The carbon-for-payroll tax trade

A carbon tax is a nice idea substantively. Pairing it with reducing the burden of payroll taxes might even make it palatable politically.

I think Mike O’Hare is right: the CAFE fuel-economy standard for automobiles is a miserable kludge.

I also think his green friends are right: carbon taxes are a non-starter, for the same reason any policy containing the word “tax” but not the word “cut” is a non-starter, in the current political situation.

But I have a fix to suggest. The Republicans have had some success in creating panic about a largely non-existent Social Security funding crisis. But beyond that looms a quite real Medicare funding crisis. So let’s kill two birds with one stone: slowly (there’s no rush) replace payroll taxes with carbon charges.

[Not just the “employee” half; replace he whole thing, since in general the “employer” half also comes out of the employee’s hide in the form of lower wages. But the business lobbies seem to love anything that reduces taxes paid by business, regardless of what the incidence analysis shows.]

The cap on the FICA tax makes it the most regressive element of the Federal tax structure; the emergence of “Reagan Democrats” probably had as much to do with the increase in FICA as part of the Social Security deal Reagen euchred Tip O’Neill into going along with as it did with social issues. So getting rid of it is good for the working-class voters who have been getting such a raw deal for the last couple of decades.

That’s not to say that the carbon-for-payroll trade is an obvious political winner. But it’s not as obvious a political loser as a carbon tax all by its lonesome.

Update Steve Teles argues against fixing a Social Security system that isn’t broken, and points out that the regressivity of the tax could be reduced by lifting the earnings cap. (And, I would add, including dividends, interest, and capital gains in the FICA base.) He suggests instead using a carbon tax to pay for universal health care. I’ll accept that as a friendly amendment, though I would still start by getting rid of the Medicare part of the payroll tax, thus making the carbon tax, to start with, something other than a straight tax increase.

Timothy Noah notes in Slate that various Republican gurus are lining up behind a carbon tax. I don’t know how much that matters, since none of them has ever run for office, but it’s nice to know.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

2 thoughts on “The carbon-for-payroll tax trade”

  1. While We're On the Subject of Elite Consensus

    by Nicholas Beaudrot of Electoral MathThe populists are winning the battle against the elite consensus on carbon taxes. I put consensus in scare quotes because no elected Republican will say they support carbon taxes. Nor will any right-of-center econo…

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