial basis!) they whined about being overtaxed. Finally, they and the Republicans in Congress are fighting for tax cuts for the rich.

I am not so sympathetic to the plight of the rich. Yes, they pay a lot of taxes. But they have tax loopholes you can drive a truck through. They get protection of their wealth from the government, including restraints on competition. They get a subsidized return on passive investments because of the monstrous federal budget deficit. And don’t get me started about retroactive extensions of copyrights, and bailouts for the financial industry.

The rich are getting a fine return on the 15% tax they pay.

That’s right. 15%. That’s the long term capital gains tax. This is lower than the marginal tax rate for median income wage earners. Wage earners pay more than that in Social Security and Medicare taxes (14.2% effectively). A 10% income tax rate puts Joe Size Pack in a higher tax bracket than Bill Gates.

OK, the rich also indirectly pay corporate income tax on the stocks they hold. So does Grandma, on whetever she hold in her retirement account. This doesn’t strike me as progressive.

Here is my proposal:

  1. Fold FICA and Medicare taxes into the income tax to make a flat tax rate of 25% up to a half million dollars a year or so.
  2. Have a somewhat higher (but not outrageous) tax rate for higher than a half million per year. Maybe 35%.
  3. Treat capital gains, dividend income, wages, etc. equally.
  4. Replace all deductions and exemptions (other than charity) with a fixed amount of free money.
  5. Instead of an estate tax, treat gifts and inheritances as ordinary income…maybe.

The last provision is a bit harsh on farmers and small business owners. Clobbering people with taxes when a loved one dies is rather mean-spirited.

So here is a possible alternative: set the tax basis on all non-cash gifts and inheritances at zero. You pay when you cash out, if ever.

Should we Extend the Bush Tax Cuts?

Our national debt is nearly as large as our GDP, and it is growing at a rate of 10% per year. So what are they debating in Congress? Extending the Bush era tax cuts.

Dumb!

Don’t get me wrong. I’d love to see lower taxes – if we had enough spending cuts to go with those tax cuts. No one is talking that kind of spending cuts. Cut $1.3 trillion dollars per year in the budget and I am open to some small tax cuts.

Small.

In my book paying down the debt takes precedence over tax cuts and economic growth. Yes, we are in a recession, but the economy is scheduled to get worse. This is not mere crystal ball gazing. It is simple demographics. The Baby Boomers will retire soon. Retired people don’t produce all that much. Our economy is scheduled to have reduced overall productivity in the not so far future. We need to be paying down the debt now while the Boomers are still on the job.

So what are we doing? We are running record deficits – both trade and budget. And we are doing so not to fight a desperate world war, but merely to subjugate some primitives in the mountains of Afghanistan, and quell a potential civil war in Iraq. There is no excuse for running a deficit in these circumstances. We’ve had some sort of conflict with outgunned peoples throughout most of our history. The level of war we are at is the American norm. We should budget accordingly.

Many Republicans would whine that we need to extend the tax cuts to make the economy grow. Let’s be real. The debt is growing at 10% annually. Does anyone seriously expect the economy to grow at 10% per year if we nibble at taxes? And 10% GDP growth merely makes us break even on the debt/GDP ratio.

Even if levying a hundred billion extra dollars costs the economy a hundred billion dollars of growth, I’ll take the levy. The debt is as big as the economy.

But I don’t think that is our choice. We are below the Laffer Curve maximum for taxing the rich these days. (We might be above the Laffer maximum for corporate tax rates, but that’s a story for another day.) The economy grew just fine under the taxes raised under Bill Clinton. And let us keep in mind that the taxes raised don’t just disappear from the economy, they return in the form of less borrowing by the U.S. Treasury. When banks can’t make money buying government debt, they have to find consumers and businesses to lend to. This can grow the private sector economy.

While this is no time for tax cuts, it is a good time to think about tax simplification. We could merge FICA into the income tax to have a nice simple two or three bracket tax code. We could use a national sales tax and/or a carbon tax to supplement the income taxes. We could raise money be closing loopholes vs. raising marginal rates.

And yes, we should also cut spending. But the strategy of forcing spending cuts by cutting taxes is a proven failure. It is time for Republicans to listen to their grownups such as David Stockman.

Some Room for Hope

After re-reading the above I realized that I made an overly pessimistic assumption: I neglected inflation. We don’t need 10% real growth in GDP to keep up with the deficit, just 10% nominal growth. If the economy grows at 4% in real terms and we have 6% inflation, then we break even. For those years where we get less than 4% real growth we’d need more inflation just to break even.

But we need to do more than break even! We need to lower the debt/GDP ratio now to prepare for the aging Boomers. So we’d need even more than 6% inflation coupled with decent real growth. So if you don’t like the Stockman solution you have another: get a leisure suit. It’s Carter time!