My Comment On Carbon Based Taxes Posted On RealClearMarkets

Posted by Milton Recht:

My comment to RealClearMarkets, "The Tax Favored By Most Economists" By William Gale:

In a world of politics and not academic economics, it is difficult to have "a well-designed tax." A carbon tax will raise the cost of energy used by households and the cost of production of goods and services. Unless the tax equals the value of the harm created by carbon emissions, not just in amount but also in timing and specificity as to the households who will bear the greatest burden, a carbon tax left to the legislative and regulatory process will likely quickly be seen as a revenue generating source as opposed to a carbon reduction tax. Even if it remains a carbon reduction tax, much of the welfare gain from carbon taxes comes from the use of the new revenue to replace distortionary taxes, which will allow for higher rates of capital investment and employment of labor. In a real world scenario, the distortionary taxes on the economy will not remain absent or low for long, and a carbon tax on top of distortionary taxes will easily create a reduction in general welfare instead of an increase.

Additionally, to the extent that a carbon tax is linked to productive assets, it is a capital tax and economic literature supports a zero capital tax.

Economic studies show that in open economies, such as the US, it will be labor and not investors that bear most, if not all, the burden of the carbon tax through lower wages.

While theory supports a carbon tax, the effective implementation requires much trust in the taxing authorities and a belief in government's restraint under a carbon tax not to reinstate taxes on other sources to increase revenue.

Externalities, prices that do not fully reflect the harm created by the production of the output, are offset in part, whole, or more by the loss in general economic welfare of the public from the increase in the price of energy and goods and services. While no doubt, a carbon tax, if it raises the prices of energy, goods and services, will lower the amount of carbon produced. Before actual implementation, there is uncertainty and a possibility that a carbon tax will reduce general welfare (in some or all households), reduce economic growth, lower GDP and lower employment. If the amount of the tax is set by a legislative and regulatory process, the tax likely will be set at a level that will do harm to the economy, especially overtime as politicians seek more revenue and reinstate taxes or raise the rate of the carbon tax, and as regulators seek to increase the tax to further reduce carbon output.